Uruguay - Montevideo Port Project

Document of The World Bank FOR OFFICIAL USE ONLY FiLE COPY Report No. 2642b-UR STAFF APPRAISAL REPORT MONTEVIDEO PORT PROJECT URUGUAY December 28, 1979 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents Currency Unit = Peso (N$) US$1 = N$ 7.30 N$ I = US$0.137 N$1 million = US$137,000 Fiscal Year January 1 to December 31 Weights and Measures Metric British/US Equivalent 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 kilogram (kg) = 2.20 pounds (lb) I metric ton (ton) = 2.205 pounds Abbreviations and Acronyms AFE = Administracion de los Ferrocarriles del Estado ANCAP = Administracion Nacional de Combustibles, Alcohol y Portland ANP = Administracion Nacional de Puertos CNPA C Comision Nacional de Politica Aeronautica DAC G Direccion General de Aviacion Civil DIGAN = Direccion General de Aeropuertos Nacionales DNT = National Directorate of Transportation DODE = Directorate of Economic Development Works IDB = Inter-American Development Bank LASH = Lighter Aboard Ship MTOP = Ministry of Transport and Public Works PLUNA = Primeras Lineas Uruguayas de Navegacion Aerea SEPLACODI = Secretaria de Planificacion, Coordinacion y Difusion SOECNI = Societa Tecnica Internazionale TAMU = Transportes Aereos Militares Uruguayos TPU = Transport Planning Unit UNDP = United Nations Development Programme USAID = US Agency for International Development Vialidad National Highway Directorate  FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT MONTEVIDEO PORT PROJECT URUGUAY TABLE OF CONTENTS Page No. I. THE TRANSPORT SECTOR .................................. I A. Background ....................................... 1 B. The Transport System .................. ...1........ C. Transport Planning and Coordination .............. 4 D. Past Bank Assistance to the Transport Sector ..... 5 II. THE PORT SUBSECTOR ...... .............................. 5 A. Ports and Maritime Transport ............ . ......... 5 B. Characteristics and Growth of Traffic .......... .. 7 C. The Port of Montevideo .... .... . . . ...................... . 8 D. Port Administration ............... ........ ..... . 13 E. Port Financial Management ........................ 16 F. Port Development . ............................... . 17 IIT. THE PROPOSED PROJECT .................................. 20 A. Objectives and Description ......... .. ............ 20 B. Cost Estimate and Financing .... .................. 22 C. Execution and Procurement ........................ 22 D. Disbursements .................. .................. 24 E. Project Monitoring ................... . . .......... 24 F. Environmental Impact ............................. 24 G. Risks ................. 0......... 25 IV. ECONOMIC EVALUATION ............ .. ..... *. ............. 25 A. General ...................................................... 25 B. Forecast of Operational Needs ................. ... 26 C. Components of the Project ..... ................... 26 D. Development Program .................................. .. 29 E. Economic Returns and Sensitivity Analysis ........ 30 This report is based on the findings of an appraisal mission which visited Uruguay during May 1979. The mission comprised Messrs. P. Engelmann (Senior Port Engineer), B. Bostrom and C-H Mumme (Transport Economists), and A. Stephenson (Financial Analyst). The report has been edited by Miss V. Foster. | 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.  TABLE OF CONTENIS (Continued) Page No. V. FINANCIAL ANALYSIS ....................... ............ . 31 A. Recent Financial Performance of ANP. 31 B. Financial Objectives ........... . .35 C. Revenue and Cost Projections ..... 35 D. Cash Flow Projections and Project Financing 37 E. Sensitivity of Financial Forecasts 38 VI. AGREEMENTS REACHED AND RECOMMENDATION .38 TABLES 1.1 Maritime Imports and Exports by Major Commodity Groups (1973-1978) . .41 2.1 Forecast of Exports through Montevideo Port (1979-1990) - Minimum and Maximum Estimate. 42 2.2 Forecast of Imports through Montevideo Port (1979-1990) - Minimum and Maximum Estimate 43 2.3 Forecast of Exports through Montevideo Port (1979-1990) - Best Estimate . .44 2.4 Forecast of Imports through Montevideo Port (1979-1990) - Best Estimate . .45 2.5 ANP - Present Staffing Schedule. . 46 2.6 Investment Program of ANP for 1978-1982 . 47 3.1 Forecast of Dredging Work and Port Conditions (4 pages) 48-51 3.2 Cost Estimate Breakdown (7 pages) . .52-58 3.3 Estimated Schedule of Disbursements ......... ...... . 59 4.1 Labor Costs of Container and Bulk Cargo Wharf . .60 4.2 Economic Analysis of Container and Bulk Cargo Wharf (2 pages) ..61-62 4.3 Ship Delay Benefits (2 pages). 63-64 4.4 Economic Analysis of New Cranes and Cargo Transfer 65 4.5 Economic Analysis of Indirect Cargo Transfer 66 4.6 Economic Analysis of Tug Boats (2 pages). 67-68 4.7 Costs and Benefits for Cargo Handling . 69 4.8 Economic Returns and Sensitivity Tests . .70 5.1 ANP Income Statement in Pesos . .71 5.2 ANP Income Statement in US Dollars . .72 5.3 ANP Current Tariff Summary ..73 5.4 ANP Balance Sheets ..74 5.5 ANP Income Projections ..75 5.6 Balance Sheet Projections ..76 5.7 ANP Sources and Applications of Funds Projections 77 5.8 Ratio Projections ..78  TABLE OF CONTENTS (Continued) Page No. ANNEXES 1. Analysis of Future Port Traffic ....................... 79 2. Proposed Reorganization of ANP ........................ 89 3. Outline of Proposed Technical Assistance to ANP ....... 92 4. Assumptions on Which Financial Forecasts Are Based .... 94 5. Selected Documents and Data Available in the Project File ........................................ 97 CHARTS 1. World Bank 20583 - present Organization of ANP .98 2. World Bank 20584 - Proposed Organization of ANP 99 3. World Bank 20585 - Implementation Schedule .100 MAPS IBRD 14367R - Uruguay Transport System IBRD 14368R - Bay of Montevideo IBRD 14369R - Port of Montevideo   I. THE TRANSPORT SECTOR A. Background 1.01 Uruguay is a small fertile country with a population of less than three million. 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 consisting of navigable coastline on the south and east, the country, geographically, is unusually well endowed for the export-oriented development strategy which it is pursuing. 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 production, offered no obstacles to the development of radial roads and rail networks, extending north, east and west from the metropolitan region around the seaport of Montevideo (Map IBRD 14367R). This port, strategically located at the mouth of the La Plata River, is the country's focal point for foreign trade and also serves inland and coastal navigation. 1.02 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 transport system was undertaken with UNDP assistance in 1976-1978. 1/ This survey established a general framework for transport investment and identified four areas of highest priority need: (a) strengthening of national transport planning; (b) improvements in road rehabilitation and reconstruction; (c) reductions in railroad operations and deficit; and (d) port modernization. B. The Transport System (i) Ports and Maritime Transport 1.03 Uruguay's foreign trade depends largely on maritime transport, most of which is served through the port of Montevideo. Public terminal facilities at this port handled between 1.0 and 1.5 million tons of general and bulk cargo in recent years (Table 1.1), and Montevideo is expected to continue to be the focal point for Uruguay's maritime commerce. The port subsector is discussed in detail in Chapter II. (ii) Highways 1.04 Roads currently account for about 73% of the total freight traffic carried within the country (while railroads account for 20% and water transport for 7%). The road network consists of some 50,000 km, of which 9,800 km are national roads maintained by the Ministry of Transport and Public Works (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, 1/ The Bank acted as UNDP's Executing Agency for the survey, which was conducted by the consulting firm SOTECNI (Italy).  -2- 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 the main international connections, which have consider- able importance given the country's reliance on trade with its neighbors. Lack of timely periodic maintenance during a long period of economic stagnation (1952-1972) has contributed significantly to this deterioration. 1.05 The departmental road network needs expansion mainly in the southwest, center, north and northwest departments, which are areas with high agricultural potential. Only 2,000 km (5%) of the departmental network are paved; 4,000 km are gravel and 34,000 km are earth roads. These departmental roads are of low standard and poorly maintained and offer restricted serviceability in the rainy season (August to November). Recently, MTOP's Highway Directorate (Vialidad) has been helping the departments to improve this situation. 1.06 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 apparently restricted countrywide growth of traffic to negligible proportions. The trucking industry, domestic and international, is highly competitive. 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. Tnternational 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, although the average age of the fleet for short and medium haul trips is high; the longevity of the truck fleet is explained by the short distances, mild climate, easy terrain and import restrictions prevailing in the country. Overloading of vehicles does not appear to be a serious problem, but a large number of obsolete bridges has forced Uruguay to limit the maximum weight of trucks to 36 tons, lower than the limits in Argentina (45 tons) and Brazil (40 tons). A countrywide weight control program is being operated in an adequate manner. 1.07 The UNDP-financed transport survey (para 1.02) recommended major investments in the highway sector for the years 1978-1982. Some of these have already been initiated, in part with Bank support (para 1.18). (iii) Railways 1.08 Uruguay's railways were owned and operated by a British company for about 65 years (until 1949). The concession terms promoted construction of a large network, 3,000 km of standard gauge track, radiating in five lines from Montevideo (Map IBRD 14367R). The Uruguayan Government constructed roads parallel to many of the rail lines, and the British company ceased further investments after 1926. Consequently, the Uruguayan Government purchased an obsolete railway in 1949. The Administracion de los Ferrocarriles del Estado (AFE), a semi-autonomous Government agency, was set up in 1952 to operate the railways. AFE began replacing steam locomotives with diesel-electrics, but did not improve the obsolete permanent way and equipment. The intervening  - 3 - 27 years have seen a further deterioration in the condition of the railways through lack of maintenance and replacement investment. Inevitably, the quality of service has fallen markedly, being reflected in rapidly declining passenger and freight traffic. Several connections exist with the Argentine and Brazilian systems, but, in the latter case, because of a difference in gauges, transshipment is necessary. By 1972, the railways reached, possibly, their lowest point. Permanent way was completely worn out (61% of the rails were pre-1920), and ballast was largely nonexistent; rolling stock was obsolete and diesel-electric locomotives were about 20 years old; communications and signaling equipment were antiquated. Workshops and maintenance equipment were obsolete, making repair work inefficient. A recovery plan was drawn up in 1973 and included purchase of rolling stock and modern workshop equip- ment. Some rolling stock has been acquired, and a program of mechanical processing of ballast is in progress. 1.09 Despite its deterioration and significant reductions in traffic, the railway network still carries 20% of Uruguay's freight and passenger movements. Principal items of freight are construction materials, rice, other grains, sugar and fertilizers. However, traffic levels on much of the rail system are now very low, and the only lines with significant traffic levels are those from Montevideo to Salto-Artigas, Mercedes and Rio Branco. A new connection with the Argentine system at Salto has persuaded AFE to commence construction of a 17-km connection near Mercedes, which would facilitate through-traffic to Argentina and provide an interconnection to Paraguay. While the economic merits of this link have not been established, it is of potential importance for international transit traffic through the port of Montevideo; this factor is to be analyzed as part of the national transportation planning activity of MTOP (para 1.16). 1.10 Inefficient managerial and operating procedures of AFE, combined with the poor physical and largely obsolete condition of the system, resulted in financial losses which amounted to over US$7 million in 1976. The 1978 transport survey concluded that all rail traffic could be carried more effi- ciently 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. (iv) Air Transport 1.11 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 Plata area, totaled about 495,000 passengers in 1978. Uruguay has only one main functioning international airport, Carrasco in 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 and serves only small aircraft. Commercial airline operations are dominated by Primeras Lineas Uruguayas de Navegacion Aerea (PLUNA), a state-owned company. Services to several domestic airports are provided in cooperation with Transportes Aereos Militares Uruguayos (TAMU).  - 4 - 1.12 Organizations involved in the administration of air transport are: Direccion General de Aviacion Civil (DAC); Direccion General de Aeropuertos Nacionales (DIGAN); and Comision Nacional de Politica Aeronautica (CNPA). The National Defense Ministry controls all these organizations, including PLUNA. DAC controls air operations, certification and licensing. DIGAN controls construction, maintenance, operation and administration of airports. CNPA was created in 1975 under the presidency of the Air Force Commander-in- Chief and includes the managers of DAC, DIGAN, PLUNA and the Director of National Transport in MTOP. Its function is to advise the Commander-in-Chief on national air policy. C. Transport Planning and Coordination 1.13 MTOP was created in 1967 and has, in principle, responsibility for the development of a national transport policy, transport coordination and the establishment of tariffs for transport services. The Ministry has some nominal jurisdiction over the investment plans and operational policies and practices of the modal agencies; however, in practice, their plans and policies are formulated independently of MTOP. Although AFE is subject to strict regulatory procedures, its management has been able, to date, to resist pressures to halt rail investment and scale down operations. The national port administra- tion formulates its own investment program and decides its operating policies. Air transport planning and operations are, again, fairly autonomous. The National Directorate of Transportation (DNT), created in 1975 within MTOP, provides the formal channel of contact from the operational agencies through to the Secretaria de Planificacion, Coordinacion y Difusion (SEPLACODI - the national planning body responsible for Uruguay's social and economic planning and coordination at the macro level). SEPLACODI prepares the five-year national plans and is assigned the responsibility for determining sectoral priorities. DNT provides road transport investment and expenditure proposals to SEPLACODI, but information on other modes generally comes to SEPLACODI directly from the responsible agencies. 1.14 Sector management and intermodal coordination have been 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 survey, of data on transport costs and demand has prevented effective efforts in this regard. There was no dis- cussion of the transport sector in the Five-Year Plan (1973-1977) despite the allocation of almost 20% of total public sector investment to transport. 1.15 In recognition of this deficiency, the UNDP-financed transport survey was initiated and used by the Government to establish priority needs of the transport sector. As mentioned in paragraph 1.02, strengthening of national transport planning was identified as one of the four highest priority areas. 1.16 As a first step toward improving transport planning and coordination, the Conclave 1/ of December 1977 created a Transport Advisory Council which is 1/ A consensus-making meeting of leading civilian and military authorities.  - 5 - led by DNT and which includes AFE, PLUNA, DIGAN, the National Port Administra- tion (ANP) and SEPLACODI. This Council is preparing a national transport plan which is to be based largely on the 1978-1982 investment recommendations of the UNDP-financed transport survey. A Transport Planning Unit (TPU) of DNT within MTOP, staffed with counterparts from the transport survey, is presently assisting the Transport Advisory Council in preparing a national transport plan. Technical assistance to strengthen this unit is to start in late 1979 with financing under a UNDP grant (US$400,000) and under the Bank's Second Highway Project (US$200,000). Included in its work program will be the completion, by mid-1981, of an intermodal comparison study, initiated by the transport sector survey, which would serve as the basis for coordination of transport policies and investments. D. Past Bank Assistance to the Transport Sector 1.17 Bank Group involvement in the Uruguay transport sector began with a highway loan in 1963 (Loan 324-UR, US$18.5 million equivalent), which assisted in financing improvement of Route 5 from the outskirts of Montevideo to the Brazilian border (500 km); it also included components of highway maintenance and a highway planning study. The works were satisfactorily completed in 1971, but five years later than the appraisal estimate; this delay was caused by incomplete engineering designs, difficulties in obtaining satisfactory bids, and poor contractor performance. Cost overruns, mainly due to the five-year delay, were about 14%, but actual traffic data showed an average increase of about 50% over the appraisal estimate for 1971. 1/ 1.18 Following a transport sector review by the Bank in 1974, the Government obtained UNDP financing to carry out a comprehensive survey of the national transport system, which was executed by consultants retained by the Bank (para 1.02 and accompanying footnote). This survey was instru- mental in identifying the Second Highway Project, approved by the Bank's Board in June 1979, and the port project under appraisal. 1.19 The Second Highway Project (Loan 1689-UR, US$26.5 million equiva- lent) will help the Uruguayan Government to reconstruct the most heavily traveled portion of Route 8, another important link with Brazil; it will also help to improve long-term programing and executing capacity for road rehabilitation and reconstruction as well as transport planning and coordi- nation. II. THE PORT SUBSECTOR A. Ports and Maritime Transport 2.01 Nearly 91% of Uruguay's foreign trade is maritime, and about 70% of this trade has traditionally been handled through the port of Montevideo. The predominant role of this port is historical: the sheltered bay was there first, accessible to the largest vessels operating in the last two centuries, and the country's inland transportation system grew around it, as did the metropolitan area of Montevideo city. Major investments in public port 1/ A final supervision report for this project was prepared on September 29, 1972.  - 6 - installations began in 1905 and continued through 1931; they resulted in the existing general cargo terminal, with navigational access for vessels of up to 10.0 m draft (1.0 m more than Buenos Aires). The oil refinery of the national petroleum company (ANCAP) is located within the bay of Montevideo, and, until recently, the entrance channel and outer harbor of Montevideo were used for all of Uruguay's crude oil imports, which were handled at the ANCAP berths, across the bay from the commercial docks (Map IBRD 14368R). This petroleum traffic, however, has now been moved to a new offshore tanker mooring at Punta Jose Ignacio (about 145 km east of Montevideo; Map IBRD 14367R). Thus, the total tonnage entering the port has been substantially reduced starting this year, but that development should not affect the flow of general cargo, dry bulk cargo and container traffic, constituting the high-value part of Uruguay's foreign trade, which will continue to be handled through public terminal installations at Montevideo. 2.02 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. River navigation and coastal shipping for domestic transport are relatively unimportant in Uruguay, amounting to only 7% of internal freight movements. Maintenance of river channels (the responsibility of a separate Department under MTOP, except at Montevideo) is costly, and the possibilities of economical channel-deepening in the Uruguay River are limited by very high resiltation rates. While prospects for some transit movement through the river ports exist (para 2.04 following), the role of Uruguay's secondary ports in export and import trade is expected to remain limited. On the southeastern coast of Uruguay, the port of La Paloma is currently being expanded as a fishery port; while of considerable importance for the prospective growth of the country's fishery industry, it is not expected to have a significant impact on the pattern of foreign maritime trade. 2.03 The merchant fleet of Uruguay consists of about 30 vessels, which carried about one-fourth of Uruguayan foreign trade in 1975. The gross registered tonnage of the fleet is 280,000 tons, and the average vessel size is just over 9,000 tons; however, the latter figure is severely distorted by the largest vessel, a 120,000-ton tanker owned by ANCAP, without which the average vessel size reduces to 5,000 tons. Of the total fleet, 10 vessels are used for ocean trade and the remainder for coastal and river trade. These vessels are mostly privately owned. 2.04 Uruguay's foreign trade is handled predominantly by foreign-flag 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 from 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 a trans-Atlantic voyage. The same pattern of operation is used, to a limited extent, by charter vessels in the grain trade "topping off" in Montevideo with Uruguayan exports, after  loading first at Rosario, Buenos Aires or other Argentine ports on the Parana River. Because of this pattern, it has long been the hope of port interests in Uruguay to develop transit traffic for countries in its hinterland, using existing inland routes to and from Montevideo, by water, rail or road. In practice, such traffic has not been significant to date; while both Paraguay and Bolivia have a small area within the Montevideo port designated as their "free zone," neither country is using these facilities extensively for transit traffic. 2.05 Potentially, Uruguay could be a major gateway for the foreign trade of adjacent countries (Paraguay, northern Argentina, Bolivia and even southern Brazil) and it is possible that inland traffic, beyond Uruguay's borders, can be developed to a significant level in coming years; factors that would favor such development in the near future are the construction of a rail link to Argentina, over the dam at Salto Grande, and proposed international agree- ments among the Southern Cone countries that would permit the transfer of freight across borders in bond, simplifying customs procedures. As a result, grain movements by unit train from the Rosario/Santa Fe area and containerized cargo movements to and from industrial centers in adjacent countries could find the port of Montevideo an attractive transit point. B. Characteristics and Growth of Traffic 2.06 Uruguay's exports consist largely of agricultural products, with meat, rice and wool predominating; however, "non-traditional" exports are becoming increasingly important and consist of manufactured goods such as shoes, garments and leather accessories. Imports in mixed general cargo are largely machinery and other manufactured goods and, in dry bulk commodities, comprise fertilizers and chemicals. The traffic through Montevideo is expected to grow from 1.5 million tons in 1978 to 1.9 million tons in 1983 and 2.7 mil- lion tons in 1990 (Annex 1). 1/ 2.07 Projections of port traffic for 1979-1990 are given in Tables 2.1, 2.2, 2.3 and 2.4. The basis of traffic forecasts for the port of Montevideo is discussed in more detail in paragraph 4.02. A summary of historical and projected total traffic through the port of Montevideo is as follows (in thousands of metric tons): 1/ This figure 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.  -8- ACTUAL Year 1973 1974 1975 1976 1977 1978 Exports 259.4 330.7 321.4 608.1 473.3 434.7 Imports 807.7 813.2 662.5 677.9 622.8 1,106.8 Total 1,067.1 1,143.9 983.9 1,286.0 1,096.1 1,541.5 FORECAST Year 1979 1980 1981 1982 1983 1990 Exports 498 522 547 604 665 1,001 Imports 1,045 1,092 1,144 1,197 1,255 1,741 Total 1,543 1,614 1,691 1,801 1,920 2,742 2.08 Relatively little of the general cargo handled through the port of Montevideo is containerized at present; 1/ there is only one regular liner service of all-container ships (the LASH 2/ vessels of the Delta Line), but several other liner services carry part loads of containers, and it is expected that Montevideo, like other ports in the Southern Cone, will experience significant increases in cargo movements by containers over the next ten years. Similarly, much of the bulk cargo moving through the port is being handled as part loads of general cargo vessels, but the percentage handled by specialized bulk carriers is already much greater than that of full container ships, and it is expected that bulk cargo (both imports and exports) will be handled predominantly by bulk carriers in the near future. This development will have significant impact on the future needs for terminal capacity within the port of Montevideo where, at present, no specialized berthing facilities exist for ocean vessels, all types of general and dry-bulk cargo (and containers) being handled at any location in the port, depending on berth availability. C. The Port of Montevideo (i) Location and Terminal Installations 2.09 The port of Montevideo is the deepest sheltered harbor in the estuary of the La Plata River. The peninsula on which the Old City was 1/ While historical records on cargo moving through Montevideo in containers are not available, it is estimated that the volume is on the order of 2%-4% of total tonnage handled. 2/ Lighter Aboard Ship  - 9 - built provides protection from the open sea to the south for the main terminal facilities located adjacent to the downtown waterfront. These facilities are connected to the main inland transport routes of Uruguay by rail and by road; despite their location in close proximity to the downtown central business district, there are no major problems of land access to the port connected with urban traffic problems. The port has numerous facilities for small vessels in coastal and river trades (having a draft of up to 5 m) as well as 2,250 m of docking space for ocean vessels with up to 10 m draft. In the original design of the port, which set 140 m as the length of the largest vessel in port, this space was considered adequate for 14 ocean vessel berths; today, with many vessels having overall lengths of 165 to 175 m, the available docking space is, in effect, equivalent to only 11 ocean vessel berths. 2.10 Navigational access to the port from the natural 10 m depth 1/ contour in the Atlantic south of the port entrance is via a 200-m wide, straight channel about 9 km in length. This channel, originally dredged to a nominal depth of 10 m, leads to the port entrance in the main break- water and into the outer harbor, where a large anchorage area is available (Map IBRD 14368R). Within the inner harbor, areas for ocean vessels were originally dredged to a nominal depth of 10 m and areas for coastal and river traffic to 5 m. There is also a channel with 9.5 m nominal depth to the ANCAP terminal. 2.11 Wharf construction at the existing ocean vessel berths consists of concrete caissons, extending to a depth of about 10.5 m; 1/ spaces between caissons (8 m clear, in most cases) are spanned by reinforced concrete decks near the High Water line. Railroad tracks, crane rails and wharf apron paving rest on about 2 m fill above the decks; the wharf face consists of a stone masonry wall. There are 11 transit sheds adjacent to berths, of which two (No. 1 and 2) are three-story, four (No. 6, 7, 8 and 9) are two-story, and five (No. 3, 4, 5, 10 and 11) are single-story; of the latter, two sheds (No. 10 and 11) are refrigerated. The total area of covered storage provided by these sheds is approximately 70,000 m . The port also has a number of single- Ind multi-story warehouses in upland areas, providing an additional 95,000 m of covered area. Pavement throughout the port consists of cobble- stones, and all facilities are served by railroad trackage. 2.12 Lifting equipment in the port comprises 49 gantry cranes of 1.2 to 5-ton capacity, a derrick of 200-ton capacity, a floating crane of 60-ton capacity, and about 50 rail or truck mounted mobile cranes. Most of this equipment was installed with the original port construction in the 1910s or 1930s. The port also owns and operates five diesel locomotives and about 120 railroad flat-cars and wagons for cargo handling within the port area. Floating craft permanently operating in the port include four dredges (para 2.17), 16 tugs, miscellaneous barges and small craft. Most of this equipment is obsolete and uneconomical to operate because of excessive cost and down-time for repairs. 1/ All depths are given from Standard Datum, which is about 0.6 m below Mean Low Water, or about 1.2 m below Mean High Water.  - 10 - (ii) Cargo and Vessel Operations 2.13 General cargo in the port of Montevideo is handled predominantly by break-bulk methods (para 2.06), using dock cranes and, increasingly, ships' gear in combination with dock cranes. Most of the cargo is transferred directly between vessels and land transport vehicles (trucks or railroad cars), with only a minor portion going through the transit sheds; these sheds are used-primarily for long-term storage (a practice which is expected to be changed as a result of this project), and very little of the cargo in the sheds is palletized. Some cargo, however, is stored in upland warehouses, within the port, and, for certain commodities (mostly agricultural exports), these warehouses actually function as transit storage areas to a greater extent than the sheds adjacent to berths. With the exception of wool in bales or rice in bags (for which lift trucks are used), cargo is hand-stacked inside the transit sheds and warehouses. 2.14 Dry bulk cargo (largely imports) is normally handled by dock cranes with grab-buckets from ships' holds into portable hoppers which are positioned on the wharf apron opposite hatches and which are arranged to allow trucks to load beneath the hoppers in a steady flow of vehicles. These operations frequently involve a truck waiting line of considerable length, so that no other cargo operations can take place at the berth where bulk cargo is being discharged. In the case of grain imports, grab-buckets are now usually replaced by portable bulk-flow unloaders (Buhler's), which are suspended from ship's gear and dock cranes to feed the hoppers for truck loading. 2.15 The predominant use of dock cranes for general cargo in Montevideo is a matter. of tradition and practical considerations by both the shipping lines in regular service to the Southern Cone and the port. The original port installation was based on French and German operating concepts of 1905, and port labor has been trained to operate with dock cranes. In the shipping lines' view, stevedoring labor is less efficient with ships' gear than with dock cranes. However, the utility of the dock cranes has decreased in recent years for the larger vessels calling at Montevideo (as a result of their age, their limited reach and lifting capacity, and the low position of the operator's cab), and a combination of dock cranes and ships' gear has become the practice; by this method, the ships' gear works between the hatch and the ships' deck, where the hook is transferred, and dock cranes work between the apron and the ships' deck. At the multi-story sheds (six of the existing berths), dock cranes are needed to reach the second or third levels. At the other berths, which have wider aprons, dock cranes are considered superior to ships' gear since the cranes can serve several lines of railroad cars or trucks and have greater flexibility in picking up or landing cargo at various spots. An argument frequently cited in Uruguay, in support of continued use of dock cranes, is that other ports in the region use the same method and that liner services are poorly equipped for ships' gear operations without help from dock cranes. An analysis of the proposed new dock cranes (para 4.09) indicates that their purchase and installation are justified when compared both to the present operations and to the use of ships' gear without dock cranes.  - 11 - 2.16 The port of Montevideo has a record of no major marine accident in its harbor basin or access channels since opening of the facilities to traffic in 1911. Pilot service in the access channel is compulsory and tug assistance is normally provided for passage through the harbor entrance: in the access channel, only one vessel operation is permitted at a time. Within the port, ocean vessel movements between the outer harbor and the terminal berths in the inner harbor are performed entirely with tug power, under the direction of harbor pilots; for these movements, a minimum of two tugs is normally required per vessel operation. (iii) Channel and Port Maintenance 2.17 About 10 million m3 of deferred maintenance dredging is needed in the port of Montevideo to bring the access channel and the harbor basin for ocean vessels to their original design depth (10 m). At present, controlling depths are about 8.5 m in the port, and about 3 million m3 must be dredged annually to maintain this depth; annual maintenance dredging is likely to increase to 4 million m3 after the port is deepened to 10 m. The port has four dredges, with the following characteristics: Annual Average Production Estimated Cost Year 1974-1978 of Production 1/ Name Type Built (m3 thousands) US$/m3 D-3 Bucket-chain 1902 76 20. Steam-driven D-5 Suction-hopper 1923 791 1.35 Steam-driven (750 m3) D-6 Bucket-chain 1949 197 6.15 Steam-driven D-7 Suction-hopper 1970 2,459 0.69 Diesel-driven (2,500 m3) 1/ With two-shift operations, normal practice in the port of Montevideo. 2.18 In view of their high cost and low productivity, dredges D-3 and D-6 should be retired from service and scrapped as soon as possible. The age and unreliable performance of dredge D-5 indicate that this dredge should also be retired in the near future. The D-7 is the only relatively new dredge  - 12 - currently in the port; it has been operating effectively for the past eight years, but has never had a major overhaul. Because of necessary repairs, the D-7 was not operational from December 1978 to November 1979, but it is now reported to be in good operating condition and should be kept in service. Agreement was reached during negotiations that ANP would prepare, by July 1, 1980, a retirement schedule for the three older dredges. This program would provide for the termination of operations and subsequent sale or scrapping of dredges D-3, D-5, and D-6 no later than nine months after the two new dredges have commenced operations at Montevideo. 2.19 Floating and land-based equipment of the port is maintained in a group of shop buildings at the eastern side of the port area, where a small floating dry-dock is also available. The shops are antiquated, but have the capacity to perform virtually all types of operations needed for the repair of mechanical and electrical components of the cranes, tugs, and other equip- ment operated in the port of Montevideo; they have kept the port running for the past 38 years with very little input from the outside world. Removal of the existing maintenance shops from their present buildings to a single, large warehouse at the northeastern end of the port area is under considera- tion at present. This move would improve the working environment for maintenance, but would not overcome some of the other deficiencies of maintenance operation, which include inadequate supplies of spare parts and overstaffing in the Maintenance Department; while deficiencies in maintenance equipment are also known to exist, significant improvements are expected to be possible in maintenance operations with (a) relocation of the shops, (b) reductions in shop personnel and (c) improvements in the spare parts supplies when spares are purchased with the new equipment in the current development program. 2.20 Facility maintenance in the port is generally at a high level. Port structures and pavement are almost without exception in good condition, but utilities, particularly electric power distribution for dock cranes, are in need of upgrading. Marine structures show no evidence of deterioration above water, and periodic repairs on the outer breakwater have permitted it to protect the harbor from significant damage by wave action. (iv) Agencies Involved in Port Activities 2.21 Private sector agencies involved in commercial port activities at Montevideo include (a) foreign and domestic shipping lines represented by the shipping association (CNT), (b) a small private tug operating company and (c) a stevedoring agency (CASE), which provides stevedores to shipping lines. Port security, the regulation of marine operations (e.g., manning scales, work rules), pilot services and navigation aids are the responsibility of the Uruguayan Coast Guard (Prefectura). The National Customs Service provides the normal customs functions and controls. All other port opera- tions, port and channel maintenance, and terminal development in Montevideo are the responsibility of ANP, discussed in the following paragraphs.  - 13 - D. Port Adm'nistration (i) Legal Status and Powers 2.22 ANP was created in 1916, by law, and charged with responsibility for essentially all aspects of commercial port operations in Uruguay. The institution is governed by a three-member board of directors named by the Government, which designates two of its members as the President and Vice-President. Although ANP is legally autonomous, it does report to the Government through the Ministry of Transport and Public Works and is required to submit its annual budget for approval by the Ministries of Planning and Finance. 2.23 ANP is responsible for essentially all aspects of commercial port operations in Uruguay. The range of services provided by ANP includes tugs, dredging, cargo handling, storage, maintenance of existing facilities and the planning and execution of works to improve port opera- tions. While the major focus of ANP's responsibility is the port of Montevideo, the institution is also responsible for operating th. other commercial ports in Uruguay (Colonia, Nueva Palmira, Fray Bentos mnd Paysandu). Investment decisions for these smaller ports are, however, a responsibility of the General Directorate of Hydrography in MTOP. In addition, ANP owns and operates some small (under 250 tons) coastal trade vessels. (ii) Organization and Management 2.24 Chart 1 shows the current organization of ANP in summary form. The chart shows that, in spite of the wide range of services handled by ANP and the large size of the organization (over 6,200 people), responsibility for day-to-day operations is allocated in a straightforward manner among four divisions run by the key managers, i.e., a finance manager, an administrative manager, a technical manager and an operations manager. The largest of these divisions is operations, which includes nearly 3,000 people and has respon- sibility for all revenue-generating services in Montevideo and the other ports, as well as for ANP's marine activities. The technical manager is responsible for over 1,000 people who maintain and repair existing equipment, as well as for dredging of the port and for the design and specification of port-related investments. The administration and financial divisions are smaller in size, having about 500 and 300 staff respectively. Policy- and decision-making responsibility lies with the President and the Vice-President of ANP, both of whom are active full time in these positions. Although the current President has been in his position for over six years, he and the Vice-President are from the Uruguayan military service and depend extensively on a single technical and planning advisor for assistance in technical areas. 2.25 The basic structure of the organization has changed little in the last ten years, but a substantial reduction in overall staff has occurred, and, at the same time, the port's operational efficiency has improved. In particular, the current administration has been successful in eliminating shipping conference surcharges that had been applied to the Montevideo Port because of the long ship turnaround tir,es and cargo losses. As a result, the port's reputation as "Puerto Sucio" has disappeared, pilferage of cargo is no longer a problem and overall staff was reduced substantially from over 10,000 people in 1970 to 6,213 in 1978 (para 2.26).  - 14 - 2.26 Table 2.5 summarizes the current staffing structure of ANP. 1/ Total staff, including those on non-permanent status, amounted to 6,213 at the end of 1978, 415 fewer than the positions allowed for in ANP's budget. The following table shows the staff reductions that have been made over the last five years. ANP - Total Staff 1974-1978 1974 1975 1976 1977 1978 Marine Operations 551 510 544 519 428 Cargo Handling 2,614 2,516 2,493 2,450 2,411 Maintenance 1,785 1,736 1,718 1,598 1,563 River Ports 399 382 382 350 320 Shipping 22 42 42 42 40 Administration 1,783 1,759 1,687 1,675 1,451 Total 7,154 6,945 6,866 6,634 6,213 The overall decrease has been 15%, in a period during which traffic has grown by 35% and overall working expenses, in real terms, have declined by 37%. The reductions have generally been achieved through retirement of eligible staff (people whose age plus years of service equal 100) as well as voluntary retirements because of low salaries (para 2.27). The number of staff is still substantial for a port which handled just over 1.5 million tons of cargo in 1978; the principal reason is that almost all positions in the port are operated on a two-shift basis, since, as in most public institutions in Uruguay, the employees work part of the day at a second job in addition to working at ANP. 2.27 Because of this "two-job" factor, salaries at public institutions in Uruguay are generally accepted as being lower than salaries paid for equivalent positions in the private sector. In the case of ANP, however, for many key positions this discrepancy has become too large, i.e., salaries offered are not sufficient to attract technical and professional employees of a type that are in demand in the country. Agreement was reached during negotiations that selective salary increases would be allowed for ANP staff. While average salaries per employee have increased by about 600% in local currency terms since 1974, they have decreased marginally in US dollar terms 1/ Figures in Table 2.5 are given according to job classification; figures in paragraph 2.24 refer to structural classification and thus differ from those in Table 2.5.  - 15 - and by 20% in real terms. ANP s salaries are lower than those paid by other Government institutions, ana it nas experienced difficulty in attracting qualified professional staff. Xt the eid of 1978, for instance, it employed four engineers, compared wit'li i2 in 1977, and recent efforts to hire more engineers for the permanent staff have not been successful. 2.28 The current President of ANP is firmly committed to strengthening the overall institution, and work is being carried out by the Vice-President with this objective in mind. The main weaknesses in the current organization are: (a) the lack of any individual with direct responsibility for the overall day-to-day functionitig of a port, which results in increased demands on the President's t,ae nnu decreased integration of the various port operational functioLs; and (b) ineffective planning and execution of facilities improvements. This latte- weakness has not been a problem in recent years because of the very imited expenditures on new equipment and the substantial profitabilitv *- ANP. The current investment plan for 1979-1982 is substantial, however, and this aspect of the organization will have to be strengthened. (iii) Proposed Organizational Improvements 2.29 A major objective of the proposed loan is to assist ANP in its effort to bolster the organization by first improving overall effectiveness of the planning effort and then building up the technical capability of the organization so that the substantial facilities improvement program that is scheduled will, in fact, be carried out promptly and with appropriate controls. 2.30 These improvements should be brought about with a minimum of institu- tional changes; however, some adjustment will be required, and proposals were discussed with ANP during appraisal. In the proposed organization (Chart 2), a new position of General Manager of Montevideo Port will be created. This person will have responsibility for coordinating all aspects of the day-to-day operations and management of the port. At the same time, the Technical and Planning Advisor will, in effect, be replaced by two newly created units - one with responsibility for overall institutional and physical planning and the other with responsibility for preparation and implementation of projects in the investment program. 2.31 Specific details on the organizational objectives for ANP are included in Annex 2, but concurrent with this institutional strengthening are objectives for further personnel reductions. During negotiations, targets were agreed with ANP on the timing and nature of organizational changes, on overall staff reductions and on personnel levels and skills for the two new departments. Financial assistance is being provided in the loan to enable ANP to hire key personnel (local and foreign) to staff these two departments for an interim period and to train the local staff (Annex 3).  - 16 - E. Port Financial Management (i) Accounting and Auditing 2.32 ANP's current financial management procedures need strengthening. Although the reporting systems provide sufficient financial information for effective cost monitoring and control, and are prepared and audited in accordance with generally accepted practices, the data are not provided in a form which is really useful for effective management analysis. In addition, the time needed to prepare usable data is excessive. Under a previous loan made by the Inter-American Development Bank (IDB) (para 2.38), the financial procedures were analyzed, and a report containing a large number of suggestions for changes was prepared. ANP's financial staff were not, however, pleased with the extremely long report, felt that the changes would be difficult to implement and were not convinced that significant improvements would result. Therefore, they have not implemented the recommendations. 2.33 ANP's audit is currently performed by the "Tribunal de Cuentas," a public institution responsible for auditing the publicly owned institutions in Uruguay. The audit reports prepared by the Tribunal are not as extensive as would normally be prepared by typical private auditing firms, but the Tribunal has agreed to expand the scope of its analysis in line with requests of the Bank. The main problem is that audit reports are issued more than 12 months after the end of each year. These delays seem to arise mainly from the slow procedures used by ANP to consolidate its financial information; therefore, the main area for improvement under the proposed project will be improvement of the speed of data preparation through assistance in the introduction of improved data processing systems. It was pointed out during appraisal that audited financial results will be required within six months of the end of each financial year, and ANP agreed that this was an appropriate objective. Both ANP and the Tribunal feel that they can meet this target, once financial data are prepared more efficiently. It was further agreed during negotiations that, if the Tribunal de Cuentas is not able to comply with this requirement, private auditors should be appointed. 2.34 Current financial information is prepared on a historical cost basis which, in view of the rapid inflation occurring in Uruguay, severely distorts the meaningfulness of the data provided. The cost data are, however, well segregated among the various operating functions and, for this reason, the financial staff can carry out the current operating cost study (para 5.05). To avoid distortions, financial data in the future should reflect current values, and it was agreed during negotiations that future audit reports should include financial data prepared on this basis. (ii) Budgeting and Financial Planning 2.35 The port staff does not prepare any real financial plan, and even the annual budget that is prepared does not function as a planning document. Budgets are detailed and well prepared, but do not get issued until late in the year to which they are supposed to apply. As a result, ANP may well wait for "approval" for each budget from the appropriate ministries for more than 12 months after that year is over. In order to increase the importance of the budget process and as a first step toward meaningful financial planning,  - 17 - it was agreed during negotiations that a budget officer will be appointed and that the draft budget will be prepared and furnished to the Bank at least three months prior to the start of the budget year, until the project is completed. 2.36 A major factor which impairs ANP's ability to make financial plans is the current practice under which a number of users of the port are granted exemptions from port fees on their imports. In recent years, these exemptions have increased substantially in importance; in 1978, some 25% of ANP's charges were waived in response to various ministers' stipulations. This issue is discussed further in paragraph 5.02. The discontinuance of these exemptions is a condition of effectiveness of the Loan, and it was agreed during negotiations that the Government will not grant exemptions from port charges in the future. F. Port Development (i) Earlier Planning Efforts 2.37 Port expansion and improvement were the subjects of various planning efforts by ANP in the 1950s and 1960s; some of the resulting plans received formal approval under earlier administrations. The possibility of major port deepening was considered briefly in the context of a site selection study sponsored by Argentina in 1972/73. Deepening of the existing port of Montevideo to 12 m was actually authorized by the Government of Uruguay about 1974 on the basis of preliminary hydraulic studies by a Dutch consulting firm; however, none of the wharf structures within the port are designed for deepening beyond the present nominal depth (10 m), and the stability of docks could be endangered by dredging alongside unless major structural changes were made first. Thus, these earlier planning efforts have not resulted in a development program that could serve as a basis for action. 2.38 In 1968, IDB made two loans to ANP, in the total amount of US$11.95 million equivalent 1/, for the acquisition of port equipment; included in these loans were funds for a study by consultants to determine, inter alia, the type and amount of equipment to be acquired under the loans. The study was completed in 1973, but a number of its recommendations were unacceptable to ANP, and most equipment purchases were delayed as a result. In 1975, IDB canceled the undisbursed balance of its loan (US$9.55 million). 2.39 The IDB-financed study of the port of Montevideo has no official status within ANP at present, although part of its findings may have been used in formulating the ongoing port development program (paras 2.40-2.42). The experience with this study, however, has left in ANP's management a strong predisposition against the use of foreign consulting firms (para 2.44). 1/ Loan 170-OC-UR, approved by IDB November 29, 1968, in the amount of US$11.6 million; and Loan 199-SF-UR, approved by IDB November 29, 1968, in the amount of US$0.35 million.  - 18 - (ii) 1978-1982 Development Program 2.40 In mid-1977, a five-year port development program was submitted by ANP to the Government, with a general description of proposed investments totaling US$74 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. The program was adopted by the Conclave of 1977 (para 1.16) and received official Government approval in early 1978. 2.41 During 1978, ANP awarded four contracts under the approved develop- ment program, committing about US$16.2 million equivalent, for (a) acquisition of 14 gantry cranes, (b) construction of a new fishery pier and a new land area ior container operations, (c) conversion of Shed Number 11 to a modern refrigerated warehouse, and (d) installation of cooling equipment for the refrigerated warehouse. A further contract, for the strengthening of dock structures at six berths, to support the new gantry cranes, is about to be awarded. 2.42 During preparation and appraisal of this project, the 1978-1982 Development Program of ANP was reviewed in detail and a number of modifica- tions in the program were agreed with ANP. The original budget estimate and the revised, current cost estimate for the Development Program are given in Table 2.6. For reasons explained in paragraphs 4.08-4.10, the overall composition and scope of the 1978-1982 Development Program, as modified, are considered satisfactory. During negotiations, confirmation was received from ANP on the agreed scope and content of the 1978-1982 Development Program. (iii) Project Preparation and Implementation 2.43 ANP relies heavily on contractors' designs for its project prepara- tion. For equipment items, general performance specifications are issued, and manufacturers are encouraged to submit proposals based on their own equipment standards; for the types of equipment in normal use by ports, this method is customary and effective in many areas. For civil works items, however, ANP only prepares sketches giving the overall dimensions and func- tional criteria for the desired facilities, and the bid invitation requests contractors to propose on a design-construct basis; the designs are then reviewed by ANP as part of the bid evaluation, and the contractor must hold hie bid price firm while modifying the designs in accordance with ANP's ccmments. This method of contracting for civil works, with which ANP has only limited experience, is expeditious but hazardous, particularly since ANP does not obtain adequate information on subsurface conditions at the construction site to provide to contractors. On the largest civil works contract awarded under the program to date (for a fishery pier and new land area for containers, para 2.41), the original contract price obtained from the low bidder was in line with market prices, but a major cost overrun is now in the process of being negotiated as a result of unforeseen difficult foundation conditions at the construction site. 2.44 The method of project preparation and implementation used by ANp reflects present staff deficiencies in the organization (para 2.29) and air's reluctance to use consulting firms (para 2.39). In 1978, while  - 19 - reviewing tne status of preparation of the development program, the Bank found that there were qualitative deficiencies and that ANP's limited staff was unable to provide the necessary effort to complete the project designs, cost estimates, economic analyses and financial forecasts required for appraisal. Therefore, UNDP-financed advisors were retained to work with ANP's staff in completing an overall analysis of the investment program and a detailed analysis of each project item being considered for Bank financing, 1/ 2.45 Outside assistance to improve ANP's capabilities in this area is highly important. During negotiations, agreement was reached with ANP on the methods and procedures to be employed for (a) preparation of detailed designs covering the (relatively small) civil works components to be included in this project, 2/ (b) preparation of bidding and contract documents, (c) contractor prequalification, (d) bid evaluation and contract award, and (e) supervision of construction and equipment manufacture. (iv) Long-Range Port Development Prospects 2.46 Beyond the 1978-1982 development program of ANP, there are prospects for additional investment needs in the port of Montevideo (para 2.05) on which planning should be initiated in the next two years. In view of the possibility of major transit traffic 3/ and expected increases in container movements for Uruguay's exports and imports, future investments are likely to involve the construction of additional berths and deepening of the port. For this purpose, alternatives for port expansion should be reviewed comprehensively on the basis of detailed information regarding subsurface and oceanographic conditions in the Bay of Montevideo. Such information is not yet available. 2.47 During negotiations, agreement was reached on the scope of long-range development planning to be undertaken by ANP, assisted by advisory services to ANP's Planning Unit, which would be provided under the technical assistance component of the proposed project (para 3.08). This planning work would comprise the preparation of forecasts of export and import traffic and of transit traffic potential, in collaboration with the National Transport Planning Unit within MTOP; study of future operational requirements to accommodate anticipated traffic; analysis of alternative development schemes, with comparison of technical, operational and cost implications of alternative physical layouts, resulting in selection of most effective and economical scheme; preparation of development plan and phased investment program; engineering, financial and ecor.omic evaluation of the recommended plan; and preparation of a program of actions for implementation by ANP. 1/ The Bank was UNDP's Executing Agency for this preparatory work on the project and retained nine specialists in various fields, who completed the required work between February and May 1979. The cost of these services was shared 50% by ANP. 2/ Estimated to cost US$6.5 million, of the total project cost of US$58.2 million. 3/ Such traffic is to be analyzed as part of the national transportation planning activity of MTOP and in the context of proposed planning assistance to ANP (para 2.47).  - 20 - III. THE PROPOSED PROJECT A. Objectives and Description 3.01 The proposed project is an integral part of ANP's ongoing (1978-1982) investment program for the port of Montevideo (paras 2.40-2.42); it consists of selected equipment and civil works components of the program for which ANP requested Bank financing and technical assistance for program implementation and institutional improvements. The proposed Bank financing would cover approximately 56% of the total cost of ANP's 1978-1982 development program for the port of Montevideo, or 75% of the estimated foreign exchange cost of the program. 3.02 The objectives of the project are to increase the operating efficiency and throughput capacity of existing terminal facilities in the port of Montevideo through the introduction of modern handling methods and equipment and to plan for port expansion needed after 1982. 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 retirement 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 an appropriate tariff structure. 3.03 The proposed project would consist of the following components: (a) acquisition of equipment and modification of an existing wharf for a container and bulk cargo terminal; (b) acquisition of equipment and improvement of pavement and sheds for general cargo operations; (c) acquisition of two harbor tugs; (d) acquisition of a bucket dredge, with auxiliary equipment, and of a suction-hopper dredge; and (e) technical assistance to ANP.  - 21 - 3.04 The container and bulk cargo terminal, to be located on the existing wharf "Muelle de Escala," 1/ would include acquisition of two bridge 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 equipment for dry bulk cargo and container operations. 3.05 Equipment and alterations for general cargo operations would include acquisition of about 60 forklift trucks, eight mobile cranes and 5,000 pallets; structural alterations to six existing, multi-story transit sheds 2/ to facilitate "indirect transfer" operations; and yard paving around three existing, single-story transit sheds. 3/ 3.06 The two new tugs would be diesel-powered and of standard design for assistance to ocean vessels in berthing and unberthing operations. One tug would have propulsion power of 2,400 hp and be designed for operations in relatively sheltered harbor and channel areas only. The other would have propulsion power of 4,000 hp and be designed for seagoing operations to (a) provide capability for assisting vessels in distress outside the port of Montevideo and (b) provide emergency service at the offshore tanker mooring buoy near Punta Jose Ignacio. 4/ The 4,000-hp tug would be provided with pollution control equipment (see also para 3.18); both tugs would have standard fire-fighting equipment. 3.07 The3dredging equipment would comprise (a) a diSsel-powered grab-bucket dredge of 6 mi capacity, three split-hull scows of 700 m capacity each, and a 700-hp tug for toling the scows, and (b) a diesel-powered suction-hopper dredge with 3,000 m bin storage capacity. This equipment would permit retire- ment of ANP's obsolete dredging equipment and removal of the accumulated backlog of maintenance dredging, and the deepening of the access channel to 11 m, so that the largest vessels for which the port is designed could enter under all sea conditions (Table 3.1). 3.08 The technical assistance would consist of approximately 18 man-years of professional services for individual advisors to ANP, at an estimated cost of US$6,000 per man-month, and engineering services by specialist firms, for design and supervision of major project components and for subsurface explora- tions, as described in more detail in Annex 3. 1/ See Map IBRD 14369R; this terminal facility would also incorporate an adjacent, new land area of approximately 6 ha, for which dike construction, fill, paving and lighting are already under contract. 2/ Sheds Numbers 1, 2, 6, 7, 8 and 9; see Map IBRD 14369R. 3/ Sheds Numbers 3, 4, and 5; see Map IBRD 14369R. 4/ About 125 km northeast of Montevideo; see Map IBRD 14367R.  - 22 - B. Cost Estimate and Financing 3.09 The total cost of the project is estimated at US$58.2 million, of which US$50.0 million, representing 97% of the foreign exchange component, would be financed by the proposed Bank loan; the balance would be financed by internal cash generation of ANP. Equipment acquisitions represent 84% of the estimated total, civil works 11% and technical assistance to ANP the remaining 5%. 3.10 A summary of the estimated project costs is given on the following page; further details are given in Table 3.2. The estimated cost of all equipment items is based on performance specifications prepared by UNDP- financed-advisors to ANP (para 2.44). The estimated cost of civil works is based on preliminary engineering designs and current unit prices for similar work in Uruguay. Cost estimates for technical assistance are based on recent contracts or man-month rates for similar services provided by local and foreign sources. 3.11 A physical contingency allowance of 15% was used for all civil works. No physical contingency was used for equipment items and technical assistance. Contingencies for price escalation reflect Bank guidelines. Based on the project implementation schedule, the average estimated price escalation throughout the implementation period amounted to about 12% of project costs. C. Execution and Procurement 3.12 ANP would be responsible for execution of the project, in accordance with the schedule given in Chart 3. For this purpose, ANP is in the process of establishing a Project Implementation Department, which would be assisted by advisors and/or consultants forming part of the technical assistance component of the project. Technical assistance would also be provided to other departments of ANP (Annex 3). In view of the Bank's previous experience with projects in Uruguay and in order to speed up procurement of project- related items, agreement was reached during negotiations that the Government would be required to pass a decree granting ANP the necessary authorization from the Government to carry out all procurement related to the project; this requirement is a condition of effectiveness of the loan. 3.13 A key issue in execution of the project would be the preparation of detailed engineering designs for all civil works and of performance-type specifications for major items of equipment and the institution of procure- ment procedures acceptable to the Bank, based on appropriate documentation for both civil works and equipment components of the project (para 2.45). Full-time engineering supervision of construction and professional inspection of major equipment items (during fabrication and at times of delivery) would be required. For the new container terminal complex at Muelle de Escala (para 3.04), ANP would prepare a detailed analysis of container and bulk cargo operations, which would provide the functional criteria for the specialist firm to be retained by ANP for engineering design of this facility. Agreement on these points was reached with ANP during negotiations.  - 23 - URUGUAY MONTEVIDEO PORT PROJECT Project Cost Estimate and Financing Foreign Exchange Bank US$ million Component Participation Local Foreign Total X US$ m X Project Components 1. Container and Bulk Cargo Terminal (a) Bridge Cranes & Accessories 0.3 6.6 6.9 95 6.3 92 (b) Yard Handling Equipment - 0.9 0.9 100 0.9 92 (c) Alterations to Muelle de Escala 2.5 1.7 4.2 40 1.7 40 Subtotal 2.8 9.2 12,0 75 8.9 2. General Cargo Handling Equipment (a) Mobile Land-Based Equipment 0.1 3.5 3.6 95 3.4 92 (b) Pavement and Shed Alterations 0.7 0.4 1.1 40 0.4 40 Subtotal 0.8 3.9 4.7 81 3.8 3. Harbor Tugs 0.3 6.6 6.9 95 6.5 92 4. Dredging Equipment 1.3 24.0 25.3 95 23.3 92 5. Technical Assistance to ANP 0.5 2.0 2.5 80 2.0 80 Base Cost 5.7 45.7 51.4 44.5 Contingencies (a) Physical 0.5 0.3 0.8 0.3 (b) Price 0.8 5.2 6.0 5.2 Subtotal 1.3 5.5 6.8 5.5 Total 7.0 51.2 58.2 88 50.0 86  - 24 - 3.14 All major equipment components of the project would be awarded through international competitive bidding (ICB) after prequalification of firms in accordance with Bank Guidelines, with the normal provisions for preference to local suppliers. Civil works for the container terminal would also be awarded through ICB. Civil works for alterations to existing transit sheds and pavement for general cargo operations (para 3.05) would be awarded to prequalified contractors and advertised locally in accordance with local competitive bidding procedures. D. Disbursements 3.15 Implementation of the project is expected to take about three years (1980-1982). The estimated schedule of disbursements is shown in Table 3.3. 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 exchange cost or 92% of total expenditures for equipment; and (c) 80% of total expenditures for technical assistance. E. Project Monitoring 3.16 For the purpose of monitoring the project during implementation, progress on the following matters for the port of Montevideo would be reviewed with ANP: (a) staff reductions over the period 1980-1984 (para 2.31 and Annex 2); (b) financial working ratio over the period 1980-1984 (para 5.10); (c) tons of cargo handled per ship-day in port; and (d) dredging operations, to remove the backlog of deferred maintenance work (para 3.07). F. Environmental Impact 3.17 No significant environmental impact is expected in the city of Montevideo and adjacent water areas as a result of ANP's 1978-1982 port development program since all proposed improvements are confined to relatively minor physical changes in existing facilities that have operated in the same locations since construction of the port in 1905-1931.  - 25 - 3.18 Environmental considerations are a significant factor, however, in the justification of a 4,000-hp tug (para 3.06), which is designated to provide standby service at the offshore tanker terminal operated by ANCAP at Punta Jose Ignacio. This terminal consists of a single-point mooring buoy, approximately 3.5 km from the shore, connected to land by subaqueous pipeline approximately 25 km northeast of the resort area of Punta del Este. 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 in the shore areas near the existing resort is considered a potential hazard to the natural environment and to the major tourism investments in the area. Furthermore, a tug with sea-going capability may provide assistance to other vessels in distress in Uruguayan waters, from its normal duty station of Montevideo, and thus provide other emergency services. The incremental cost of the tug to have such emergency service capacity in the open sea, rather than merely an in-port service (i.e., the difference between 2,400 hp and 4,000 hp in propul- sion power, related hull design, and anti-pollution devices, representing an increase of 30% in the cost of the tug), is considered justified by environ- mental and safety considerations. C. Risks 3.19 The proposed port improvements at Montevideo involve the risks normally associated with the acquisition and operation of modern port equip- ment and minor alterations to existing port structures, e.g., possible increases in capital cost, delays in implementation and less than efficient utilization. However, these risks would be affected significantly by ANP's inexperience in the execution of a major program of this type and by the staff deficiencies known to exist within the organization. The provisions for organizational changes, technical assistance, engineering preparation and supervision of the project (paras 3.12 and 3.13) are therefore of particular importance. 3.20 The new container and bulk cargo terminal at the Muelle de Escala (para 3.04) presents a special case, in which the provision of assistance for engineering preparation and for initiation of operations is considered imperative (Annex 3). Even with such assistance, however, productivity of the terminal may be less than anticipated; this risk has been taken into account in the economic analysis (para 4.13). IV. ECONOMIC EVALUATION A. General 4.01 All components of ANP's development program have a common objective, i.e., the replacement of existing equipment, which is both old and obsolete, with modern equipment which would reduce overall port costs per ton of cargo, including ship time. The investment components analyzed can be classified  - 26 - into three principal groups. The first group is represented by cargo handling equipment and related ancillary investments; its final objective is to reduce overall port handling costs per ton and add capacity to existing berths. The second group is represented by dredging equipment, and its objective is to maintain the existing depth at nine meters at least cost and to catch up with the backlog which has accumulated over recent years, reducing the original draught of ten meters to the present nine. The third group is represented by tug boats, and its objective is the elimination of some of the obsolete existing fleet and the reduction of costs. B. Forecast of Operational Needs 4.02 Another main objective of the whole development program is to provide increased port capacity needed for higher traffic. A traffic forecast for the Port of Montevideo up to 1990 was prepared by consultants and revised by the Bank. Because of the uncertainty surrounding the magnitude of expected cargo movements, forecasts were prepared under minimum and maximum assumptions. The forecast used is a best estimate representing the mid-point between the two sets of assumptions. The best estimate forecast is reasonable and is in line with growth rates for imports and exports estimated in the Bank Report, Economic Memorandum on Uruguay, dated December 1977. Annex I explains the rationale and assumptions used in the traffic forecast and contains a detailed analysis of future traffic by major commodities and of containerized traffic. Traffic through Montevideo is expected to grow from 1.5 million tons in 1978 to 1.9 million tons in 1983 and 2.7 million tons in 1990, mainly as a result of the Government's strategy and efforts to increase the export of grains and beef and to liberalize import restrictions. Such future traffic includes only Uruguayan imports and exports since international through traffic has remained of minor importance to date; 10% of the container cargo potential is already containerized and is expected to increase in increments of 3% per year until 1983. By 1990, 50% of the potential is assumed to be containerized. C. Components of the Project (i) Container - Bulk Cargo Terminal 4.03 Among the largest investments for the port, but also one creating the largest capacity increase, is the conversion of the present Muelle de Escala to a terminal for container and bulk cargo handling. The major part of the earthworks to create a land area behind the dock has already started. The proposed Bank project would include dock widening and strengthening and the purchase of multipurpose bridge-cranes and yard equipment for bulk and container handling. Since all investment is related to containers and bulk cargo, the combined investment, including all earthworks, has been included as cost of the project. Benefits include the reduction in handling costs per ton and reduction in ship service time as well as ship delays avoided at other parts of the port. These reductions will accommodate an expected change to more costly but also more efficient ships. The improvement in dock produc- tivity is clarified in Table 4.1, ship time savings are explained in Table 4.2 l  - 27 - and ship delays in Table 4.3. A special problem arises concerning the transfer of benefits to Uruguay from ship time savings. For bulk cargo, all would be recaptured because a large part of these cargos would probably be carried by a recently purchased 22,000-dwt vessel or because of freight rates established taking the port cargo handling into account. For container cargo, the situa- tion is more complex. Larger container ships have a substantial economy of scale compared to small, and Uruguay is likely to continue to be served by large foreign-owned units. Any time saving benefits to these ships may not be fully recaptured by Uruguay. Without the project, Uruguay could be bypassed by these ships and be subject to much larger transshipment costs. Also, other advantages of door-to-door containerization may be such that a case would be made that, in fact, all the ship savings in port would be transferred indirectly to the Uruguay economy although not to the port itself. The best estimate has therefore been made assuming a 50% recapture of port savings to container ships. 4.04 Various crane alternatives were considered such as bridge cranes, portal cranes and different sizes of mobile cranes. The lower cost of the cheaper mobile and portal crane alternatives and somewhat lower dock strengthen- ing costs are more than offset by their lower productivity, which leads to longer service and ship waiting times. An incremental analysis was carried out for the different crane alternatives and demonstrated clearly that the multipurpose bridge cranes are economically superior to the mobile and portal cranes. The rate of return for the terminal complex, including the multipurpose bridge cranes and the new land area, under the best estimate, is 21% with a first year return of 11%; the rate would be reduced to 17% for 25% lower benefits and 19% for 15% higher investment costs. (ii) Cargo Transfer Equipment 4.05 One of the earliest parts of the proposed Bank-financed project would be the purchase of mobile equipment for existing general cargo berths. At present, investment of mobile cargo handling equipment has been limited to items such as forklift trucks, mainly used for handling wool. The normal handling method is discharge directly to or loading from trucks or rail wagons. This method leads to longer ship time in port and waiting times for trucks. A system of indirect transfer through existing transit sheds will reduce ship and truck service times. An analysis of costs and benefits has been included in Tables 4.4 and 4.5. The results show a rate of return of 36%, with a first year return of 17%. (iii) Harbor Tugs 4.06 The proposed tug boats are of two types, one of 2,400 hp and the other of 4,000 hp. Tugs with 2,400 hp would, however, be adequate for the Montevideo port functions, and the extra power from a 4,000 hp would be needed to provide emergency service at the offshore tanker terminal at Punta Jose Ignacio (para 3.19) and to carry out rescue and salvage operations in Uruguay's territorial waters. Since the justification of the additional power from 2,400 hp to 4,000 hp is based on environmental considerations and since those benefits are difficult to be quantified, the economic analysis considers, as a first step, the hypothetical case of the provision of two 2,400 hp tugs. Those two tugs would reduce ship waiting time and would be more efficient than ANP's present tugs in that they can be operated with smaller crews, have a lower consumption of fuel per operation and lower maintenance costs. With their purchase, it would be possible to retire two of the larger and four of the smaller tug boats of ANP's present fleet. During negotiations, agreement was reached on  - 28 - timing and arrangements for the tug retirement program. The rate of return for the 2,400 hp tug under the best estimate is 14% with a first year return of 14%. The economic analysis, in a second step, did not quantify the environ- mental and emergency service benefits associated with the incremental capital and operating cost of the 4,000 hp tug, compared with that of the 2,400 hp tug (para 3.18). The rate of return for the 4,000 hp tug under these conservative assumptions is 7% with a first year return of 8%. In addition to the quanti- fiable benefits limited to its port functions, the oceangoing 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 at Punta Jose Ignacio and would be useful in carrying out rescue and salvage operations in Uruguay's territorial waters, which is ANP's responsibility as laid down by law. Details of the basis for the analysis are provided in Table 4.6. (iv) Dredging Equipment 4.07 As outlined in paragraph 2.17, at present about 10 million m3 of deferred maintenance dredging is needed in the port of Montevideo to bring the access channel and harbor basin to their original depth (10 m). In addition, deepening of the access channel (to 11 m) is planned to allow passage into the port by the largest vessels that can be accommodated at existing berths without major structural alterations; furthermore, there will be additional siltation in the port throughout 1979. Thus, it is estimated that the total backlog of dredging at the start of 1980 will be 13.6 million m3. The port, at present, has two bucket chain dredges built in 1902 (D-3) and 1949 (D-6) and two suction hopper dredges built in 1923 (D-5) and 1970 (D-7). The D-7 is the only rela- tively new dredge currently owned by AN?. Given the quantity of dredging to be performed for removal of the backlog and to maintain the port (Table 3.1), the economic analysis searched for a least-cost solution and considered the purchase of a new clam-shell grab-bucket dredge of 6 m3 capacity (D-8); this dredge would reduce current operating and maintenance costs by enabling ANP to retire its older, inefficient dredges and by avoiding or reducing contract dredging. The economic evaluation of the D-8 is based on a two-shift operation, 30% additional routine maintenance requirements, the retirement of the D-3, D-5 and D-6 when the D-8 becomes operational, repair of the D-7, and contract dredging. The rate of return for the D-8 is estimated at 36%. 4.08 The 1978-1982 development program includes, besides the new D-8, a new suction hopper dredge of 3,000 m3 capacity (D-9). The incremental analysis for the D-9, using the same assumptions as for the D-8 (para 4.07), but without contract dredging, showed a rate of return of 18%.  - 29 - 4.09 Finally, concerning the deepening of the access channel to 11 m, an incremental analysis has been carried out taking into account the needed incremental dredging cost, including the accumulated backlog, and the ship voyage cost savings; in calculating the economic return, voyage cost-saving benefits for container ships were considered at 50% and bulk carrier cost- saving benefits at 100%. The analysis showed, assuming the purchase of the D-8 and D-9, that the deepening of the access channel to 11 m is economically justified. D. Development Program (i) General Cargo Dock Cranes 4.10 ANP has already begun a first phase of improvement of cargo handling operations by ordering 14 dock cranes to replace existing cranes, dating back as far as 1911, and constructing a small warehouse for refrigerated cargo. The cranes, although not part of the proposed Bank project, are part of the investment program and, therefore, have been evaluated separately. Some of the costs, however, have already been incurred and have been deducted from the investment cost. The details of the analysis are included in Tables 4.4 and 4.7. The most important benefit is the increased cargo handling rate without an increase in dock labor, which will be achieved by faster crane cycle times and greater cargo uplift. These have been conservatively estimated at an increase from 15 to 16 cycles per hour, and a 10% increase in load per lift (an average of about 670 kilograms at present). These changes will result in lower labor cost per ton, lower ship service times and fewer delays for ships waiting for available dock space. For all general cargo ships, only ship time savings for Uruguayan ships and half of those for foreign ships have been included (para 4.03). Changes in maintenance and operating costs have been included as well as 80% of crane costs (the remainder is already paid) and all investment costs for dock strengthening. Growth in the benefits for cargo handling has been allowed until 1990 with no growth after that. Under those relatively conservative assumptions, the best estimate rate of return is 32% with a first year return of 16%, with shadow pricing of local expenditures. (ii) Grain Silo 4.11 Two basic design alternatives were analyzed, one with a storage capacity of 25,000 tons and ship loading capacity of 750 tons per hour and another with 7,500 tons storage capacity and ship loading capacity of 500 tons per hour. It was found that reduced forecasts of grain traffic, increases in the estimated construction cost of the silo and increased efficiency of handling at existing berths make even the smaller alternative not economically justified for construction at this time.  - 30 - E. Economic Returns and Sensitivity Analysis 4.12 In carrying out the economic assessment, adjustments have been made to avoid the influence of taxes and customs duties. A shadow price conversion factor of 0.80 was applied to adjust for distortions in the exchange rate. The opportunity cost of capital in Uruguay was estimated at 11%. 4.13 The rate of return was computed on the costs and quantified benefits described above, over the construction period and the economic life for each of the components of ANP's development program as well as for the project as a whole. In calculating the economic return, only half of the benefits from reduced ship time of foreign liner ships have been considered (para 4.03). Full ship time savings have, however, been considered for Uruguayan liner ships as well as for all bulk vessels. It appears that a reasonable portion of the ship time savings of foreign ships can be attributed to Uruguay through increased possibilities of raising port charges and avoidance of the reimposi- tion of the penalty surcharge by the conference, which was lifted during 1974-1976. If the project were not carried out, the continued use of existing antiquated equipment and methods would result in substantial ship delays that could trigger a reimposition of the penalty surcharge. 4.14 The rate of return for the cargo handling investment (new cranes, changed cargo transfer and container/bulk cargo wharf) is about 27% (Table 4.7), about 36% for the new D-8 and about 18% for the new D-9 dredge, about 14% for the smaller of the two harbor tugs and about 7% for the larger. The overall rate of return is 24%. The various parts of the project have been tested for sensitivity, as shown in Table 4.8, and for major changes in costs or benefits. For either higher investment costs or lower benefits, the rates are generally adequate. The cargo handling investment program has also been tested for a delay in implementation as well as an investment cost overrun and lower handling rates. As indicated previously (para 3.21), a critical risk area is the bulk container terminal. A special sensitivity test for this part of the project was there- fore made assuming the simultaneous effect of 15% total higher investment cost, a two-year delay in the construction and lower handling rates per crane (to 15 TEU 1/ or 100 tons per crane per hour). The higher investment cost would allow for the possibility of a substantial increase in the price of the existing land reclamation contract. 1/ 20-foot equivalent unit (of container)  - 31 - The economic rate of return based on these assumptions was 15%. The major risk is likely to be higher investment costs, whereas it is quite possible that benefits *ill be higher than the best estimate. It should also be noted that the measured benefits include only those obtained in the port itself, and with no growth beyond 1990. V. FINANCIAL ANALYSIS A. Recent Financial Performance of ANP 5.01 ANP has been a profitable institution over the last five years as shown in the income statements, presented in peso terms in Table 5.1. Because high rates of inflation in Uruguay over this period tend to distort the real trends in these figures, the data are also presented in Table 5.2 in US$ terms, using average exchange rates for each year. Table 5.2 is sumirarized below. 1974 1975 1976 1977 1978