Mexico - Ports Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 2592 PROJECT PERFORMANCE AUDIT REPORT MEXICO PORTS PROJECT (LOAN 820-ME) June 29, 1979 Operations Evaluation Department 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.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MEXICO PORTS PROJECT (LOAN 820-ME) Table of Contents Page No. PREFACE iii PROJECT PERFORMANCE AUDIT BASIC DATA SHEET iv HIGHLIGHTS V PROJECT PERFORMANCE AUDIT MEMORANDUM I. Background 1 II. Project Results 2 III. Main Issues 4 IV. Conclusions 8 Tables 1. Income Statements: Empresas de Servicios Portuarios 10 2. Five Project Ports: Income Statements 1978 11 ATTACHMENT: PROJECT COMPLETION REPORT E. Introduction 13 II. Project Identification, Preparation and Appraisal 14 III. Project Implementation and Cost 17 IV. Operating Performance and Traffic 22 V. Financial Performance 26 VI. Institutional Development 37 VII. Economic Reevaluation 41 VIII. The Role of the Bank 47 IX. Conclusions Tables 1. Appraisal Estimate and Actual Construction Schedule and Project Costs 49 2. Mexican Economic Growth Performance 1965-1976 50 3. Traffic Flows, Port of Veracruz - 1971-1877 51 4. Traffic Flows, Port of Tampico - 1971-1977 52 5. Traffic Flows, Port of Manzanillo - 1971-1977 53 6. Traffic Flows, Port of Mazatlan - 1971-1977 54 7. Traffic Flows, Port of Guaymas - 1971-1977 55 8. Five Project Ports, Income Statements - 1973-1977 56 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Table of Contents (Continued) Page No. 9. Five Project Ports, Income Account - 1976 57 10. Five Project Ports, Income Statements - First Six Months 1977 58 11. Annual Income Statements of the Empresas de Servicios Portuarios 59 12. General Balance Sheets of the Empresas de Servicios Portuarios 60 13. Income Statements of the Port Equipment Trust Fund 61 14. Balance Sheets of the Port Equipment Trust Fund 62 Maps IBRD 3668R - Mexico Ports Project, Transportation Network and Service Areas IBRD 3669R - Mexico Ports Project, Veracruz Grain-Handling Installation IBRD 3670R - Mexico Ports Project, Tampico Warehouse IBRD 3706R - Mexico Ports Project, Manzanillo Warehouse  - iii - PROJECT PERFORMANCE AUDIT REPORT MEXICO PORTS PROJECT (LOAN 820-ME) PREFACE This report presents a performance audit of the Mexico Ports Project for which Loan 820-ME for US$20 million was closed in May 1978; about US$300,000 remained undisbursed and was cancelled. The memorandum is based on the attached Project Completion Report (PCR) prepared by the Bank's Latin America and the Caribbean Regional Office, discussions with Bank staff, a review of the project files and the minutes of the Board of Executive Directors' meeting which considered the project. OED staff visited Mexico in January 1979 to discuss the project with the Borrower and obtain additional information. The views expressed by Mexican officials, in particular the reasons why the consultant's pro- posals on dredging were rejected, the difficulties encountered in implement- ing the recommendations of the port planning study and the decision to raise the design standard of the warehouses, have been fully taken into account in preparing the audit. Concerning the overall Bank loan operations in Mexico, officials of the Finance Ministry expressed their concern on the foreign exchange risks which the Borrower bears and the fact that it does not have the option to select the currency of disbursement. The assistance provided by the Government is gratefully acknowledged. The draft PPAR was sent to the Borrower, but no comments were received. The audit memorandum generally concurs with the findings of the PCR; however, it expands upon the delays and modifications made to the proj- ect and comments on its preparation. It also comments on the achievement of the institution-building objectives, draws some wider lessons from this ex- perience, and highlights the difficulties encountered in implementing the financial objectives which appear to have been inappropriately formulated.  - iv - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET MEXICO PORTS PROJECT (LOAN 820-ME) KEY PROJECT DATA Original Actual or Item Plan Current Estimate Estimated Total Project Cost (US$ Million) 27.6 40.6 Overrun (%) - 47 Loan Amount as of 4/30/79 (US$ Million) 20.0 20.0 Disbursed - 19.7 Cancelled - 0.3 Repaid - 1.4 Borrower's obligation - 21.4 Project Completion Date 6/75 6/76 Proportion Completed by Above Date 83 95 Time Overrun (%) - 33 Economic Return (%): - grain berth 28 30 - tanker berth 17 6 - dredger 24 28 Financial Performance - moderate Institutional Performance - good CUMULATIVE EXPECTED AND ACTUAL DISBURSEMENTS 1972 1973 1974 1975 1976 1977 (i) Expected 0.7 9.8 19.4 20.0 20.0 - (ii) Actual - 0.5 12.5 16.3 19.6 19.7L Z of (ii) to (i) - 5 64 82 98 100 OTHER PROJECT DATA Original Actual or Item Plan Current Estimate First Mention in Files 12/70 Government's Application 12/70 Negotiations 1/31/72 Board Approval 2/07/72 5/04/72 Loan Agreement Date 3/72 5/17/72 Effectiveness Date 6/30/72 8/17/72 Closing Date 6/75 1/30/77 Borrower NAFINSA/Government Executing Agency Marina Fiscal Year of Borrower Jan. Dec. Follow-on Project None MISSION DATA Month/ No. of No. of Date of Item Year Weeks Persons Manweeks Report Identification 1/71 2 4 8 1/71 Preparation 3/71 2 3 6 4/71 Appraisal 9/71 3 4 12 4/72 Supervision 1 11/72 1 2 2 12/72 Supervision 16 3/73 1 4 4 5/73 Supervision 111 8/73 1 1 1 9/73 Supervision IV 11/73 1 3 3 1/74 Supervision V 3/74 1 1 1 4/74 Supervision VI 4/74 2 2 4 6/74 Supervision VII 11/74 2 2 4 1/75 Supervision VIII 4/75 2 3 6 5/75 Supervision IX 11/75 2 2 4 12/75 Supervision X 6/76 2 2 4 6/76 Supervision XI 2/77 2 4 8 4/77 Completion 4/78 2 3 6 10/78 7 3 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Mexican Peso (Mex$) Year: Appraisal Year Average (1971) Exchange Rate: US$1 - Mex$12.50 Intervening Years' Average (1972-1975) US$1 = Mex$12.5 1976 (September onwards) US$1 - Mex22.50 1977 US$1 = Mex$22.50 /1 Excludes US2.3 million for equipment which was supplied by Pemex. /2 Us$263,000 cancelled.  - v - PROJECT PERFORMANCE AUDIT REPORT MEXICO PORTS PROJECT (LOAN 820-ME) Highlights This project, which was supported by the first Bank loan for port development in Mexico, included the construction of grain handling installation, petroleum tanker berths and related facilities at the port of Veracruz; construction of warehouses and ancillary items at Veracruz, Tampico and Manzanillo; the acquisition of dredgers and other related port equipment; and various consulting services. During the execution, many changes were made to project components, mainly due to inadequate preparation of the project (paras. 3-4 and 11-14). The project was com- pleted one year behind schedule with a cost overrun of 47% (paras. 3 and 8). The project supported the measures already adopted by the Govern- ment for improving the operational efficiency of Mexico's ports; existing institutions were developed, thereby preserving continuity; and labor problems were successfully handled (para. 26). An unanticipated large traffic increase during project execution made the grain terminal in Veracruz a more timely investment than appreciated at appraisal. However, some of the institutional objectives, i.e., training, and planning of dredging operations, were only partially achieved (para. 5). Overall, de- spite the cost increase, the reestimated economic return on the project is substantial, ranging between 28% and 30%, except for one item (tanker ter- minal) whose reestimated return is 6% (para. 9 and PCR, paras. 7.23-7.27). The project experience raises the following additional points of special interest: - training program was not completed because manpower requirements were not prepared nor administrative arrangements made (paras. 17-19, 26 and PCR, paras. 6.18-6.24); - implementation of a cost-based tariff at each individual port proved unrealistic (paras. 23, 27 and PCR, paras. 5.08-5.18); - underestimation of traffic led to change in specifi- cations of grain terminal (paras. 12, 29 and PCR, * paras. 3.13 and 4.02); and - decision to change depth of dredging was not based on a study of sizes of ships expected to use the port (paras. 13, 29 and PCR, para. 3.06).  - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM MEXICO PORTS PROJECT (LOAN 820-ME) I. Background 1. The Mexico Ports Project was supported by Loan 820-ME of May 1972 for US$20 million. It was the Bank's first loan to Mexico for port develop- ment, although at the time of the loan about US$238 million had been lent for the transport sector as a whole. The 1971 Sector Review served as catalyst to the port project. The Sector Review concluded that while the capacity of the country's 36 ports was adequate for traffic up to 1976, the following areas required improvement: (a) Port policy, management and operations responsibilities were divided among 12 ministerial departments. Manage- ment of the ports was hampered by lack of clear objectives and inadequate organization, coordination and staffing leading to investments of doubtful justification; (b) Financial planning and management of the ports were in- adequate and charges were not related to costs or economic objectives; (c) Dredging operations were inadequate and the dredging fleet obsolete; and (d) Cargo-handling operations were inefficient and under-equipped (PCR, para. 6.01). These findings were well received by the Government which had hitherto given somewhat insufficient attention to port development. At the same time, a new policy encouraging growth of coastal areas through decentralization had been adopted, with implications for port development. 2. The project, whose total cost was estimated at US$27.6 million, con- centrated on these areas through institutional reforms, financial objectives and preinvestment studies. It consisted of: (a) purchase of two self-propelled dredgers and auxiliary dredging equipment; (b) fire fighting, port communications and cargo handling equipment for the ports of Veracruz, Tampico, Mazatlan, Guaymas and Manzanillo; (c) staff training; - 2 - (d) consultants' services to: - prepare a national port development study including feasibility studies; - improve accounting procedures; - prepare a study, and advise, on dredging procedures; (e) construction of a grain terminal (including grain handling equipment) and a tanker terminal at the port of Veracruz; and (f) construction of eight warehouses and transit sheds at the ports of Veracruz, Tampico and Mazatlan. The dredgers and consultants' services would be used by all of Mexico's 36 ports. II. Project Results 3. The components of the project were substantially completed - albeit with many modifications - by mid 1976, about a year later than expected at appraisal. The delay in completing the grain terminal and the grain handling equipment was mainly caused by changes in the scope of these works following increases in demand about a year after appraisal; storage capacity was expanded from 15,000 tons to 25,000 tons, loading and unloading rates raised and handling capacity increased from 200,000 tons to 500,000 tons per year. The terminal is now actually handling cargo of one million tons per year. The delay in delivery of the dredger was caused by a change in specifications made by the Secretaria de la Marina (Marina), the authority responsible for implementing the project. 1/ Marina determined that one large, dual-purpose dredger would better serve capital dredging at San Pedrito and maintenance dredging at Salina Cruz than would the two self-propelled dredgers proposed at appraisal and this was accepted by the Bank following review by a Bank dredging consultant. 4. There were many modifications to the project and some components were not completed as planned. A railway bridge which was to provide access to the warehouse at Tampico was not built due to land expropriation difficulties and, as a consequence, the utilization of the warehouse has been impeded (PCR, para. 3.11). Moreover, only three of eight warehouses were completed apparently be- cause of higher than expected bid prices, and the warehouse at Manzanillo was deleted from the project altogether when the Borrower did not follow the Bank's bidding procedure. Finally, the alongside depth of the tanker terminal was in- creased from 10.5 m to 12 m. The additional dredging proved to be costly and difficult when hard patches were encountered. The audit's analysis of vessel records for October through December 1978 show that the extra depth has not been required so far as tankers using the berth are still entering with drafts of less than 9.5 m. 1/ Marina was at that time responsible for the nation's ports. Responsibility was transferred in 1976 to the Secretaria de Comunicaciones y Transportes (SCT). - 3 - 5. The institution-building components of the project - consultants' services and staff training - produced mixed results. While the consultants' services were provided largely as anticipated, the training program was not completed for reasons discussed in paragraphs 17-19. The operations and accounting consultants performed well and in line with their terms of refer- ence. They helped to establish the Comision Nacional Coordinadora de Puertos (CNCP), prepared financial forecasts for each of the project ports and devel- oped various systems including those for budgeting, accounting, asset inven- tory, personnel and cargo-handling control (PCR, paras.3.18, 5.06, 6.10, 6.14 and 6.27). Their proposals with respect to increasing port tariffs and a staff training program met with less success (paras 17-19 and 23-24). The consultants who were to advise the Directorate of Dredging (Dragado) on dredg- ing operations and equipment also performed reasonably well, but their recom- mendations on dredging operations and planning were not well received by the Government, apparently causing the initial rejection of their other recommen- dations as well. It seems that these recommendations are only now being implemented, years after the completion of the consultants' report. 6. Finally, the consultants who were to advise the Borrower on national port development produced their study in 1974. The investment program they recommended based on a complex, traffic, allocation model was rejected by Marina because of what the latter considered to be over-optimistic traffic forecasts and because of its overemphasis on investment in Veracruz. Several agencies within the Secretaria de Comunicaciones y Transportes (SCT) have plans to adapt the model used by the consultants, or to update their forecasts, but a united direction for port investment programming appears to be lacking. 7. The covenants of the loan which were focused at strengthening the institutions dealing with the ports and improving administration and planning, have been substantially achieved; appropriate staff were appointed, suitable consultants retained and cargo-handling charges were amended to cover costs. However, project ports were expected to recover the cost of operations and in- vestment from the users and to produce a return on net fixed assets but only two ports succeeded in this attempt (PCR, para. 5.15 and discussed in paras. 23-24). The Equipment Trust Fund (FIDEMAP), was expected to operate at a prof- it but, due to currency exchange losses following the 1976 devaluation of the peso, it has operated at a deficit (para. 15). Finally, free storage time was to be reduced from 15 to 10 days. This was not done and since traffic declined following the devaluation, it has not been important but as traffic began to increase during 1978, a reduction in free storage time is now urgently needed. 8. The total cost of the project of US$40.6 million (Mex$913 million) represents an overrun in terms of US dollars of 47% over the appraisal esti- mate of US$27.6 million (Mex$344.7 million) (PCR, Table 1). The costs of the grain and tanker terminals and the warehouses were, respectively, 186%, 227%, and 197% greater than expected at appraisal. The cost increase was partly due to inflation following the "oil crisis"; between 1974 and 1976 consumer prices increased 75% (PCR, para. 4.07). While the cost increase was partly due to inflation which could not have been foreseen at appraisal, the cost also in- creased due to modifications in design. The cost of the grain terminal in- creased from an expansion of storage capacity and modifications in the design; it excludes an amount of US$3.9 million (appearing in the PCR's final cost Table 1) which was used to strengthen the pier and increase throughput which was not foreseen at appraisal (PCR, paras.3.03-3.04). The cost of the tanker terminal increased by dredging to a greater depth after, rather than before, construction and that of the warehouses by an increase in the design standard, using stronger and more expensive concrete construction. The increase in de- sign standard was made after a hurricane had damaged other sheds and it more than offset any saving from building fewer sheds. The cost of the dredger was about 33% less than expected at appraisal as only one dredger, of different type than envisioned, was purchased and much of the auxiliary dredging equip- ment was deleted to reduce costs (PCR, para. 3.16). The cost of other equip- ment was in line with the appraisal expectation; however, the cost of grain- handling equipment to complement the grain terminal was about 60% above the appraisal expectation because of an increase in design and insufficient com- petition in the contract bidding (paras.3.13-3.14). The cost of consultants' services is close to the appraisal estimate with the exception of the National Port Study, which was 21% over the estimate and was financed by funds originally intended for the training program. 1/ 9. The rates of return at appraisal and at audit are shown below: Rate of Return Appraisal PCR grain terminal 28 % 30% tanker terminal 17% 6% dredger 24% 28% At appraisal the rate of return on the grain terminal was based on reduced han- dling costs. The PCR has reestimated the rate of return on the basis of benefits from faster ship turnaround and reduced queueing, i.e., in terms of ship-time saved. At appraisal the rate of return on the tanker terminal was based on freight savings resulting from the use of larger tankers whereas the PCR's re- estimated rate of return is based on reduced handling costs (ship-time saved). The rate of return on the dredger was based on the reduction in dredging costs over the alternative -- dredging by contract. III. Main Issues 10. The following three issues arise from the project experience, and are discussed in this section: (1) modifications made to the project during execution; (2) successful institution-building effort in improving port operations but not in national port planning or training; and (3) difficulties in achieving the financial objectives. 1/ The appraisal estimate of the cost of consultants' services (PCR, Table 1) includes an amount of US$300,000 which was originally intended for the training program. - 5 - 1. Modifications to the Project Description 11. The many modifications made to the project (discussed in paras.4-5 and PCR, paras.3.03-3.17) were caused mainly by inadequate preparation. 12. In the case of the grain terminal at Veracruz, storage capacity was greatly increased at the Borrower's request about a year after the project was approved (PCR, para. 3.03). The request was based on the expectation of greater than expected traffic to be unloaded by ships of 20,000 DWT. At appraisal, import and export traffic was expected to remain in line with past volume of about 200,000 tons per year, largely comprised of export traf- fic. However, a year later, traffic had more than doubled to 500,000 tons because of a substantial increase in grain imports required to meet the short- fall in domestic grain production. At appraisal, traffic forecasts based on an analysis of demand were not available and the Appraisal Report, while rec- ognizing the urgent need for a comprehensive, demand-oriented framework for forecasting the volume, composition, and direction of port traffic, stated that such analysis was not required in this particular instance as it believed the project to be "... not sensitive to the lack of reliable traffic forecasts ...", an assumption which the later development has shown to be erroneous (Appraisal Report No. PTR-104a, paras 5.05-5.06). A national port develop- ment study, financed by the project and completed in 1974, forecast substan- tial grain imports up to 1980. Actual grain imports through the port in 1978 were about one million tons. In 1977, the loading and unloading rates were increased by CONASUPO, the Government grain monopoly, to cope with the in- crease in traffic by making alterations in the equipment which allow direct loading from ships to railcar (PCR, para. 7.07). The PCR considers that, with improved cargo-handling methods and equipment, "there should be no serious pro- blems in handling up to 1 million tons of grain a year" (para. 4.02). To the extent that this statement is valid it raises the question of whether the poten- tial capacity of the grain terminal was underestimated both at appraisal and when the capacity requirement was raised to 500,000 tons a year in 1973. 13. The additional dredging of the tanker berth was undertaken at the request of PEMEX which operates the coastal tankers. PEMEX apparently did not prepare a clear justification for dredging to extra depth but, in the event, it was approved. As already mentioned, this appears to have been a premature decision, since the tankers presently using the berth have drafts of not more than 9.5 m. In addition, the piping for the berth was changed which resulted in substantial additional cost which was paid for by PEMEX; the reason for this change is unclear. 14. Finally the changes in the design and reduction in the number of ware- houses to be constructed from 8 to 3 (PCR, paras.3.09, 3.10 and 3.12) might have been avoided by review of requirements and by agreement before the loan was signed. The eight warehouses/transit sheds as appraised were to be of steel construction with asbestos cement cladding. Later, it was decided to use stronger and much more expensive concrete construction instead. While the increase in de- sign appears to have been prompted by the Borrower's desire to avoid technical - 6 - problems on Bank-financed items (after a hurricane had severely damaged other warehouses), it does seem that their design to the standard selected may have been unwarranted. 2. Institution-Building Effort 15. In addition to the institution-building components included in the project and described in para. 5, the Borrower has undertaken various other measures to strengthen its port organizations. At appraisal, responsibility for port policy and planning was divided among 12 ministries, with the Secre- taria de la Marina assuming the major share of responsibility. The CNCP was established before the loan was signed in line with recommendations of the 1971 Sector Review Mission. It was subsequently reorganized to take over the responsibility for port policy and coordination. It is an inter-minis- terial body which brings together various groups involved in port operations -- port users, customs officials and worker's organizations -- and reports directly to the Presidencia. Direccion General de Operaciones Portuarios (DGOP) was created with the purpose of concentrating day-to-day port operations in one department. The Equipment Trust Fund (FIDEMAP), was created to provide a central purchasing agency for port equipment (PCR, paras 5.20-5.23). The Loan Agreement required that FIDEMAP be finacially viable. While at first FIDEMAP operated with a profit, for the reason noted in para. 7, its financial situa- tion deteriorated. The Empresas de Servicos Portuarios (ESP) are cargo-handling organizations established in each port to help improve labor arrangements and working conditions (PCR, paras.6.08-6.10). Finally, CNCP set up zonas francas within each port to provide areas where cargo would be handled without interrup- tion of custom inspection; the cargo is inspected on leaving the zona franca (PCR, para. 6.11). 16. All of these organizations have helped improve administration and operations in the ports. However, despite these successes, there were some aspects of the institution-building effort which were less satisfactory -- namely, improvement in port planning and staff training. Although planning functions were to be centralized under Marina, port investments still appear to be undertaken without benefit of comprehensive planning and without proper consideration of financial implications (PCR, paras.6.32-6.35). The National Port Development Study, if properly carried out, might have provided a useful framework for planning. But, Marina rejected the study because the proposed port investments were heavily concentrated at the Port of Veracruz, which was not unreasonable if transport costs are considered but which raised political problems. Marina also thought that the study's traffic forecasts were too optimistic. The Borrower is now trying to modify the study. 1/ 17. The staff training component of the project was not realized. The operations and accounting consultant produced two proposals for staff training but both were rejected by CNCP as being too theoretical. 1/ In retrospect it would have been desirable to have all of the agencies involved in planning associated with the study rather than only the CNCP (PCR, para. 6.05). However, it is difficult to determine if such a measure would have produced a more acceptable study. - 7 - 18. There were two weaknesses in the approach to training at the time the project was proposed. Firstly, the training program was not based on a systematic analysis of manpower requirements for the ports. Secondly, al- though the CNCP was primarily responsible for training, it did not make adequate administrative arrangements for the implementation of a training program including coordination of manpower planning and recruitment. A better proposition would have been to retain manpower/training specialists to prepare an outline of staff requirements before or at the time of appraisal. Based on this, the scope and shape of the training program could have been agreed with the Government during negotiations and refer- ence made in the project agreements to the administrative arrangements to be made for its implementation. 19. A considerable amount of training has indeed been undertaken in- dependently of the project. But these activities now appear to be fragmented within SCT, the ESPs and CNCP. In view of the imminent introduction of con- tainers, there is an urgent need now for a review of manpower needs and the preparation of a training plan. 3. Financial Objectives 20. Within the overall aims of increased efficiency and improved admini- stration, the project incorporated three financial objectives in the Guarantee Agreement: (a) DGOP would strive to achieve autonomy and self sufficiency; (b) the Borrower would revise cargo-handling charges to cover costs and allow a profit to concessionaries; and (c) the Borrower would cause charges to port users for services provided by Marina to be related to operating expenses so that ports would cover their costs. 21. The goal of autonomy and self sufficiency for DGOP has not yet been achieved. Income statements are now prepared, but these are essentially "pro- forma" only. Revenues continue to go to the Treasury and expenses are met from the budget. A working party was set up to consider the steps necessary to achieve autonomy but was discontinued once it became apparent that the Treasury would not alter its traditional approach of separating Government receipts from budget expenditures. 22. Port user charges are comprised of: cargo-handling charges of ESPs, the port tariff of DGOP, and various relatively minor fees levied by other official bodies. Apparently cargo-handling charges make up about 90% of all port charges. 1/ A very effective move towards better financial control of the 1/ For general cargo based on a detailed analysis made by the DGOP at one port. - 8 - ports was made at the CNCP's initiative in setting up the ESPs in individual ports as quasi-commercial organizations. Recent income statements of four ESPs show three of the four producing a surplus in the period covered (Table 1). Cargo handling at Tampico is undertaken by a cooperative and, although figures are not available, it is understood to be profitable. The results for Veracruz for the half year to June 1978 show a much larger surplus than in the same period of 1977, in line with the upsurge in traffic. Overall the charges made by the cargo-handling organizations will clearly have been sufficient in 1978 to meet the requirement of the agreement. 23. The appraisal report had recommended that port charges levied by Marina including wharfage, entrance and departure dues, demurrage, etc., be reasonably related to the operating costs (maintenance, dredging and administration) at each port. The appraisal report shows that this would have required large in- creases in port charges -- tripling the charges at one port. Following a study by the operations and accounting consultants who made various proposals for increasing port revenues, the Borrower made strong efforts to achieve a cost- related tariff for each port (described in PCR, paras.5.07-5.12). But when substantial increases were implemented in 1975, the traditional Government policy of uniform tariffs prevailed. These increases did, however, provide sufficient revenue overall. The concern of Government, the audit mission was informed, was that the revenues of all of the ports put together should meet their costs, and this aim now appears to have been realized (see Table 2). 24. While there was a clear need for increased port revenues, the basis for recommending a cost-based tariff for port charges at each port is less clear. The appraisal report argued that such a tariff system would not result in traffic diversion among ports (para. 6.06). However, the PCR indicated (para. 4.10 and Map) some scope for shifting general cargo traffic among the ports in Mexico. The audit notes that this tariff policy is not consistently applied in all Bank port projects; in fact, in one project, full cost pricing in each individual port was argued against because of its supposed effect on traffic diversion between ports. In view of the above, it is desirable that the Bank review its tariff recommendations related to port projects it finances as to their consistency and practicality. IV. Conclusions 25. The major physical components of the project, as modified, have now been completed successfully, with the exception of a railway bridge at Tampico. The cost of the modified project is estimated to be 47% above appraisal esti- mates. In addition to inflationary influences, the cost increased due to up- grading of the specifications and design of project items. This also caused delay in project implementation. 26. The project was notably successful in its contribution to improve port operations and to overcoming the shortfalls identified by the 1971 Sector Review (para. 1). Three major factors appear to have contributed to the success: the loan in this instance aimed at strengthening measures adopted by the Government; the institutions set up were largely developed from existing organizations pre- serving continuity; and a major and successful effort was made to tackle labor - 9 - arrangements. However, the project was not successful in developing national port planning. The upsurge in traffic in 1978 and the introduction of con- tainers emphasize the urgency for a national port plan. The opportunity for the Bank to play a major role in training was missed because the training pro- grams prepared were not based on a review of manpower requirements and because no arrangement was made with the borrower on the administration of training. 27. The requirement that the project ports should make a surplus over- all, has been achieved. The agreement to introduce cost-based tariffs at each individual port - not yet fulfilled - however requires reexamination. The DGOP is functioning effectively but has not achieved autonomy nor financial self sufficiency, as set forth in the loan agreement. It is doubtful if this aim could be achieved by a directorate of any one ministry. It would have been better to have more fully considered the implications of this move, and the one relating to cost-based tariffs, before making them the subject of agreements. 28. Overall, the project has made a valuable contribution to the physical and institutional development of the ports of Mexico. The provision of a grain terminal in particular has prevented very serious port congestion. 29. The fact that the grain terminal at Veracruz presently handles a volume of traffic which is double the estimated capacity of the facilities appears to point to the need for a close study of the feasibility of increasing cargo handling through operational improvements before expensive physical expansion is undertaken. Similarly, the decision to dredge the port basin to a greater depth should have been based on a more thorough study of the sizes of ships expected to use the port. - 10 - Table 1 PROJECT PERFORMANCE AUDIT MEMORANDUM MEXICO PORTS PROJECT (LOAN 820-ME) Income Statements: Empresas de Servicios Portuarios (thousands of pesos) 1/2/ 3/ 4/ Manzanillo Mazatlan- Guaymas- Veracruz4 Operating Revenues 65,723 52,668 73,778 134,781 Operating Expenses 65,682 42,029 58,639 130,883 Administrative Expenses 3,056 5,942 9,024 Interest 2,524 - - 798 Profit Before Tax (5,539) 4,697 6,115 3,100 Tax 2,350 ... 1,881 Amortization of Previous Loss - (1,580) Net Profit (5,539) 2,347 ... 2,799 1/ 12 months to June 1977. 2/ 12 months to June 1978. 3/ 8 months to October 1978. 4/ Calendar Year 1977. Source: DGOP PROJECT PERFORMANCE AUDIT MEMORANDUM MEXICO PORTS PROJECT (LOAN 820-ME) Five Project Ports: Income Statements 1978 (millions of pesos) Tampico Veracruz2/ Guaymas Mazatlan ManzanilloZ/ Total Operating Revenues Port dues 4,687 6,297 2,591 4,190 5,050 22,815 Berthing dues 6,040 8,040 2,320 3,265 3,274 22,939 Wharfage 10,682 6,394 4,763 4,555 4,834 31,228 Storage 10,803 30,821 1,740 1,173 9,125 53,662 Concession fees 17,971 406 - o - - o - - o - 18,377 Other income 3,417 - o - 7 - o - 56 3,480 Total Revenue 53,600 51,958 11,421 13_3 222339 152,501 Operating Expenses Wages and salaries: Operational 2,208 3,742 1,723 1,763 1,306 10,742 Technical 657 985 585 465 553 3,245 Maintenance 2,734 8,983 1,966 1,684 4,174 19,541 DredgingL/ 15,517 1,799 - 0 - 2,904 - o - 20,220 Sheds 9,994 25,185 3,015 2,184 5,810 46,188 Other 293 160 121 102 77 753 Costs of Administration: Salaries 1,280 2,263 936 1,070 797 6,346 Other costs 297 252 167 163 95 974 Depreciation 5,3 8,993 2 _,148 5,537 27,663 Total Expenses 38,423 52 362 13 C55 13 483 18 349 135,672 Net Operating Income 15,177 (404) (1,634) (300) 3.990 16,829 I/ Costs estimated for Deriod Aug. - Dec. 197F. 2' 9 cember 1178 figures estima-Ed. L r 'k : .) ( n,i Marina.  -13 - ATTACHMENT MEXICO PROJECT COMPLETION REPORT FIRST PORTS PROJECT (LOAN 820-ME) 1. INTRODUCTION 1.01 Transport has not been a serious constraint to economic-development in Mexico, partly because, over the years, it has had consistent support in terms of public investment, receiving slightly less than 20% of the budget allocation through 1974. For 1975 and 1976, the percentage dropped to 14% and 12% respectively, indicating a possible change in its future status in the overall public sector plan. Other than public investment, however, a major reason for the general adequacy of transport has been the existence of a privately financed bus and truck industry that has operated under few Government restrictions. Thus, on the supply side, the public sector has, until recently, provided adequate support for transport investment in all modes, while the private sector has provided an adequate fleet of road vehicles and.levels of service. Available evidence, in the form of GDP components, road vehicle traffic counts, and actual rail and air traffic figures, has indicated that demand for transport has been growing in excess of 8% annually during a period in which GDP has been growing slightly in excess of 6% annually. 1.02 The two major transport modes are road and rail. Pipelines and coastal shipping are important, but specialized, while aviation, the most dynamic mode in terms of growth, is highly specialized and relatively small in terms of output. Ports and the merchant marine are naturally related to road and rail traffic and have been of increasing importance in recent years. The most recent data available for estimating the relative importance of the road, rail, and air modes in terms of output are from 1972. At that time, it was estimated that road transport accounted for 69% of intercity freight ton-km, with rail accounting for 31%. For passengers, it was estimated that road transport accounted for 90% of intercity pass-km, with 6% for rail and 4% for aviation. All available evidence indicates that, since 1972, the road and aviation share of intercity traffic has been increasing relative to rail. 1.03 In terms of public investments over the period 1971-1976, highways received 57% of total transport investment followed by railways with 26%, ports with 10% and aviation with 4%. If consideration is taken of private sector investment in the form of road vehicles, total investments were roughly proportional to traffic shares. 1.04 Mexican port traffic (excluding petroleum) is surprisingly small for a country with a 1976 GDP of US$54.2 billion and combined imports and exports of US$10.2 billion. Much of Mexico's foreign trade moves overland to and from the United States by road and rail. Thus, Veracruz, Mexico's largest port, moved only 819,000 tons of general cargo in 1977, and Tampico, the second largest, moved 626,000 tons of general cargo, accounting for the bulk of the approximately 2 million tons of general cargo that moved through the 11 principal ports of the country. Most of this traffic moved through the Gulf coast ports of Veracruz, Tampico, and Coatzacoalcos, to and from t-h e II , QLZ e.t-rn Qc, t-Q q ~nd Fi irnn P- - 14 - 1.05 The Bank, to date, has made 12 loans for transport--seven for high- ways (an eighth program loan is being prepared), three for railways, one for airports, and one for ports. This Project Completion Report covers Loan 820-ME, Mexico Ports Project, for US$20 million, dated May 17, 1972. II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL 2.01 At the Government's request, a transport sector mission was sent to Mexico in April 1970. It identified a number of problems in the port sector, including: (a) No clear policy on objectives in the port sector regarding: (i) whether a primarily military-oriented and senior-staffed organization is the most efficient body to have port responsibility; (ii) whether the ports should be self-financing; (iii) whether port investments should be economically justified; (iv) whether the Ministry of Communications and Transport should determine charges for port services; and (v) whether port operations should be under one controlling authority. (b) No effective organization for port planning. 2.02 The mission recommended the following measures: (a) Organization of a National Ports Council; (b) Operation of all ports on a commercial basis; (c) Improvement of staff through recruitment and training; (d) Determination of the extent and timing of dredging work at certain key ports; (e) Immediate improvements in the key ports of Veracruz and Tampico; (f) No construction of new ports; (g) Provision of a centralized equipment leasing authority; (h) Immediate provision of urgently needed fixed and mobile cargo-handling equipment; - 15 - (i) Immediate provision of urgently needed firefighting, communi- cations and safety equipment; (j) Provision of warehouses to relieve transit shed congestion and revision of free time regulations for use of transit sheds and warehouses; (k) Removal of restriction on entry of trucks into ports; and (1) Studies required to support a long term port development strategy. 2.03 Aware of the problems, the Government established a number of organizations to improve the coordination and administration of port opera- tions. These organizations are discussed in detail in Section VI. Working with Bank staff and a consultant, the Government also developed a port project which provided for further implementation of the mission's recommendations; it concentrated on institutional reforms, financial objectives and preinvestment studies. Government officials particularly involved were those in the Ministry of Marina and the Ministry of the Presidency. The project was tentatively identified in January/February 1971, and two preparatory missions visited Mexico in March and May. The project was appraised in September/October of that year. The preparatory work was largely done by Bank staff members and a consultant in port operations who worked with them. 2.04 The principal changes in the project between the time of identifica- tion and Board presentation were the elimination of the grain storage and handling terminal at Manzanillo and of a warehouse at Guaymas and the addition of tanker berths at Veracruz. These changes were agreed to by the Government and the Bank prior to and during appraisal (the grain storage changes were suggested by the appraisal mission). 2.05 The project consisted of the following parts: (a) Construction of a grain-handling installation, a wharf platform extension, petroleum tanker berths and related rail, road and pipeline access at the port of Veracruz. (b) Acquisition of two self-propelled dredges and other dredging equipment. (c) Construction of warehouses at Veracruz, Tampico and Manzanillo, a transit shed at Veracruz and related open storage areas, roads and rail access. (d) Acquisition and installation of firefighting and port communica- tions equipment at the project ports. 1/ (e) Acquisition of mobile cargo-handling equipment. 1/ Veracruz, Tampico, Manzanillo, Mazatlan and Guaymas - 16 - (f) Provision of consultant services to: (i) Improve the organization, planning, financial controls, operations and maintenance of the guarantor's port services; (ii) Study the development of the national port system; and (iii) Improve the organization, operations and finanial controls of Marina's 1/ dredging activities. (g) Provision of training for the staff of Marina and CNCP 2/ and for cargo-handling personnel. Note: Parts (a), (b), (c), (d) and (f)(iii) of the project were to be carried out under the responsibility, supervision and control of Marina, and parts (f)(i), (f)(ii) and (g) were to be carried out under the responsibility, supervision and control of CNCP in coordi- nation with Marina. Part (e) of the project was to be carried out by the Trust Fund. 3/ 2.06 Special covenants provided that: (a) the borrower (NAFINSA) would administer the Equipment Trust Fund (Fideicomiso) to maintain its financial viability, meeting its operating expenses, including repayments of its part of the loan, from internally generated sources: (b) the guarantor would: (i) organize and adequately staff a Port Operations General Directorate in Marina and Marina superintendencies at the ports; (ii) consult with the Bank before making any port investments estimated to cost more than 10 million pesos; (iii) revise tariffs and charges, including those of concessionaires, to reflect the cost of the services provided and to furnish sufficient revenues to cause each project port to become financially viable; and (iv) establish an adequate accounting system in Marina and at the ports. 1/ Marina - Secretaria de Marina, Ministry of the Navy 2/ CNCP - Comision Nacional Coordinadora de Puertos 3/ Trust Fund (Nacional Financiera) - fund for procurement of cargo- handling equipment - 17 - III. PROJECT IMPLEMENTATION AND COST A. Physical Execution of the Project 3.01 Physical execution of the project, with some revisions and omissions, has been completed. However, Marina has not yet taken action to: (a) expropriate necessary land at Tampico to build the railway siding to provide access to the new warehouse, to construct a railway bridge and to join the tracks with the existing rail network in the port; (b) rebuild warehouse No. 3 in Veracruz; (c) provide better training for operators of dredges and to improve maintenance of dredging equipment. Neither has CNCP fully implemented a plan to provide appropriate training to port personnel at all levels. 3.02 Except for some minor works, e.g., assistance by outside consultants in design of the grain-handling berth and procurement of the grain-handling equipment, Marina has handled the design, tendering and contract supervision of all civil works discussed below. Marina was generally slow in the prepara- tion of tender documents which, in some cases, delayed construction. A comparison of the appraisal estimate and the actual construction schedules as well as of the appraisal estimate of project costs compared with the final cost figures is given in Table 1. (i) Grain-Handling Installations at Veracruz 3.03 The horizontal grain silo was originally designed for a storage capacity of 15,000 tons. During project execution, Marina decided to increase the capacity to 25,000 tons in order to provide sufficient storage for unloading ships of 20,000 DWT. The Bank agreed to this change and suggested that the silo be located and designed in such a way that, should the need arise in the future, the capacity could be further expanded; this was done. 3.04 The work financed by the Bank did not include strengthening of the pier by Marina or modifications to increase the throughput carried out by CONASUPO at US$3.2 million and US$.72 million respectively. The total cost of civil works for grain handling amounted to US$8.47 million against the appraisal estimate of US$1.59 million, including contingencies. In addition to inflation and delayed execution, increases in cost were due to: (a) increase in the size of the silo; and (b) higher construction standards adopted by Marina for better hurricane resistance. - 18 - 3.05 Marina is now planning to dredge in front of the grain terminal to -12 meters in order to unload ships of 32,000 DWT. The use of larger ships should increase throughput and lower shipping costs substantially. (ii) PEMEX Pier 3.06 Contrary to the soils consultants' (Solum S.A.'s) recommendation to dredge the basin prior to driving piles, Marina dredged after construction of the pier. This procedure was adopted in order to start the PEMEX opera- tions and construction of the grain berth at the earliest possible date. Construction of the pier presented no unusual problems. 3.07 The project provided only for the construction of the pier. PEMEX financed the supply and erection of electro-mechanical equipment, i.e., 4,300 meters of 13-inch diameter piping and dredging, which cost US$2.32 million and US$2.00 million respectively. The total cost of the works, excluding mechanical installations for the PEMEX pier, amounted to US$4.94 million against the appraisal estimate of US$2.23 million, with contingencies. 3.08 In addition to inflation and delays, increases in cost may be attributed to: (a) Inability of Marina's Dredging Department to utilize proper dredges and dredging techniques, which resulted in delays, cost increases and overdredging. (b) Dredging after construction of the pier rather than before. (c) Dredging to greater depths (-12.0 meters rather than -10.5). (iii) Transit Shed and Warehouses at Veracruz 3.09 At the appraisal stage, it was decided that four warehouses and one transit shed were to be built at Veracruz. Subsequently, Marina changed the plans, with the agreement of the Bank; the two northern warehouses were combined into one of equivalent capacity, and the existing warehouse No. 3, which was on the verge of collapse, was not rebuilt. (iv) Warehouse at Tampico 3.10 During appraisal, it was decided to construct two warehouses in Tampico. However, bid prices received substantially exceeded the amounts estimated at the appraisal stage. Marina indicated that local funds were insufficient to award the contract and referred the matter to Presidencia. The Bank indicated that the cost of contract was excessive and suggested that Marina consult with the Bank before signing the contract. In spite of this suggestion, Marina informed the Bank shortly thereafter that it had signed a negotiated contract with the second lowest bidder, Ing. Cao Romera y Loya S. de R.L. Mexico. The negotiation mainly consisted of elimination of one of the warehouses and reduction of the contract price from US$2.18 million to US$1.43 million. On that basis, the award of the contract by Marina was found reasonable. - 19 - (v) Railway Bridge and Railway Track at Tampico 3.11 Construction of a railway bridge and a railway track to provide access to the new warehouse was included in the civil works for Tampico. However, the necessary land to build the railway track was not expropriated in time, and the construction of the bridge was postponed. Marina is now considering providing temporary access to the warehouse by road and postponing construction of the bridge. Without proper access, the warehouse is not being utilized. However, as explained in paragraph 5.18, the warehouse is not now urgently needed. (vi) Construction at Manzanillo 3.12 At the appraisal stage, construction of a warehouse, a paved area for open storage and rail and roadway access were planned for Manzanillo. Marina started construction of the warehouse without following Bank procure- ment procedures. Consequently, the Bank did not finance this work, and it was financed by Marina. The Bank funds allocated for this construction were transferred to other works in the loan. However, the Bank did partially finance the construction of the open paved area, railway siding and road. (vii) Grain-Handling Equipment in Veracruz 3.13 The equipment was originally to be designed to discharge from rail cars and trucks at 200 tons per hour while the traveling ship loader would load ships at 300 tons per hour. During the design stage, it was decided to change the ship unloading rate to 250 tons per hour and loading rate to 400 tons per hour. After completion of the project, changes made by CONASUPO provided both loading and unloading rates of 400 tons per hour to meet increased demands. 3.14 A total of 17 international firms were prequalified, of which only four submitted bids. None complied with the tendering procedures established, and Marina requested the Bank's permission to reject all four tenders and negotiate the contract with the lowest bidder, Jeffrey and Buhler. Requesting new bids could have delayed the project by as much as seven to eight months, and, in addition, manufacturers might have lost interest. The Bank agreed, and Marina negotiated a contract with Buhler. (viii) Dredger-and Auxiliary Dredging Equipment 3.15 Two 1,400 m3-capacity self-propelled dredges and dredging equipment were included in the project. Prior to preparing tender documents, Marina decided to purchase only one dredger of 3,000 m3 capacity instead of the two smaller dredges. The Bank accepted the change. The contract was awarded to Dubigeon Normandie S.A. of France at a cost of US$8.70 million. Because of favorable exchange rate fluctuations, the final amount paid was US$8.01 million equivalent. - 20 - (ix) Auxiliary Dredging Equipment 3.16 Based on bids received, the cost of the auxiliary dredging equip- ment was too high to finance with funds available in the loan; for this reason, Marina's proposal to reduce the scope was accepted by the Bank. (x) Remaining Equipment 3.17 The remaining equipment, listed below, did not present any unusual problems and was procured in accordance with Bank regulations: Contract Price in Actual Cost Delivery Item Contractors US$ million in US$ million Date Tug boats Seadrec Ltd. 2.89 2.90 Fuel barge Astilleros de Tampico .13 .13 Firefighting launches and trucks CIPESA .65 .83 July 1975 Communications Comunicaciones equipment Electricas S.A. .05 .05 May 1976 31 Forklift trucks Sumitomo Shoji Kaisha .24 .24 July 1973 4 hydraulic cranes Fabrexim S.A. .20 .20 July 1973 1 belt conveyor Joy Manufacturing Co. .02 .02 July 1973 4 shunting tractors CIPESA .15 .15 Nov. 1973 2 cranes 1OT Bendix Skagit .07 .07 Nov. 1973 3 tractor shovels Maquinaria Lyn .04 .04 Nov. 1973 1 hydraulic crane 30T Pettibone de Mexico .11 .11 Oct. 1974 Pneumatic conveyors Dumbar-Kapple (Canceled) 28 terminal tractors Pettibone de Mexico .18 .18 Nov. 1973 36 Forklift trucks PRIMSA .54 .54 Oct. 1974 Note: The first four items were purchased by Marina; the remainder by the Equipment Trust Fund. (xi) Studies (a) Operations and Accounting 3.18 The contract for consulting services to improve organization, planning, operations and financial control of the ports was let to IPESA (Mexico) and Muller, Fox and Pennington (U.S.A.), prior to making the loan, and costs were partly financed retroactively. The total amount paid for these services was US$790,000 (the appraisal estimate was US$803,000, excluding contingencies). The consultants were unable to complete their work prior to December 1972, as scheduled, and completed it in April 1974. Their work is discussed in Chapters V and VI. - 21 - (b) National Ports Study 3.19 The contract for the national ports study was let to the joint venture of CIFSA (Mexico), Frederick R. Harris (U.S.) and BCEOM (France). The total amount paid for their services was US$1.35 million compared with the appraisal estimate of US$1.15 million, including contingencies. The study was completed in 1974 and was based on 1970 and earlier data. The terms of reference specified a sophisticated approach for analyzing the present and future port systems. A macroeconomic model was used to predict national growth and foreign trade through 1995, and a traffic assignment model allocated foreign trade flows according to least cost criteria. The traffic flowing through ports according to these criteria then served as the basis for determining future capacity requirements and probable invest- ment requirements. It was assumed that GDP would grow at 6.1% between 1970 and 1978 and at 8.0% from 1978 to 1995. It was then determined how the domestic economy would have to perform in order to achieve these growth rates. The foreign trade sector (net exports) would then have to provide, as a residual, whatever the domestic economy could not. Under these circumstances, net exports had to perform very well. In addition, it was assumed that there would be a shift away from U.S. markets, which would result in more traffic through the ports than over land. The net effect of all those assumptions was a 17% annual growth rate between 1970 and 1975 in non-petroleum traffic through ocean ports. From 1975 to 1980, the growth rates were to decline to 4.6% per year. Neither the GDP estimate nor the shift from U.S. markets were reasonable assumptions in retrospect. A further distortion was the routing of a major portion of port traffic through Veracruz based on a least cost traffic allocation. The analysts were unable to anticipate the effect of the stevedores' union at Veracruz on the actual choice of port. The optimistic traffic assump- tions for Veracruz led to a large and ambitious proposed Second Port Project, which was subsequently scaled down and eventually discarded at the green cover stage. (c) Dredging Study 3.20 The contract for the dredging study was awarded to Levesey & Henderson, U.K., and DEPLAN S.A., Mexico. The total amount paid for their services was US$.31 million, which was equal to the appraisal estimate. Unfortunately, this study fell short of its expectations, partly because of the inability of Marina's Dredging Department to provide full time counterparts to work with the consultants on the study. Marina considered that the consultants failed in their analysis of dredging volumes and did not take into account, and incorporate into their draft report, remarks made by the Dredging Department. However, there is little evidence that the Dredging Department accepted or acted upon the consultants' recommenda- tions, which had considerable merit. B. Project Cost 3.21 The total project cost has been assessed at US$42.9 million, as spelled out in Table 1. A comparison between the appraisal estimate and the final project costs is given below: - 22 - Appraisal Cost Estimate Categories Item Including Contingencies Final Cost (in US$ million) (in US$ million) I Civil works 6.9 24.6 II Grain-handling equipment 1.6 2.4 III Dredging equipment 14.2 11.0 IV Other equipment .5 0.9 V Cargo-handling equipment 1.9 1.5 VI Consultants 2.5 2.5 Total 27.6 42.9 IV. OPERATING PERFORMANCE AND TRAFFIC A. Project Items 4.01 The operating performance of the principal project items is reviewed below. Improvement in cargo handling in Mexico's ports generally is discussed in Chapter VI on Institutional Development and in Chapter VII on Economic Reevaluation. (i) Grain Terminal 4.02 CONASUPO, the agency responsible for operating the grain terminal, has had no serious problems in its operation. However, because traffic has greatly exceeded forecasts, CONASUPO has had to increase the loading and discharging rates and otherwise improve the physical installations to increase their capacity. It has provided heavy covers over conveyors and provided portable evacuators to increase unloading rates of ships, etc. With such modifications, there should be no serious operating problems in handling up to 1 million tons of grain a year. (ii) PEMEX Pier 4.03 Now that dredging has been completed to -12 meters, the pier is capable of berthing ships of up to 40,000 DWT. However, accidents could occur during berthing/unberthing operations because of the restricted area for ship movement. Operations at the pier for handling oil do not present any problems. - 23 (iii) Dredges 4.04 The Dredging Department of Marina is of the opinion that the dredger is not powerful enough to dredge some of the materials it was designed to remove. However, with proper maintenance, this dredger would be very useful in maintaining the navigation channel at Tampico. (iv) Warehouses 4.05 The warehouses at Veracruz and Manzanillo are well designed and adequately used. The Tampico warehouse requires some repairs and the construc- tion of an access bridge to become fully operational. B. Traffic 4.06 At the time the project was appraised, the Mexican economy had experienced more than 30 years of sustained growth in excess of 6% per annum. From 1965 to 1970, real GDP grew at an average annual rate of 6.6% (Table 2). During the same period, the real value of merchandise imports and exports for the economy as a whole grew at an average rate of 3.5%. General cargo and dry bulk cargo traffic, however, exhibited no growth during the 1965-1970 period at the five project ports. This lack of activity at the ports in a time of general economic growth was explained partly by the importance of trade with the U.S., the efficiency of overland transport between Mexico and the U.S., and the inefficiency of Mexican ocean ports. More than 50% of Mexican foreign trade in 1970 was traveling by truck and rail between the U.S. and Mexico. For this reason, the emphasis of the First Port Project was placed on achieving better operational efficiency in the ports and in removing key bottlenecks rather than on increasing capacity with large infrastructure investments. 4.07 Since the time of appraisal, the figures in Table 2 indicate two to three years of dramatic increases in economic activity and port traffic followed by the Mexican recession of 1974-1977. The year 1974 combined a GDP growth rate of 5.9% with an inflation rate of 31%. In 1975, GDP grew at 4.3% and inflation at 21%. By 1976, the GDP growth rate was at an all- time low of 2.0%, with inflation still running at 23%. A major devaluation of the peso took place in the final quarter of 1976. In 1977, the recovery had begun, but GDP was not expected to grow more than 2%. The real value of merchandise imports and exports was greatly affected by the recession, as was the flow of cargo through the major ports. Much of the huge (33.6%) increase in merchandise foreign trade in 1974 was accounted for by a 30% increase in imports as inventories of imported goods were built up in anticipation of the devaluation. This situation was reflected in ocean port traffic by a 20% increase in all traffic. At Veracruz, general cargo imports increased 29% in 1974; at Tampico, they increased 61%. It is useful to bear in mind the extraordinary external economic events that have affected the port system of Mexico since the appraisal of the First Port Project. (i) Traffic in the Project Ports 4.08 Actual foreign trade cargo flows through the five project ports for the period 1971-1977 are given in Tables 3 through 7. A summary of total import and export traffic for the five ports is given below in thousands of metric tons: - 24 - 1971 1972 1973 1974 1975 1976 1977 1/ General Cargo 1,435 1,583 1,809 2,173 2,157 2,155 1,880 Dry Bulk 2,052 2,939 3,083 3,695 3,567 2,816 3,014 Liquid 3,096 3,441 4,809 2,986 2,649 2,306 1,076 Total 6,583 7,963 9,701 8,854 8,373 7,277 5,970 1/ Preliminary 4.09 The performance of general cargo flows closely parallels the perform- ance of the Mexican economy. Dry bulk traffic is likewise subject to these forces, but the large drop in 1975-1976 is also due to the cessation of Mexican sugar exports brought on by Government control of internal prices, which encouraged domestic consumption and discouraged increased sugar production. The combination of increased consumption and lack of production dried up export surpluses. The effect was to stop the sugar exports of about 500,000 tons per year that had moved through the fully mechanized warehouse and conveyor at Veracruz designed solely for handling sugar. For liquid cargoes, the rapid drop from a 1973 level of 4.8 million tons to a 1977 estimate of 1.1 million tons is explained by the emergence of increased Mexican petroleum production. Previous imports have been displaced by domestic production which moves by coastal shipments (and, hence, does not appear in import-export figures) and, increasingly, by pipeline. (ii) Veracruz vs Tampico 4.10 Veracruz and Tampico have been the major ports in the country (Coatzacoalcos in the southern oil-producing areas is now a third major competitor) and were the recipients of most Bank funds and supervision efforts. Because the natural hinterlands of the two ports overlap, there is scope for shifting general cargo traffic from one to another. An examination of Tables 3 and 4 indicates what has taken place in this respect since project appraisal. The information is summarized below: - 25 - General Cargo Flows - Veracruz and Tampico - 1971-1977 ('000 tons) 1971 1972 1973 1974 1975 1976 1977 Veracruz Imports 637 565 676 873 740 652 525 Exports 129 215 225 188 192 215 294 Total 766 780 901 1,061 932 867 819 Tampico Imports 165 169 153 247 373 294 77 Exports 170 247 274 366 417 495 549 Total 335 416 427 613 790 789 626 During the period 1971-1977, there was a clear shift of general cargo traffic from Veracruz to Tampico in spite of the fact that Veracruz is the best located port, has the better natural harbor and has 13 general cargo berths as opposed to Tampico's seven. Tampico also serves general cargo exports almost exclusively, while Veracruz specializes in import traffic. Part of the explanation of this phenomenon appears to lie in the improvements in productivity and operation experienced in the two ports since project appraisal. 4.11 In Veracruz, the situation was not as favorable as in Tampico, where a single union operates the port. While some unions were consolidated at Veracruz, the stevedores have managed to maintain their independence. The stevedores' union at Veracruz plays a key role in the Mexican port system, with the members tending to discourage use and development of the country's largest port because they are relatively inefficient and their charges are excessive. 4.12 The stevedoring problem at Veracruz has other important ramifica- tions. When the bulk sugar terminal was constructed, the stevedores demanded and received the same revenue per ton as they had been getting for stowing sugar in bags, despite the fact that the loading rates had increased by a factor of ten and that very few workers were required in the hold of the ship. The stevedores' union also obtained a very favorable agreement to operate the bulk grain terminal. The Government is understandably reluctant to make a major commitment to another investment in technology from which the financial savings would be limited. 4.13 In retrospect, it probably would have been wise to have made a formal contract with the stevedores for operating the grain terminal a precondition for tendering for construction. At the time of appraisal, however, it was believed that the labor problem would be greatly improved by various means discussed in Chapter VI. - 26 - V. FINANCIAL PERFORMANCE A. General 5.01 At the time of appraisal, the following system of port charges existed: (i) Charges Levied by Marina 5.02 Marina levied port dues, berthage, wharfage and storage charges. Revenues from these levies were collected by the Customs Department and appeared as revenues in the budget of the Ministry of Finance. Working expenses for the ports for maintenance, dredging and administration appeared in the budget of Marina. The system of port charges had evolved in response to budgetary and political pressures and was not related to the costs of providing the services. The charges were generally very low and discriminatory. Coastal traffic enjoyed exemptions and preferential rates so that rates on coastal ships and cargo were considerably less than on international ships and cargo. Storage charges were also too low and did not provide sufficient incentives for rapid clearance of goods. Charges were identical for all ports, and changes had to be approved by the Ministry of Finance. Estimates made during appraisal indicated that, although as a group the project ports more or less broke even in 1970, considerable losses were incurred at some ports. (ii) Charges Levied by Others 5.03 Port-operating concessionaires levied charges for stevedoring, longshoring, trucking, and other services. The concessionaires normally paid nothing to the Government for the privilege of operating in the port. Most rates (other than, for example, stevedoring) had to be approved by the Ministry of Transport and Communications. During loan negotiations, the Government agreed that: (a) with the exceptions listed in (b) and (c) following, charges levied by Marina in each port would be reasonably cost-based and sufficient to cover fully distributed costs of each project port, including a return on the value of fixed assets to be determined in consultation with the Bank. The return was to be sufficient to generate funds to cover fully distributed costs (excluding depreciation), interest on and repayment of funds provided by the Government for new port investments initiated after January 1, 1972, and a contribution to finance a reasonable portion of future capital expenditure, including replacement of assets. (b) exemptions from port charges should be granted only for compliance with international courtesy rules; and (c) only when economic factors so required, would charges be assessed below fully distributed costs, with a floor not lower than the relevant marginal cost. - 27 - 5.04 Assistance in developing accurate operating costs, in revaluing fixed assets and assessing depreciation and in reviewing port charges was to be obtained from the operations and accounting consultants, IPESA/MFP. Because implementation of the new tariff policy required legislative approval, a deadline of January 1, 1974 was set. 5.05 The following was also agreed: (a) Special accounts were to be opened for each project port by the Department of Port Operations of Marina not later than January 1, 1973. These accounts were to be credited each year with the operating revenues generated by each port and not spent for working expenses and debt service, and the balances were to be available for capital expenditures. (b) By January 1, 1973, Marina would be responsible for the assessment and invoicing of all port charges levied by the Government, with the Ministry of Finance remaining the collecting agent. (c) By January 1, 1973, charges levied by concessionaires for cargo handling should be amended to reflect the cost of services rendered. (d) The policies outlined above should be extended progressively to major ports other than the project ports. (e) The free storage period for import cargo should be reduced from 15 to 10 days in Manzanillo, Tampico and Veracruz, when the warehouses provided in the project are in operation. (f) Adequate accounting procedures would be established in Marina and at the five project ports by January 1, 1973. B. Marina 5.06 The operations and accounting consultants (IPESA/MFP) prepared financial forecasts, including cash flow statements, for each of the project ports for the period 1974-1980. Cost projections were based on estimates of port maintenance, including maintenance dredging costs, Marina's admin- istrative expenses (including a share of headquarters' expenses in Mexico City) and depreciation based on 1972 asset replacement costs. Estimates of port revenues were based on traffic forecasts prepared by the same consultants. -The consultants made var-ious computations based on different rates of return on investments to provide financial resources to cover varying percentages of the costs of port investments planned by Marina. 5.07 On the basis of these calculations, the consultants made proposals to increase port revenues by: - 28 - (a) raising the level of charges for port dues, berthage and wharfage. (b) eliminating most of the exemptions existing and raising charges on coastal traffic. (c) reducing free time in warehouses. 5.08 After reviewing the tariff proposals for the five project ports, CNCP and Marina decided to await the results of the financial studies of the other ports being prepared for the National Ports Development Study before making proposals for increases in port charges to the Government. Both CNCP and Marina were of the opinion that the Government would not consider tariff proposals which referred only to the five project ports. Historically, revisions had been made in charges levied by Marina in the ports for the entire system of public ports, and CNCP and Marina considered that any departure from this pattern was not feasible politically. This attitude, of course, delayed the submission of tariff proposals and resulted in a failure to comply with the loan documents to implement the new tariffs by January 1, 1974. 5.09 Subsequent discussions of the tariff proposals revealed further difficulties in implementing the consultants' proposals. The Government also wished to continue its policy of maintaining equal port charges on each coast and exempting coastal traffic from port charges other than port dues. This practice would mean that the objective of basing port charges on costs could not be realized and that a degree of subsidization would continue. Apparently, the Government felt that imposing higher port tariffs in ports with higher per unit costs would result in a loss of traffic in those ports, and it considered this course politically unacceptable. Coastal traffic exemptions (especially to such important users as PEMEX) had been in existence for many years and would also probably be opposed at the political level. Moreover, the Mexican authorities claimed that coastal traffic fostered regional development. 5.10 Because of satisfactory progress in other project areas, the Bank agreed to extend the deadline for revising Marina's port charges by a year to January 1, 1975. However, there were further delays in 1974 since the Govern- ment was hesitant about submitting the proposal to Congress for approval. It finally hit upon the solution of merely increasing levels of existing charges without changing the structure of port charges. Apparently this could be done by Presidential Decree without Congressional review. 5.11 In November 1974, Marina submitted a tariff proposal for all 12 principal ports. The ports of Veracruz, Tampico, Coatzacoalcos and Manzanillo were to charge 100% of a basic tariff; Mazatlan and Acapulco, 75% of the basic tariff; and Ensenada, San Carlos, Guaymas, Salina Cruz and Progreso would charge 50%. Thus, ports that were considered to be at a competitive disadvantage were allowed to provide an incentive for use of their facilities. Coastal vessels would continue to pay port dues only. Projections based on the application of these tariffs indicated that, of the five project ports, only Veracruz, Tampico and Manzanillo would earn a return on their invest- ments; Guaymas and Mazatlan would lose money. In the case of Guaymas, it was considered that the proposed charges would probably be below the minimum requirement of covering avoidable costs provided in the loan documents. - 29 - 5.12 The January 1, 1975 deadline for increasing port charges passed, and the Bank informed the Government that it could accept the latest Govern- ment approach although it did not strictly adhere to the original intent reflected in the loan documents. The Bank also stated that further tariff adjustments could be made on the basis of more refined studies of the economic impact of port charges to be included in a second port loan and made enactment of the proposed tariff increases a condition for proceeding with the appraisal of that project. 5.13 A tariff increase went into effect on February 6, 1975; however, it turned out to be a considerable compromise of the latest proposals. The users objected to the size of some of the increases and suggested that the proposed increases be made in stages. The first stage, which was finally approved, was some 64% of the level recommended by the ports charges study. It represented a 4.5 times increase over the existing level of charges and provided for the collection of additional port dues from coastal vessels. Furthermore, it would enable the project ports, as a group, to achieve the financial goals spelled out in the loan documents. The Bank concluded that, in view of the achievement of other project objectives and the fact that further improvements in the level and structure of port charges could be achieved in the context of a second port project, it was justified to proceed with the appraisal of Ports II. 5.14 Subsequently, it was determined that the new port tariffs did not produce the revenues sufficient to meet the Government's obligations in the Guarantee Agreement and that the project ports would have an operating deficit in 1975. A further increase in revenues was required in port charges or in warehouse charges (which had not been increased since 1969) or by charging the concessionaires fees for using the ports. It was decided to raise this issue during negotiations for a second port loan rather than in the context of supervising Loan 820-ME. The second port project never materialized, and, despite a further increase of about 15% in port charges in August 1976, the project ports continue in deficit. 5.15 Table 8 gives a statement of income and expenses for the five project ports for the years 1973 through 1976 and for the first six months of 1977. The ports as a group continued to incur losses throughout the period, although the tariff increases of 1975 and 1976 considerably reduced the size of the losses despite a steady increase in operating expenses. For the first six months of 1977 (latest available data), the ports were close to the breakeven point. Tables 9 and 10 give income and expenses by port for the year 1976 and the first six months of 1977. In 1977, only Veracruz and Tampico covered their costs and yielded a small return on fixed assets. The other ports incurred losses. 5.16 It is clear that Veracruz, Tampico and Manzanillo have sufficient traffic to produce satisfactory financial returns. In the case of Veracruz, port charges could be further increased and a concession fee could be levied on cargo operations as is done in Tampico. The same applies to Manzanillo. In Mazatlan and Guaymas, charges are already fairly high, but concession fees could be raised in these ports and charges on coastal shipping could be increased. - 30 - 5.17 While the project failed to achieve the financial goals spelled out in the loan documents, a considerable increase in port charges was achieved. To some extent, certain charges (e.g., on ships) were more closely related to costs, and subsidies were reduced. Over the period 1973-1977, the project ports contributed some 65 million pesos, or about 15% of total project cost. 5.18 Although the warehouses at Manzanillo, Tampico and Veracruz were completed in 1976, the free storage period was never reduced from 15 to 10 days. After the devaluation of the peso in 1976, port traffic decreased abruptly, and the need for rapid clearance of goods from the warehouses disappeared. The intention still is to reduce the free period, but not until required by an increase in port traffic. C. Concessionaires 5.19 Based on the financial and cost accounting systems established in the Empresas de Servicios Portuarios (ESPs, Chapter VI, Section B, the cargo-handling rates have been adjusted throughout the project execution period so that they are generally cost based and cover operating costs. Although recent financial statements of the Empresas are not available, results for the year.1975 (Tables 11 and 12) show that they generally are financially viable, recovering in their service charges the costs of the port workers they employ, the costs of equipment used and also overhead. Only in one port (Tampico) do the concessionaires pay the Government a fee for use of the port facilities. This is a major weakness in the structure of existing port charges. If an adequate fee could be introduced at the major ports, it would greatly improve their financial results. D. Equipment Trust Fund 5.20 In its early stages, the Equipment Trust Fund chose to sell equip- ment to port operators on long term contracts rather than to lease it on a short term basis, chiefly because it lacked qualified technical personnel to advise and supervise the maintenance and utilization of the equipment. 5.21 Until the devaluation of the Mexican peso in 1976, the Equipment Trust produced reasonable profits on its operations (Table 13). In 1976, after the devaluation, the Equipment Trust incurred a large foreign exchange loss because its leases were denominated in pesos, while most of its equipment purchases were acquired with loans denominated in foreign currency. This was the case not only with regard to the World Bank loan but also with respect to an Eximbank credit. 5.22 Although cash flow forecasts showed that the Equipment Trust would have no problems in financing its day-to-day operations during 1977, for a number of years thereafter (and especially from 1978 to 1981), cash receipts from equipment sold on long term contracts would be less than the related debt service payments (Balance Sheets, Table 14). 5.23 The Equipment Trust has made proposals to resolve this problem, but so far none has been acted upon. The Equipment Trust requested the Secretaria de Comunicaciones y Transportes to: - 31 - (a) subsidize the relevant payments of principal and interest in accordance with the repayment schedules; and (b) assist it in renegotiating the outstanding balance of contracts with customers who acquired equipment financed with the proceeds of the foreign credits and loans. It was estimated that, at the end of 1977, it would have been necessary to adjust outstanding loans by some 57% in order to offset the foreign exchange loss and that this was probably impracticable. In 1977, the Equipment Trust requested the Government to consider increasing its scope of operations to provide it with other sources of income which could absorb the operating (exchange) losses from its former operations. These additional areas of operation also included expansion of its leasing operations in ports and in other fields. VI. INSTITUTIONAL DEVELOPMENT A. Project Problems 6.01 The appraisal report identified the following main problems in Mexico ports: (a) Some 12 ministerial departments, four Government agencies and numerous state, municipal and private groups were directly or indirectly involved in port activities. Communications between these interests were unsatisfactory, resulting in inadequate coordination of operations and in investments of doubtful justification; (b) Responsibility for port operation was distributed among the Ministry of the Navy's (Marina's) numerous departments in Mexico City without appropriate internal coordination; (c) Marina's representation in the ports was limited to the port captain and the resident engineer, each reporting to his respective department in Marina; (d) Maintenance dredging and most of the capital dredging was carried out by a separate department of Marina whose activities were neither well planned and managed nor properly coordinated with other port functions; (e) Marina's staff was primarily military-oriented, with limited experience in the commercial aspects of port activities; (f) Marina's function in the ports was limited to (i) providing and maintaining port installations and fixed equipment and (ii) regulating their use, including the movement of ships. All cargo handling was carried out by concessionaires, mainly labor unions, with little control over costs and productivity; and - 32 - (g) Cargo handling carried out by concessionnaires (cooperatives and labor unions) was often inefficient because of inadequate management, wasteful labor practices and insufficient mechanized equipment. 6.02 Aware of these problems, the Government established the National Ports Coordinating Commission (Comision Nacional Coordinadora de Puertos-CNCP) in December 1970, and a Department of Port Operations was established in Marina in April 1972. The success of these organizations in improving port planning and operations is discussed below. Improvements achieved in financial manage- ment are discussed in Chapter V of the report. B. CNCP (i) General 6.03 CNCP, established on December 23, 1970, was essentially an inter- ministerial committee responsible for: (i) policy formulation; (ii) overall planning; and (iii) coordination of all public and private interests related to ports. It was not concerned with day-to-day port operations, which were the responsibility of Marina. 6.04 One of the principal problems revealed during project preparation was the lack of coordination among the principal groups involved in port operations: port workers, Government authorities and port users such as customs agents, shipowners and shipping agents. CNCP was established with this problem clearly in mind and it included representatives (at the national and local levels) of port workers organizations, users and Government agencies. 6.05 CNCP was reorganized in April, 1972, mainly to transfer certain functions (principally planning) to the reorganized General Directorate of Port Operations in Marina. Despite this change, CNCP continued to be the organization responsible for the National Port Study so that there continued to be an overlapping of functions between CNCP and Marina, particularly in the area of planning. In 1973, CNCP established a committee to (a) coordinate and supervise consultants' studies and implement their recommendations, (b) propose and monitor training programs, (c) propose policy guidelines for implementing the recommendations of the port studies, and (d) coordinate the efforts of the various port entities in order to optimize port planning and operations. The committee included an advisor from Marina. 6.06 Although it was the Government's policy to keep the roles of CNCP and Marina separate, CNCP being responsible for policy and coordination and Marina for day-to-day operations, in practice it was difficult to recruit sufficient qualified staff. In several ports and for some time, the Port Superintendent (Marina) also served as the CNCP delegate. 6.07 Despite these problems, CNCP had considerable success in coordinating and improving port operations through its own activities and through the estab- lishment of Empresas de Servicios Portuarios (ESPs) and Zonas Francas in the ports and through the technical assistance the ESPs received from consultants financed by the loan. These improvements are discussed below. CNCP also - 33 - successfully carried out the National Port Development Study, part f(ii) of the project (para 2.05). It had considerably less success in preparing and carrying out a training program for port workers. This matter is also dis- cussed below. (ii) Port Operations 6.08 One of the principal institutional changes made by the Government (through CNCP) to improve the coordination of cargo-handling operations and the level of efficiency with which they were carried out was to create ESPs and Zonas Francas in the principal ports. The Government recognized that it was necessary to create entities which satisfied the following minimum conditions: (a) gave port workers, through a collective labor contract, satisfactory working and salary conditions; (b) offered to port users adequate prospects of a gradual improvement in operating efficiency through a reliable work force having adequate cargo-handling equipment and applying appropriate operating methods; and (c) were capable of being financially self-supporting. 6.09 The first port to establish an ESP was Manzanillo (June 1971). The Government (through CNCP) acquired 51% of the shares of the new Empresa, and 15 port users (shipowners, shipping and customs agents) acquired the other 49%. Cargo-handling equipment was acquired with the proceeds of share purchases. The Empresa entered into a collective work contract with the Union of Stevedores and Port Workers of the Pacific, which represented longshoremen and stevedores working in the port. The Union was also represented in the Management Council of the Empresa. 6.10 One of the principal problems confronting the new Empresa was that of operating two port zones 3 km apart (San Pedrito and Manzanillo). This required careful advance planning of ship operations to reduce ship and labor time. Systems for ship operations and for control of cargo handling within the Zona Franca were introduced with the assistance of the consultants financed under the Bank loan (IPESA/MFP). The consultants also introduced personnel, billing, general accounting and cost accounting systems for the Empresa. 6.11 In Manzanillo, the creation of an Empresa resulted in significant improvements in the loading and discharging of cargo to/from ships and in clearing cargo through the port. This was made possible by the new organiza- tion which gave workers greater job security, regularity of employment, higher salaries and social benefits; provided them with more and better equipment; resulted in more effective planning of operations and removed some of the impediments to efficient operations. The so-called Zonas Francas, for example, were established to provide an area within the port limits where cargo could be handled freely without interruption or delay caused by customs control or examination. These areas were regulated and controlled to avoid any alteration or theft of the goods so that they could be subjected to - 34 - customs examination with confidence upon leaving the Zona Franca. This system greatly facilitated the unloading of cargo and its delivery to the sheds and open storage areas because customs requirements (deliveries to specific points, delays for examination, special handling for customs examination) could be ignored within the Zona Franca. 6.12 After Manzanillo, ESPs were established in 1972 in the ports of Guaymas, Salina Cruz and Coatzacoalcos, Progreso and Ensenada, and, in 1973, an ESP was established in Veracruz. 6.13 Veracruz has always been considered the most difficult port to reorganize because of its labor problems. A great many different labor organizations functioned in the port and were responsible for various types of longshoring, stevedoring, trucking and other port operations. As a result, the operations were divided, disorganized, badly coordinated and even duplicated in some cases. Rivalry and continuing disputes prevailed among the unions, and the level of port efficiency was low. In 1971, four different unions and one cooperative carried out cargo-handling operations in Veracruz. In 1973, the cooperative which carried out unnecessary transfer operations was dissolved, and the unions carrying out longshoring operations established the Empresa with a majority of its shares. In 1975, these unions merged, leaving one union responsible for all longshoring operations in the port. This union represented 80% of the workers in Veracruz port, the other 20% being stevedores responsible for cargo handling aboard ship. The failure to include this last group in the Empresa seriously limited the possible improvements in cargo-handling efficiency in this important port. Nevertheless, the Empresa has made some important improvements in operations ashore by improved coordination of work, increased normal working time and more and better cargo-handling equipment. 6.14 Zonas Francas have been established in each of these ports, and consultants IPESA/MFP have installed operating and management systems. Improvements have also been made in cargo-handling operations in each port as a result of these changes. 6.15 It was not considered necessary to create an Empresa in the port of Tampico, where the Gremio Unido de Alijadores has been in charge of cargo operations for many years. Its operations are efficient and well managed, and it administers the Zona Franca in this port. 6.16 The creation of the Empresas and the Zonas Francas, the work of coordinating port operations by CNCP and Marina, the technical assistance provided by the management consultants and the cargo-handling equipment supplied through the Equipment Trust Fund together resulted in measurable improvements in cargo handling in the various ports. 6.17 With the exception of Acapulco (and of Mazatlan, in the case of general cargo handling), the investments and institutional changes have had a positive effect on operating efficiency in Mexico's major ports. (iii) Training 6.18 The project included US$300,000 for an estimated 317 man-months of staff training. CNCP requested consultants IPESA/MFP to develop a training - 35 - program as part of their contract to improve management and operations in the ports. However, the program developed by the consultants did not agree with the concept arrived at during project preparation. It was not based on an evaluation of training requirements, and it included too much theoretical training in foreign universities and too little local practical training. CNCP and Marina did not act on the consultants' proposals, principally because they could not provide trainees (at the time they were trying to recruit management personnel and had practically no management staff avail- able for training). CNCP preferred a program of sending staff to European ports such as Rotterdam for on-site training. The consultants opposed such a program on the grounds that there was little relevancy between the ports of Rotterdam and Mexico and that the port policies of the two systems were very different. 6.19 In April 1973, the consultants submitted new proposals consisting mainly of: (a) academic training abroad for eight high level individuals in Business Administration, Economics and Systems Analysis; (b) Practical courses for middle and lower level technicians given in Mexico by professionals from Marina and the Merchant Marines School; and (c) Seminars given by international specialists in Mexico City on particular topics of interest to Marina technicians. 6.20 In August 1973, CNCP informed a Bank supervision mission that the new training plan proposed by the consultants was too general and theoretical to be usable and stated that CNCP and Marina were preparing a program of their own, including training for CNCP, Marina personnel and staff of the ESPs in foreign ports and the bringing of expatriate experts to Mexico. 6.21 The responsibility for preparing this plan was given to Engineer Eduardo Farias, a member of the consulting firm of Frederick R. Harris, which was involved in the National Port Study. He was to work closely with the Technical Commission of CNCP responsible for training (on which Marina was represented) to prepare an inventory of the existing level of training and future training needs, less plans and training manuals, and a training schedule. Because of Mr. Farias' heavy involvement in the National Port Study, he made only a limited contribution to the development of the training programs, and his contract was finally canceled. The CNCP Technical Committee did carry out some training although, despite several requests, the Bank has never been able to get a detailed description of it or what it cost. 6.22 In 1973 and 1974, CNCP estimated that it had spent some 1,234,000 Mexican Pesos (US$98,700) on training abroad and requested Bank reimburse- ment from Loan 820-ME. Because the training had not been carried out as part of the training program approved by the Bank, the Bank refused to finance it. Moreover, the Bank was considering a second port loan to Mexico and considered that financing these expenditures might make it more difficult - 36 - to get the Mexican authorities to develop a proper program for use of the training funds planned to be included in the proposed second loan. 6.23 At this point in time (end 1974), the Bank virtually gave up trying to get the training program included in the first port project carried out. The consultants' contracts had been terminated, and the cost overruns in other project elements had used up available funds for training. Most significant, however, the Bank was preparing a second port project and planned to include an important training component in it. 6.24 It is clear that training was not one of the successful parts of the Mexican Ports Project. The program developed during appraisal did not sufficiently take into account the teething problems of CNCP and Marina and the difficulties that they would encounter in releasing staff for training. In addition, the consultants (IPESA/MFP) selected lacked expertise in planning training programs. C. Marina (i) Port Administration 6.25 In April 1972, the General Directorate of Port Operations (DGOP) was established within Marina in order to concentrate responsibility for port operations within one department. It was given the following respon- sibilities: (a) Exercise the functions given to the Secretaria de Marina for ports; (b) Operate public port installations; (c) Analyze and improve port operating systems; (d) Regulate maritime traffic; (e) Assign the use of port installations and coordinate the means of transport within the port limits; (f) Represent the Secretaria de Marina in the ports and before the authorities and representatives of public and private groups in port administration and operating matters; (g) Review requests for port operating concessions; (h) Propose works and installations for ports in operation; (i) Maintain port installations and equipment; and (j) Study and propose changes in port dues and exercise the powers of the Secretaria de Marina in the matter of tariffs for port services. - 37 - 6.26 Superintendencies were established in each port, each with their departments as follows: (a) Port Captain - port operations, including cargo handling, warehouses, port traffic - maritime rescue - promotion and relations with port users - maritime and ship communications (b) Administration - accounting and billing - administrative services - port statistics (c) Technical - projects and planning - engineering and maintenance 6.27 Consultants IPESA/MFP assisted DGOP in organizing and staffing its headquarters and superintendents' offices, defining clearly the fields of action and complementary functions of CNCP and DGOP. The consultants designed the following system for DGOP: (a) Budgeting (b) Accounting and costing (c) Personnel (d) Correspondence and filing (e) Notification of charges to port users (f) Operating information (Port Operating Statistics) (g) Cargo-handling control (also prepared for ESP's) (h) Asset inventory control. 6.28 These systems were implemented in large measure, although with varying degrees of effectiveness. Marina had some difficulty in recruiting personnel both at Headquarters in Mexico City and in the ports, and this delayed the implementation process. In some ports, it was necessary for some time to combine the jobs of Port Superintendent and CNCP coordinator because of the lack of qualified management personnel. This did not seem to adversely affect the process of improving port administration and opera- tions, although it is rather difficult to separate Marina's responsibility for improving port operating efficiency from that of CNCP as discussed above. It is clear, however, that: - 38 - (a) responsibility for port operations was concentrated in one Marina Department; (b) Marina's organization in Mexico City and in the ports was expanded and reorganized and new management systems were installed to direct and control operations; and (c) Marina's administration in the ports was given a new commercial orientation. 6.29 Despite these accomplishments, responsibility for planning and administration of the ports at the national level continued to be fragmented. This fragmentation was reduced in December 1976 when the Federal Government Administration was reorganized. At that time, the responsibility for ports was transferred from the Secretary of the Navy to the Secretary of Communi- cations and Transport (SCT). A sub-secretary in SCT is now responsible for Ports and Merchant Marine. Reporting to the sub-secretary are the Directors General of: (i) Port Operations, (ii) Merchant Marine, (iii) Port Construction, (iv) Dredging, and (v) Navigational Aids. 6.30 Although CNCP continues to fulfill its function as coordinator of various port operators and as a forum for exchanging news about port opera- tions, the Government is considering reducing CNCP's role since it has accomplished many of the purposes for which it was established. For example, it is considering giving the Directorate of Port Operations the responsibility for representing the Government on the Boards of the ESPs. It is also considering putting the Port Equipment Trust Fund under the sub-secretary (it has been under CNCP with Nacional Financiera as trustee). 6.31 There is no doubt that the project contributed to the institutional improvements made in Marina and that these contributed to improvements in port operational efficiency. The extent to which improvements were made in port planning is discussed below. (ii) Port Planning 6.32 At the time the loan was made, responsibility for making port policy and for investment planning was divided among a dozen ministerial departments. Marina had the largest share of responsibility for setting port policy, but, because of its interest in naval, naval aviation, merchant marine, shipyard, scientific exploration and other matters, its approach to its responsibilities in ports (e.g., construction and maintenance of port works) had a military rather than commercial orientation. It had apparently never throughly examined the question of whether the ports should be self-financing or whether the pricing of port services should be used to achieve specific objectives in the port subsector. Moreover, no clear instructions existed regarding criteria for evaluating port investments. As a result, responsibilities for planning were divided within Marina and other Ministries, and there was a large political element in determining port investments, with efforts being made to provide each of the 17 seaboard states with a port of significance. - 39 - 6.33 It is clear that planning responsibilities continued to be divided. During the project period, a number of doubtful or inadequately prepared projects were carried out. A new deep-water port was built at Puerto Madero (its economic justification was doubtful), and a new berth was constructed in Tampico port despite considerable excess capacity in the port of Veracruz, a port in direct competition with Tampico. 6.34 To some extent, there has also been a tendency to plan port facilities without regard to their financial viability. The General Directorate of Port Works (Obras Maritimas) is responsible for the design and construction of port works while-DGOP (the General Directorate of Port Works) is responsible for their maintenance and administration. Each Directorate has a separate budget which is not related to the revenues collected from port operations. The Ministry of Finance collects public port revenues, and DGOP keeps track of port revenues and expenses only on a pro forma basis. However, since the individual budgets of DGOP and Obras Maritimas do not depend on the collec- tion of port revenues, the incentive for proper financial management (and investment planning) is lacking. 6.35 The project probably had a positive effect on the quality of port investment planning. Some local port staff were trained in investment planning through their participation in the preparation of the National Port Study. Some concentration of dispersed investment planning procedures was achieved, as well as some understanding of the financial implications of port investment. These factors are clearly reflected in the efforts of the Government to estab- lish a Port Analysis Unit within DGOP. The unit, related to the Bank's efforts to prepare a second port project in Mexico, was to consist of eight to ten port specialists with training in financial analysis, economics and engineering to review the investment proposals of the Port Construction Directorate. Adequately staffed and given sufficient opportunity for review, the unit could make a very positive contribution to the quality of planning in Mexico's ports. Unfortunately, the Government decided not to proceed with the proposed second port project, and the possibility for continuing Bank influence in achieving these results was lost. D. Equipment Trust Fund 6.36 One of the causes of inefficient port operations had been the lack of appropriate, well maintained cargo-handling equipment. On September 29, 1971, the Government established a port Equipment Trust Fund in Nacional Financiera (the Government Development Bank and Borrower under the Loan Agreement) to supply such equipment, by rental or sale, to cargo-handling concessionaires. The Government made an initial capital contribution of 1 million pesos (US$80,000) with further contributions expected. The Trust Fund was administered by a Technical Committee of the Federal Government. 6.37 During loan negotiations, agreement was reached that the Trust Fund would be properly administered and operated along commercial lines (i.e., financially viable). 6.38 The project included funds for fork-lifts of varying capacity, tractors, trailers and pallets. The total cost was estimated to be - 40 - US$1,925,770 including contingencies, of which US$1,782,000 was foreign exchange (Table 5, appraisal report). Procurement of cargo-handling equip- ment under the loan proceeded satisfactorily; its cost is shown in Chapter III of this report. 6.39 Consultants IPESA/MFP prepared the organization charts and procedures for the Equipment Trust and provided advice on the specifications of equipment to be acquired by it. Until equipment was delivered, the Equipment Trust had a very small staff in an office supplied by Nacional Financiera. Prior to equipment delivery, the Equipment Trust planned to hire a financial analyst, a secretary and equipment specialists; initially, it planned to sell the equipment on the basis of five-year additional sales agreements with the port operating enterprises. At that time, a Bank mission pointed out that there would be a risk of exchange loss which could not be recovered through a conditional sales contract and suggested a more flexible arrangement such as short term leases. 6.40 Because of limited initial operations and budget, the Equipment Trust had only two professional staff members. Equipment was sold rather than leased because personnel were not available to supervise the mainte- nance and utilization of leased equipment. The Equipment Trust also relied heavily on Nacional Financiera for accounting services and for interim financing for equipment procurement required until documentation could be prepared for Bank reimbursement. There were delays in clearing documents through Nacional Financiera's legal department, the accounts were not kept up to date and the financial statements produced (1974) did not represent the financial situation of the Equipment Trust. During 1974, the Equipment Trust retained external auditors and supplemented its staff. The 1974 audit report raised so many questions on the adequacy of the underlying accounting system and procedures that the Equipment Trust hired a local firm (SOMATEC) in April 1976 to install appropriate accounting and budgeting systems. 6.41 Eventually, the Equipment Trust was adequately and competently staffed, and effective accounting and other procedures were installed. However, because of the manner in which it made equipment available to the cargo-handling companies, i.e., through long-term sales contracts, which was to some extent forced upon it by its lack of staff, the Equipment Trust found itself in financial difficulties in 1976 after the peso devaluation (Chapter V, Section D). 6.42 The Equipment Trust Fund has performed a valuable service in that it provided badly needed equipment at reasonable costs and terms to the ports and thus made an important contribution to port efficiency. However, it is clear that the basic problems of the Equipment Trust were not identified during appraisal. The initial capitalization of the Equipment Trust was inadequate given the local currency costs of equipment procurement and the relatively long period before equipment could be acquired and leased and before revenues were produced. Arrangements should have been made for adequate technical and financial management at an early stage, and this does not appear to have been done. Relying upon Nacional - 41 - Financiera to provide accounting and financial help was not productive. In short, the difficulties and costs of starting a new institution were greatly underestimated. VII. ECONOMIC REEVALUATION A. Introduction 7.01 The eventual total cost of the project excluding consulting services was 450.5 million pesos, about US$36 million at the pre-1976 exchange rate of 12.5 pesos to the dollar. The breakdown by items is given below: First Port Project Expenditures Item Amount million pesos % Total Grain berth - Civil works 91.9 20.4 Grain berth - Equipment 26.4 5.9 PEMEX berth - Civil works 37.8 8.4 PEMEX berth - Equipment 29.0 6.5 PEMEX berth - Dredging 32.4 7.2 Dredger 101.1 22.4 Auxiliary floating equipment 37.9 8.4 Warehouses 61.7 13.7 Communications and firefighting 11.0 2.4 Cargo-handling equipment 21.3 4.7 Total 450.5 100.0 7.02 A retrospective economic analysis will be performed for the grain facility at Veracruz, which accounted for approximately 26% of the eventual project cost, the PEMEX oil berth at Veracruz, which accounted for approxi- mately 22%, and the dredger purchase, which accounted for 22% of the project cost. These three items together account for 70% of expenditures. Informa- tion was not available for analysis of the other items. 7.03 Although the two facilities at Veracruz were analyzed separately for economic feasibility at the time of appraisal, they are interrelated. The new PEMEX berth was required because the old berth was needed for the grain terminal site and the future container berth site. The cost of moving the PEMEX facility was really a cost associated with the grain berth. There are, of course, quantifiable benefits associated with the new PEMEX facility and some non-quantifiable benefits such as the safer location within the harbor. For purposes of analysis, the cost and benefit streams of the two facilities will be joined in a combined rate of return analysis for the Veracruz investment. - 42 - B. Grain Berth Benefit Streams (i) Traffic 7.04 At the time of appraisal, no wheat had been imported through Veracruz between 1967 and 1970 and only 50,000 tons per year prior to that time. At the national level, food imports between 1965 and 1969 had been averaging about US$14 million per year, but they increased dramatically to over US$200 million in 1974 and 1975 before falling again to US$99 million in 1976. 7.05 According to the most recent macroeconomic projections, food imports will continue at about US$130 million per year through 1982. The Veracruz grain terminal was originally seen as a relatively small operation handling exports in good years and imports in bad years. As such, the traffic projections in the appraisal report were assumed to average 200,000 tons per year of imports and exports. In fact, as the table below indicates, traffic since 1972 has fluctuated between 500,000 and 650,000 tons per year, virtually all imports - a direct result of the enormous increase in food imports at the national level. The years 1974-1975 were peak years at Veracruz just as they were at the national level. Veracruz Bulk Grain Traffic 1972-1977 (Thousands of metric tons) 1972 1973 1974 1975 1976 1977 496 546 679 632 439 572 7.06 At Tampico up the coast, a similar increase in grain traffic took place, as indicated below. Tampico Bulk Grain Traffic 1972-1976 (Thousands of metric tons) 1972 1973 1974 1975 1976 64 145 240 341 177 If the Veracruz facility were to have sufficient capacity, the Tampico traffic would probably divert to the more efficient facility and the Veracruz traffic forecast for the retrospective economic analysis would have to be revised to a level of approximately one million tons annually since the Mexican food grain deficit is not likely to disappear in the forseeable future. - 43 - (ii) Capacity 7.07 The original design for export flows provided for discharging rail cars and trucks into the warehouse at a rate of 200 tons/hour. Ships could then be loaded from the warehouse at 300 tons/hour. For imports, the reverse rates were attainable. A 200-ton-per-hour operation for 12 hours per day with a 50% berth utilization and a 300-day year 1/ yields a capacity of 360,000 tons/year, quite adequate for the appraisal forecast but not for what actually took place. The Government grain monopoly CONASUPO, which now operates the grain facility, has made alterations in the equipment which allow direct loading from ship to railcar at a rate of 350 tons/hour. By achieving a rate of 350 tons/hour, working an 18-hour day, a 300-day year, and 50% berth utilization, a flow of 945,000 tons/year can be achieved. 7.08 CONASUPO is planning to move a million tons annually through the facility from 1978 on, handling current Veracruz flows as well as grain imports shifted from the less efficient facilities at Tampico. (iii) The "Without" Case 7.09 Without the mechanized grain terminal, the old semi-mechanized system would have to be used. At Veracruz, two general cargo berths were used to handle the large flow of food grain between 1970 and 1977 when the mechanized terminal began operations. Portable evacuators were used to load directly to rail cars. With this system, a ship could be unloaded at a rate of 65 tons/hour. 2/ By working 24-hour days, a 300-day year and having 50% berth utilization, a flow of 468,000 tons per year could be achieved. With an average cargo of 20,000 tons, a ship required 13 days to unload under the old system, with an average stay in port of 20 days, and an average waiting time of 7 days for a berth. A standard queuing analysis assuming random arrivals supports these figures. At 468,000 tons/year, the berth occupancy would be 51% for both berths, and the average ship waiting time 4.3 days. At 600,000 tons/year, the berth occupancy increases to 65%, with an average ship waiting time of 9.5 days. The peak year of 1974, in which 679,000 tons of grain moved through Veracruz, must have been very bad in terms of grain ship congestion. 3/ 7.10 If the two berths at Veracruz and the single berth at Tampico are considered jointly as the alternative to the mechanized facility at Veracruz, and a one-million-ton flow of grain is used (in 1975, the joint 1/ High-velocity "northern" winds keep the facility from operating the year round. 2/ Actual unloading rates are about 130 tons/hour, but the shifting and positioning of rail cars takes up about half the operating time. 3/ Although CONASUPO is the sole importer of food grains, it has not, as yet, been able to control ship arrivals at Veracruz and Tampico to minimize waiting time. - 44 - flow was 973,000 tons), then the "without" case is a three-berth facility moving 1,000,000 tons and experiencing random ship arrivals. The "with" case would be the same flow with the mechanized single berth at Veracruz. A queuing analysis indicates the implication of the two different alterna- tives: Impact of Mechanized Grain Terminal on Ship Time in Port "Without" Case "With" Case Traffic (tons) 1,000,000 1,000,000 Average shipload (tons) 20,000 20,000 Number of ships 50 50 Average unloading rate (tons/hr) 65 350 Hours per day worked 24 18 Ship unloading time (days) 12.8 3.2 Number of berths 3 1 Berth occupancy (%) 72 53 Average waiting time for berth (days) 7.8 3.5 Average total ship time in port (days) 20.6 6.7 7.11 With the old system, an average ship would spend 21 days in port. With the new system, only seven days would be required on the average, a saving of 14 days per ship. Ten days of the saving are due to faster loading rates, while four days are due to reduced queuing. For 50 ships per year, it amounts to 700 ship-days of saving annually. At US$5,000 per ship-day in 1976 prices, this represents an annual saving of US$3.5 million. Since CONASUPO moves the grain on charter carriers, the savings would accrue to the Mexican economy. 7.12 The "without" case may not be realistic for a long period even though it is what, in fact, took place in 1975. Eight-day ship-waiting times are very long and, in the longer term, a third general cargo berth in Veracruz would probably have been used for semi-mechanized grain handling, providing a total of four rather than three berths, although this would have required some investment in improved rail access and evacuators and, perhaps, some queuing of general cargo ships. - 45 - 7.13 The basic problem with the semi-mechanized unloading on the Veracruz general cargo berths is that of rail car movements on the finger piers, which effectively limits unloading rates. Not only are large amounts of ship time required, but costly strings of box cars are tied up in the process. 7.14 With the old system, a 20,000-ton cargo could be unloaded in 12.8 days and would require 400 boxcars in that period since there was no warehouse storage. For the new system, 400 boxcars are required over a period of only 3.2 days, and the storage allows continuous ship unloading even if boxcars are not immediately available. For one million tons/year, this amounts to 28,000 car-days per year. A 50-ton boxcar costing US$30,000 has an annual value of US$3,825 at 12% interest, or US$10.50 per day. Thus, 28,000 car-days of savings are worth about US$294,000 per year. C. PEMEX Berth Benefit Streams (i) Traffic 7.15 At the time of appraisal, 1.3 million tons of petroleum products were entering the Veracruz PEMEX facility annually. This was forecast to increase at 6% per year and was then cut back to 4.5% per year to allow for diversion to pipeline in 1975. In fact, the traffic grew at 13.5% per year through 1975, when it peaked at 2.47 million tons. In 1976, it declined to 2.2 million tons, and, in 1977, it declined further to 1.15 million tons. The decline was attributed to the diversion of previous coastal movements to recently completed pipelines, an event foreseen in the appraisal report. However, the decline from 1976 to 1977 was very sharp, and the factors causing it appear to be permanent. For purposes of reevaluation, the 1977 level of 1.2 million tons will be used with an assumed growth rate of 6% per year. (ii) Capacity 7.16 Unlike CONASUPO's use of the grain berth, PEMEX has precise control over the arrivals of tankers at the Veracruz petroleum berth. All movements are coastal movements of PEMEX products coming from PEMEX refineries on PEMEX tankers; thus, the problem of random arrivals and queuing is avoided and the berth utilization could be nearly 100% without congestion. For a 360-day year and a 24-hour operation, this facility could theoretically handle 6 million tons annually, which it will not be called upon to do. (iii) The "Without" Case 7.17 The last full year of operation of the old pier was 1975, during which 214 ships delivered an average of 11,336 tons each to the facility, requiring an average time at berth of 1.69 days. This implies an average unloading rate of 279 tons per hour and a 50% berth utilization. (iv) The "With" Case 7.18 In 1976, when the new pier was partially in use, the average cargo was 10,961 tons delivered by 209 ships with an average stay at the new berth of 1.16 days. The average unloading rate was 394 tons per hour, - 46 - a 41% increase over unloading rates at the old pier. The pipes and equipment on the new pier are more efficient, and berthing and unberthing at the new facility requires less time. 7.19 If future traffic is to grow at 6% from a 1977 level of 1.2 million tons, then the major direct benefit associated with the new PEMEX facility is the reduced ship time in port with the faster unloading rates (394 tons/ hour vs 279 tons/hour). Further, it is anticipated that the average cargo will increase from 11,000 tons to 15,000 tons as larger, more efficient ships enter the PEMEX fleet. For the larger ships, the new facility would reduce ship time at berth from an estimated 2.24 days at the old facility to an estimated 1.58 days at the new facility, a savings of .66 days per ship. The 1977 cargo level of 1.2 million tons would require 80 ships per year, and the savings would amount to 52.8 ship-days per year. A 17,000 DWT tanker in port costs US$6,000 per day in 1976 prices. Annual savings with the new facility would be US$317,000, and the benefit stream would grow at 6% annually. D. Dredger Acquisition Benefit Stream 7.20 The dredger Guadalupe Victoria began operations on May 17, 1975. Marina records indicate that, between this date and December 31, 1976, approxi- mately 4.4 million cubic meters were dredged at a unit cost of 4.16 pesos/m3 (excluding depreciation). This implies an annual workload of 2.75 million cubic meters. (i) The "Without" Case 7.21 Without the new dredger, the annual 2.75 million cubic meters would have to be dredged under contract. Marina records indicate a unit cost of 16.1 pesos/m3 for this type of work. A 2.75 million cubic meter annual workload would cost 44.3 million pesos. The avoidance of this contract work was a benefit to the country since foreign dredging contractors would have done the work. (ii) The "With" Case 7.22 By investing 101.5 million pesos in the new dredger, a 2.75 million cubic meter annual workload costs only 11.4 million pesos per year in the early years when the dredger is efficient. If the efficiency in its 15th year of useful life is half that initially (i.e., an annual cost doubling from 11.4 million pesos to 22.8 million pesos), the annual costs of the new dredger would rise at 4.5% per annum. Annual benefits would then be the difference between contract dredging costs and own account costs and would decline from a level of 32.8 million pesos in the first year to a level of 23.3 million pesos in the 15th year. E. Rate of Return Analysis 7.23 For the grain berth, assuming a 30-year useful life for the civil works and a 10-year useful life for the machinery, the revised rate of return (ROR) on the investment, considering only ship and boxcar time savings, will - 47 - be 30% with first year benefits (FYB) of 36%, indicating that the project will be well justified and should have been undertaken several years sooner. 7.24 For the PEMEX oil berth, assuming a 30-year useful life and savings in ship turnaround time alone, the likely ROR will be 6% with FYB of 3%, indicating that this investment by itself is probably not justified. The desire of the port planners to have the petroleum pier isolated from the grain facility for safety and pollution reasons as well as to make space for the grain facility was the rationale for the investment, and, for this reason, the two investments at Veracruz should be analyzed jointly. 7.25 For the joint Veracruz grain and PEMEX investment, the combined ROR is 20% with FYB of 21%, indicating the joint investment to be economically justified and well timed. 7.26 For the dredger investment, considering only the differences in contract dredging costs vs own account dredging costs, the ROR will be 28% with FYB of 32%, indicating that the investment is well justified. 7.27 The combination of all benefit and cost streams of the three major elements of the investment program yields an ROR of 22% with FYB of 21%, indicating that the major investments partially financed by the loan will be well justified. VIII. THE ROLE OF THE BANK 8.01 The Bank, through the transport sector mission in 1971 and in subsequent project identification, preparation and appraisal missions, was instrumental in identifying problems in the administration, planning and operation of Mexico's ports. It also acted as a catalyst in the development of solutions to some of these problems. The solutions themselves were mainly those of Mexican officials, but they were, in most cases, considered to be suitable alternatives to Bank proposals and generally reflected a sound knowledge of what was possible in the Mexican political and socio-economic situation. Bank staff and consultants employed under the project followed up these institutional and administrative changes fairly closely, and many were successfully implemented. 8.02 The project itself was relatively successfully implemented, but the related changes in the institutional structure and procedures in the ports were much more important, and these constituted the principal reason for the Bank's involvement in this project. IX. CONCLUSIONS 9.01 As mentioned above, the principal reason for the Bank's participa- tion was to achieve change in Mexico's port institutions and to improve port planning, administration and operations. - 48 - 9.02 To those who observed the ports in 1970 and who look at them today, the changes have been impressive. The ports are cleaner and more efficiently run. Much of the staff has had overseas training or served as counterparts to the consultants employed under the loan. Nevertheless, a more systematic and better administered program of training is needed to bring all key staff up to an acceptable level. 9.03 Although the nucleus exists for good port planning and administra- tion, there is a lack of staff in the vital areas of port finance, tariff setting and project analysis. While the project accomplished a good deal in terms of institutional improvements, much remains to be done to achieve a port organization capable of developing and setting sound port policies. 9.04 It is clear that the Bank underestimated the difficulties in achiev- ing improvements in port tariffs. The diversity of the ports, and of their problems, and the degree of competition between certain of them make the development of a coherent port tariff policy very difficult to achieve. Clearly, the Government could benefit from further expert advice in this area and in the related field of port planning and project evaluation. - 49 - TABLE 1 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Appraisal Estimate and Actual Construction Schedule and Project Costs Appraisal Cost Estimate Project Completion Including Final Appraisal Item Contingencies Cost Estimate Actual (US$ millions) Civil Works Veracruz Grain Handling First Quarter Installations 1.6 8.5 Mid-1975 1976 Veracruz Tanker Berths 2.2 7.2 1/ Early 1975 End 1974 Warehouses and Transit Third Quarter Shed 3.0 8.9 Mid-1974 1974 Equipment Second Quarter Grain-Handling Equipment 1.5 2.4 Early 1974 1976 Dredging Equipment 14.2 11.0 Early 1974 Mid-1975 Other Equipment 2.4 2.4 Early 1974 Mostly on Schedule Consultants Services Operations and Accounting 1.2 0.8 End 1972 Second Quarter 1974 National Port Study 1.2 1.4 Early 1974 End 1974 Dredging Study 0.3 0.3 Mid-1974 27.6 42.9 1/ Includes cost of piping done and paid for by PEMEX Source: Bank Staff February 1978 - 50 - TABLE 2 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Mexican Economic Growth Performance 1965-1976 Annual Real Rates of Change in Percent Real Value Tonnage General Cargo Merchandise 2/ and Dry Bulk Cargo at Year GDP Imports and Exports - Five Ocean Ports 1965 1966 + 6.8 + 2.1 - 12.7 1967 + 6.3 + 2.6 + 5.8 1968 + 8.2 + 8.7 + 0.4 1969 + 6.3 + 6.6 + 1.4 1970 + 6.9 - 2.6 - 5.7 1971 + 3.5 - 10.1 - 12.8 1972 + 7.2 + 17.1 + 26.8 1973 + 7.6 + 6.3 + 10.6 1974 + 5.9 + 23.6 + 20.0 1975 + 4.3 - 1.7 - 2.5 1976 + 2.0 - 4.0 - 13.2 1/ Table 2.1 "Special Study of the Mexican Economy", IBRD Draft Dec!. 2, 1977. 2/ Tables 3.4 and 3.5 "Special Study" excludes non-factor services such as border trade, tourism, and gold movements. 3/ 1965-1970 Table 10, "Appraisal of a Ports Project in Mexico", IBRD February 16, 1972. 1971-1976 Quarterly Report of Direcci6n General de Operaci6n Portuaria, Mexico. Excludes bulk liquid traffic mostly petroleum products. Source: Bank Staff November 1978 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Traffic Flows Port of Veracruz 1971 - 1977 (1000 Tons') Item 1971 1972 1973 1974 1975 1976 1977 1/ Imports General Cargo 637 565 676 873 740 652 525 Dry Bulk 279 714 810 797 785 560 557 Liquid 20 4 22 '58 34 74 156 Exports General Cargo 129 215 225 188 192 215 294 Dry Bulk 522 464 488 426 148 - 36 Liquid 341 394 443 379 321 283 196 Total General Cargo 766 780 901 1,061 932 867 819 Dry Bulk 801 1,178 1,298 1,223 933 560 593 Liquid 361 398 465 437 355 357 352 1/ Estimate based on six months of data. Source: Quarterly report of Direccion General de Operaci'n Portuaria. F-4 February 1978M PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Traffic Flows Port of Tampico 1971 - 1977 (1000 Tons) Item 1971 1972 1973 1974 1975 1976 1977 1/ ImDorts General Cargo 165 169 153 247 373 294 77 Dry Bulk 78 157 347 '517 600 550 670 Liquid 411 1,233 2,482 1,151 682 601 219 Exports General Cargo 170 247 274 366 417 495 549 Dry Bulk 856 917 988 1,040 690 995 1,332 Liquid 1,751 1,414 1,159 703 656 529 251 Total General Cargo 335 416 427 613 790 789 626 Dry Bulk 934 1,074 1,335 1,557 1,290 1,545 2,002 Liquid 2,162 2,647 3,641 1,855 1,338 1,130 770 1/ Estimate based on six months of data Source: Quarterly report of Direcci6n General de Operaci6n Portuaria February 1978 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Traffic Flows Port of Manzanillo 1971 - 1977 (1000 Tons) Item 1971 1972 1973 1974 1975 1976 1977 1/ Imports General Cargo 116 87 89 208 181 306 116 Dry Bulk 138 365 388 515 668 359 161 Liquid 84 41 94 101 198 119 70 Exports General Cargo 57 45 63 87 59 60 60 Dry Bulk 49 238 46 19 10 5 4 Liquid 41 55 67 68 43 33 12 Total General Cargo 173 132 152 295 240 366 176 Dry Bulk 187 603 434 534 678 364 165 Liquid 125 96 161 169 241 152 82 1/ Estimate based on six months of data Source: Quarterly report of Direccion General de Op.eraci'n Portuaria February 1978 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Traffic Flows Port of Mazatlan 1971 - 1977 (1000 Tons) Item 1971 1972 1973 1974 1975 1976 1977 1/ Imports General Cargo 1 - 93 7 21 19 37 Dry Bulk - - - 83 371 176 67 Liquid 42 6 26 - - - - Exports General Cargo 76 143 125 116 94 77 63 Dry Bulk - - - 8 - - - Liquid 84 .24 66 80 64 25 18 Total General Cargo 77 143 218 123 115 96 100 Dry Bulk -- - 91 371 -176 67 Liquid 126 30 92 80 64 25 18 1/ Estimate based on six months of data Source: Quarterly report of Direcci'n General de Op.eraci'n Portuaria February 1978 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Traffic Flows Port of Guaymas 1971 - 1977 (1000 Tons) Item 1971 1972 1973 1974 1975 1976 1977 1/ Imports General Cargo 8 10 1 2 18 10 66 Dry Bulk 28 11 16 286 295 171 148 Liquid 322 270 450 446 651 642 154 Exports General Cargo 76 102 110 79 62 27 93 Dry Bulk 102 73 - 4 - - 39 Liquid - - - - - - Total General Cargo 84 112 111 81 80 37 159 Dry Bulk 130 84 16 290 295 171 187 Liquid 322 270 450 446 651 642 154 1/ Estimate based on six months of data. Source: Quarterly report of Direccion General de Operaci'n Portuaria February 1978 - 56 - TABLE 8 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Five Project Ports Income Statements (Figures in Millions of Pesos) 6 Months 1973 1974 1975 1976 1977 Operating Revenues Port Charges 15.6 19.4 46.7 48.7 27.5 Warehousing revenues 28.3 62.3 61.6 48.0 25.6 Concession fees 4.5 6.1 8.0 9.2 5.0 48.4 87.8 116.3 105.9 58.1 Operating Expenses Working Expenses 51.4 74.7 91.9 90.1 43.4 Depreciation 31.0 32.6 36.2 31.6 16.6 82.4 107.3 128.1 121.7 60.0 Operating Income (Loss) (34.0) (19.5) (11.8) (15.8) 1)..9) Operating Ratio 170 122 110 115 103 1/ Includes Marina operations only Source: Marina February 1973 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT (LOAN 820-ME) Five Project Ports Income Account - 1976 (Figures in Thousands of Pesos) Veracruz Tampico Manzanillo Mazatlan Guaymas Totals Operating Revenues Port Dues 4,994 3,401 3,174 2,012 1,879 15,460 Dockage Fees 6,374 5,347 1,953 1,266 741 15,681 Wharfage 4,723 6,432 3,399 1,489 1,367 17,409 Warehousing 31,068 10,054 5,593 651 716 48,082 Concession Fees 399 8,751 - - - 9,150 Other - 20 56 - 3 79 Total Operating Revenues 47,557 34,005 14,175 5,418 4,706 105,861 Operating Expenses Administration 2,161 1,099 843 845 815 5,763 Port Captains Department 2,731 1,625 1,007 1,395 987 7,745 Technical Unit 708 300 549 229 410 2,196 Maintenance 9,671 1,966 2,219 1,662 2,239 17,757 Dredging 990 12,679 - 442 - 14,111 Warehousing 23,594 7,445 2,308 1,595 2,106 37,048 Central Office Expense 978 2,627 454 446 364 4,869 Other 140 261 77 88 68 634 Total Working Expenses 40,973 28,002 7,457 6,702 6,989 90,123 Depreciation Port Installations 8,992 5,437 5,541 3,269 4,503 27,742 Dredges 354 3 - 172 - Total Depreciation 9,346 8,760 5,541 3,441 4,503 31,591 Total Operating Expenses 50,319 36,762 12,998 10,143 11,492 121,714 Net Operating Income (Loss) (2,762) (2,757) 1,177 (4,725) (6,786) (15,853) Source: Marina February 1978 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT (LOAN 820-ME) Five Project Ports Income Statements - First Six Months 1977 (Figures in Thousands of Pesos) Veracruz Tampico Manzanillo Mazatlan Guaymas Totals Operating Revenues Port Dues 2,583 1,971 1,849 1,328 989 8,720 Dockage Fees 3,223 2,868 661 645 688 8,085 Wharfage 2,621 4,347 1,510 817 881 10,176 Warehousing 16,565 6,249 2,072 306 404 25,596 Concession Fees 204 4,771 - - - 4,975 Other - 488 28 - 3 519 Total Operating Revenues 25,196 20,694 2,120 3,096 2,965 58,071 Operating Expenses Administration 947 575 371 397 401 2,691 Port Captains Department 1,442 606 588 667 518 3,821 Technical Unit 366 136 342 110 244 1,198 n Maintenance 567 430 222 287 285 1,791 00 Dredging 678 7,845 1,366 303 343 10,535 1 Warehousing 13,204 3,451 1,740 825 1,358 20,578 Central Office Expense (Estimated) 489 1,313 227 223 182 2,434 Other 78 139 38 46 34 335 Total Working Expenses 17,771 14,495 4,894 2,858 3,365 43,383 Depreciation Port Installations 4,496 2,722 2,768 1,564 2,272 13,832 Dredges 204 2,163 375 26 44 2,812 Total Depreciation 4,700 4,885 3,143 1,590 2,316 16,644 Total Operating Expenses 22,471 19,380 8,037 4,448 5,681 60,027 Net Operating Income 2,725 1,314 (1,917) (1,352) (2,716) (1,956) Rate of Return on Fixed Assets (Annual Basis) 2.1% 0.9% - - Tons of Dry Cargo 886 1,585 244 212 197 3,124 Revenues Per Ton Dry Cargo 0 (Excluding Warehouses Charges) 97 91 166 132 130 104 Source: Marina February 1978 PROJECT COMPLETION REPORT MEXICO PORTS PORJECT (LOAN 820-ME) Annual Income Statements of the Empresas de Servicios Portuarios (1975) MANZANILLO MAZATLAN GUAYMAS OTROS PUERTOS* TOTAL (000) (000) (000) (000) (000) Pesos % Pesos % Pesos % Pesos % Pesos % OPERATING REVENUES Stevedores 25,418 31 12,734 32 11,381 29 29,999 28 79,532 30 Shorehandling 50,183 61 25,850 65 13,840 36 41,614 40 131,487 49 Warehousing Other 6,769 8 892 3 13,756 35 33,525 32 54,942 21 TOTAL OPERATING REVENUES 82,370 100 39,476 100 389222 10 105,138 100 265,961 100 Ln OPERATING EXPENSES Stevedores 20,387 25 8,851 22 11,724 30 23,427 22 64,389 24 Shorehandling 45,014 55 18,644 47 13,384 34 32,013 31 109,055 41 Warehousing Other 8,075 10 5,038 13 8,534 22 28,666 27 50,313 19 TOTAL OPERATING EXPENSES 73,476 90 32,533 82 331422 _86 84,106 80 223,757 84 OPERATING MARGIN 8,894 10 6,943 18 5,335 14 21,032 20 42,204 16 Administration C_3,518)( 4) ( 4,172)(11) (4,875)(13) (132091) ( 12) (25,656)(10) Net Operating Profit 5,376 6 2,771 7 460 1 7,941 8 16,548 6 Other Income and Expense (Net) (_22931)( 3) 30 (_ 2901) 1 PROFIT BEFORE TAXES 2,445 3 2,771 7 460 1 7,971 8 13,647 ( 5) TAXES 1 027)( 1) ( )164(_3) ( 128) ( 3 ) ( 3) (57)(2) > ___ _ 2_ _) 128) 3,4 w_ _ NET PROFIT 1,419 2 1,607 4 332 1 4,623 5 7,915 3 F- * Includes: Ensenada, Lazaro Cardenas, Acapulco, Progreso, Salina Cruz y Coatzacoalcos. Source: Marina February 1978 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT (LOAN 820-ME) General Balance of las Empresas de Servicios Portuarios (1975) MANZANILLO MAZATLAN GUAYMAS OTHER * TOTAL (000) (000) (000) (000) (000) Pesos % Pesos % Pesos % Pesos % Pesos % CURRENT ASSETS Cash 3,730 13 579 4 991 8 7,037 11 12,337 10 Accounts Receivable 8,740 31 7,998 55 4,292 33 12,477 20 33,507 28 Stores 1,607 6 877 6 1,810 14 3,723 6 8,017 7 Other 601 2 236 2 10 - 847 1 TOTAL CURRENT ASSETS 14,678 52 9,454 66 7,329 57 23,247 37 54708 _46 FIXED ASSETS Machinery & Cargo Handling Equipment 16,352 58 4,674 32 4,460 35 32,531 51 58,017 49 Accumulated Depreciation ( 6,978)( 25) ( 1,387)( 10) ( 1,899)( 15) ( 7,390)( 12) (17,654)( 15) Other Fixed Assets 4,077 15 1,487 10 1,476 11 3,580 6 10,620 9 Accumulated Depreciation ( 651)( 2) ( 223)( 1) ( 420) ( 3) ( 355) (,649 ( 1) TOTAL NET FIXED ASSETS 12,800 46 4,551 _31 _31617 28 282366 45 9 2334 _42 OTHER ASSETS 602 2 409 3 2,006 15 l1,669 18 14,686 12 , TOTAL ASSETS 28 0 1OO 1 10 1'2 YO 63.328 100 118 8&228 100 0 CURRENT LIABILITIES Accounts Payable 2,362 8 2,688 19 5,847 45 6,909 11 17,806 15 Accrued Expenses 677 2 82 1 7 607 1,373 1 Other Current Liabilities 8,765 31 2,123 14 7,358 12 18,246 16 TOTAL CURRENT LIABILITIES 11,804 42 4,893 34 5,854 45 14,874 23 37,425 32 LONG-TERM DEBT Trust Fund Other 7,21 25 4,000 28 3 23 18,298 29 32,349 27 TOTAL LIABILITIES 18,825 67 8893 _62 8,884 68 33172L _52 69,774 _59 CAPITAL STOCK 6,330 23 3,9no 27 3,71A 29 23,767 38 37,715 32 CAPITAL RESERVES 1,506 5 14 18 137 1,675 1 RETAINED EARNINGS-PRIOR PERIODS 633 1 633 PROFIT OF CURRENT YEAR 1 5 1,607 11 332 3 5,573 9 8,931 8 92,255 33 5,521 _38 _42068 32 30,110 _48 48,954 41 TOTAL LIABILITIES AND CAPITAL 100 14,414 100 1 100 63,282 100 118,728 100 * Includes: Ensenada, Lazaro Cardenas, Acapulco, Progreso e Istmo de Tehuantepec. Source: Marina February 1978 - 61 - TABLE 13 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Port Equipment Trust Fund (FIDEMAP) Income Statements Figures in Thousands of Pesos 11 Months 1973 1974 1975 1976 Revenue from Equipment Sales 9,340 11,263 31,243 Revenue from Lease Payments - 149 418 Total Revenue 9,340 11,412 31,661 50,312 Less: Cost of Sales 7,814 9,468 28,260 40,635 Gross Operating Revenue 1,526 1,944 3,401 9,677 Operating Expenses Salaries 354 516 884 Administration 109 144 180 Commissions to NAFINSA 228 255 78 691 915 1,142 3,801 Net Operating Revenue 835 1,029 2,259 5,876 Financial Income Interest Income 853 1,511 5,539 164 Interest Expense (51) (467) (3,070) (3,497) Foreign Exchange Loss (42,914) 802 1,044 2,469 46,247 Net Income 1,637 2,073 4,728 (40,371) Source: FIDEMAP February 1978 - 62 - TABLE 14 PROJECT COMPLETION REPORT MEXICO PORTS PROJECT LOAN 820-ME Port Equipment Trust Fund (FIDEMAP) Balance Sheets Figures in Thousands of Pesos December 31 November 30 1974 1975 1976 ASSETS Current Assets 26,987 29,551 38,956 Current Liabilities 7,554 17,100 35,706 Net Working Capital 19,433 12,451 3,250 Long-Term Assets Notes and Accounts Receivable 21,509 26,898 76,045 Fixed Assets (net) 53 110 208 21,562 27,008 76,253 Deferred Assets Interest, Commissions and Taxes Applicable to Future Years 51,847 Other Assets and Prepaid Expenses 36 50 36 51,897 40,995 39,495 131,400 LIABILITIES AND EQUITY Long-Term Debt 31,630 28,978 141,708 Deferred Income 4,775 3,275 21,183 Government Equity Government Capital 1,000 1,000 1,000 Retained Earnings (deficit) 3,590 6,242 (32,491) 4,590 7,242 (31,491) 40,995 39,495 131,400 Source: FIDEMAP February 1978 M Ai s cU. S. - -- cor± - L z- 0 F pe BA JA -L4?t~rYT - i -_ o----- CALIFORN*A ' " ----3.,J·· r -- M E X I C O p '.- - - - o --.-- - PORTS PROJECT TRANSPORTATION NETWORK AND SERVICE AREAS -- ". 10 200 300l400/50 - 1L,METERS - -- GOUF O F MEXICO - 1 -. -- - - - - l cAMP p c e UCA TA NV 11 '- -O-'cSpo - -. PEN/INsUlA AREAS SERVED BY PROJECT PC • - - GUA . - - .o- . MAIN 00000DS TRUNK AIRPORTS GUATEMALA HONDURAS DECEBER 191  MAP 2 U S. A. MEXICO ALUMINA~ BLo9TAMPICD HANDLING INSTALLATION TAMP/c M *c QVERACRU Oan •EIOO?N E ö Railroads 5M Seabed contours STORAGE N A V A L Built up area Proect area shown in red NO0 M EICO6CEET0DC YARD 9,0, 40, Tanker Berth, Warehouses & Transit Shed DECEMBER 1971 !BRD 3669  MAP 3 PORTS PROJECT TAMPICO WAREHOUSES R GA BAi(-up Areas CARGO WHARVES 3M1 -l-o1m- Seabed C-nfour in Me-ersR Pro,et Shown.- Red l0m E1 MEXICO PMif TAMP GCO 0 1020 0 6 100 M D E C E M B EM ETERS 9loB Rm 'DECEMBER 1971 IBRD 367OR  州A P4 一以