Peru - Aviation Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2960b-PE STAFF APPRAISAL REPORT AVIATION DEVELOPMENT PROJECT PERU February 25, 1981 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents 1 Peruvian Sol = US$0.00286 US$1.00 = 350 Soles (January 1981) System of Weights and Measures Metric 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 metric ton 2205 pounds 1 metric ton-kilometer = 0.69 short ton-mile I passenger-kilometer = 0.62 passenger-mile Fiscal Year of CORPAC January 1 to December 31 Abbreviations and Acronyms AM Amplitude Modulation APS Aviation Planning Services Ltd. CAIM International Airport Consultants of Montreal Ltd. CFR Crash, Fire, Rescue Buildings and/or Equipment COFIDE Corporacion Financiera de Desarrollo COPESCO Comision Especial para Coordinar y Supervigilar el Plan Turismo y Cultura CORPAC Corporacion Peruana de Aeropuertos y Aviacion Comercial CPV Compania Peruana de Vapores DGTA Directorate General of Air Transport DGTT Directorate General of Land Transport DCGIT Directorate General of Water Transport DME Distance Measuring Equipment ENAFER Empresa Nacional de Ferrocarriles ENAPU Empresa Nacional de Puertos ENATRU Empresa Nacional de Transporte Urbano FFI Facility Flight Inspection Aircraft HF High Frequency ICAO International Civil Aviation Organization ILS Instrument Landing System INP Instituto Nacional de Planificacion LAGESA Laboratorio Geotecnico S.A. LLN Lainez - Lozada, Navarro Asociados SCRL MEF Ministry of Economy and Finance MOA Ministry of Aeronautics MTC Ministry of Transport and Communications ORDEZA Organismo Regional para el Desarrollo de la Zona Afectada ORETT Transport Tariffs Regulatory Agency OSP Oficina Sectoral de Planificacion PETROPERU State Owned Petroleum Company PPF Project Preparation Facility SIDERPERU State Owned Steel Company SIMA Servicio Industrial de la Marina SSB Single Side Band UHF Ultra High Frequency VASIS Visual Approach Slope Indicator System VHF Very Xigh Frequency VOR Very High Frequency Omni Directional Radio Range  FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT AVIATION DEVELOPMENT PROJECT PERU TABLE OF CONTENTS Page No. I. THE TRANSPORT SECTOR . ........ ...... . . .................... . 1 A. General ......... ........ so...... *..........so................. oo 1 B. Highways ... ..................................... 2 C. Railways .......................................... ............ 2 D. Water Transport .................... ............. 3 E. Aviation .......................................... ............ 5 F. Pipelines ....................................... 5 G. Coordination and Planning ................*....... 5 H. Bank Operations in the Transport Sector .......... 6 II. THE AVIATION SUBSECTOR . ............. ... * . ............. . 6 ,A. General ... * ................... a............... o ... ..... ..... 6 B. The Aviation Traffic and Network ................ 7 C. Commercial Airlines ....... . . . . . ........ . . ...... . . . . 7 D. Traffic Projections ................ ............ . 8 III. THE EXECUTING AGENCIES ............................... 9 A. Aviation Administration ......................... 9 B. Laws and Statutes Governing CORPAC .............. 9 C. Operations and Administration of CORPAC ...*...... 10 D. Proposed Executing and Financial Responsibilities 11 IV. THE PROPOSED PROJECT ........... . .......... . 12 A. Objectives ... ................................... 12 B. General Description . ................ ............ 12 Co Cost Estimate .......................... ...... .. 12 D. The Project Components ..... ..................... 14 E. Execution . ....................................... 17 F. Procurement ..................................... 18 G. Financing and Disbursement ........................ 18 H. Ecology ............................ .................... 18 This report is based on the findings of an appraisal mission which visited Peru in February/March 1980. The mission comprised Messrs. B. Bostrom (Senior Transport Economist), John R. Bowlin (Financial Analyst) and W.B.R. Zetterstrom (Senior Aviation Engineer). The report was edited by Miss Virginia R. Foster. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Cont'd) Page No. V. ECONOMIC EVALIJATION ...................... .......... 19 A. Project Selection .............. ............... 19 B. Project Evaluation .............................. 20 C. Project Airports ...... ....21 D. Total Project Return ..... .... ... .. 22 E. Project Fisks .................................. 23 VI. FINANCIAL ANALYSIS ........................... 23 A. Existina Situation ..... 23 B. Financial Objectives . . ......................... 25 C. Financial Plan ..................... 26 D. Financial Projections . . 26 VII. AGREEIENTS REACHED AND RECOMIENDATION ............... 29 TABLES 1.1 Port Traffic 1979 .31 2.1 Airport Passenger and Cargo Traffic 1971-1979 32 2.2 Airport Traffic Forecasts ... 33 3.1 CORPAC Airports ... 34 4.1 Detailed Cost Estimates (3 pages) ... 35-37 4.2 Navaids and Communications Installations (4 pages) 38-41 4.3 Apron Equipment ................................. 42 4.4 Electrical Generation Fquipment .43 4.5 Crash, Fire, Rescue Equipment ................... 44 4.6 Supportive Aircrafc Apron Equipment (2 pages) ... 45-46 4.7 Disbursement Schedlile ........................... 47 5.1 Quantified Benefits and Costs of the Project Airports ...... 48 5.2 Quantified Net Benefits and Costs for Equipment Investment ...... 49 5.3 Detailed Calculations of Benefits (2 pages) ...... 50-51 5.4 Economic Return and Sensitivity Tests .... .. 52 6.1 CORPAC Income Statements 1976-1979 ..... . 53 6.2 CORPAC Balance Sheets 1976-1979 ...... 54 6.3 Projected Balance Sheets ........................ 55 6.4 Summary of Projected Income Statements .56 6.5 Tarapoto Airport Projected Income Statement .... 57 6.6 Pucallpa Airport Projected Income Statement .... 58 6.7 Huanuco Airport Projected Income Statement .... 59 6.8 Tingo Maria Airport Projected Income Statement .. 60 6.9 CORPAC Projected Cash Flow Statements ........... 61 6.10 CORPAC Infrastructure Investment Program ....... 62 6.11 CORPAC Projected Balance Sheets .63  TABLE OF CONTENTS (Cont'd) Page No. ANNEXES 1. Bank Operations in the Transport Sector .... ....... 64 2. Terms of Reference for Consultant Services for Airport Final Engineering ................... 67 3. Financial Assumptions ............................. 73 4. Ratio Statement ................................. 76 5. Selected Documents and Data Available in the Project File . .77 CHARTS World Bank 21676 CORPAC Organization.. 78 World Bank 21677 Implementation Schedule ................ .. 79 World Bank 21722 Implementation Schedule (Continued) ....... 80 MAPS IBRD 15020 Air Transport Route Structure IBRD 15019 Airport and Equipment Locations IBRD 15021 Pucallpa Airport Plan IBRD 15022 Tarapoto Airport Plan IBRD 15024 Huanuco Airport Plan IBRD 15023 Tingo Maria Airport Plan  I  I. THE TRANSPORT SECTOR A. General 1.01 Peru, with an area of 1.3 million km2, is the fourth largest country in Latin America. It has a population of almost 18 million. The Andes, which closely parallel the Pacific coastline of Peru over its entire length, divide the country into a narrow coastal region (Costa), a mountainous region (Sierra) and the eastern Amazon plains region (Selva). The Costa is the most densely populated and economically developed part of the country. Six out of the ten largest urban centers in Peru are located in that region, including Lima, the country's capital. 1.02 Peru's topographic, geological and climatic conditions make the provision of transport facilities extremely difficult. The transport network reflects these difficulties and has shaped the country's development accord- ingly. Since the nineteenth century, several isolated railways have been built by private interests to connect mining areas in the Sierra with coastal ports. Even today, railways and ports are highly specialized and operate mainly as transport systems for minerals. Only highways and, more recently, civil aviation have played a role in integrating the country, but the lack of an adequate transport network is still one of the most difficult problems confronting Peru. Highways and road transport are the country's basic movers of domestic freight and passengers. 1.03 The transport system in the most developed parts of the Costa is broadly adequate. Here lies the backbone of the Peruvian road network, the 2,750 km long Pan American Highway. From this road, several major secon- dary roads and two railroads link with laige towns in the Sierra, while a handful of roads, mostly unimproved, lead into the Selva. Of these roads, the Bank-financed Trans-Andean Highway from Lima to Pucallpa constitutes the only all-weather road connecting the three regions of the country. Expansion and improvement of the transport network, particularly in the Sierra and Selva, by road, air and river, are necessary to meet the growing transport requirements and, particularly, to give access to areas of the country presently isolated and undeveloped. 1.04 The latest objectives for the transport sector were formulated in the 1977-1986 Transport Plan (Plan Director) which recommended: "the provi- sion of a rational transport system which would (a) efficiently contribute to the socio-economic development of the country, its integration and its national defense; (b) satisfy transport demand requirements; (c) support foreign trade and strengthen the balance of payments; (d) connect different regions and permit popular access to social services; (e) promote the welfare of workers in the sector; (f) promote adequate transport technologies; and (g) facilitate integration with the Latin American Region."  -2- B. Highways 1.05 Peru's highway network totals some 58,000 km, of which about 6,000 km of the roads are paved, 16,000 km have gravel surfacing and 36,000 km are earth roads. After the heavy emphasis on highway contruction in the mid-1960s, road development has been concentrated on paving and improving some of the more heavily used roads and slowly extending the system. The highway system is still in a very early stage of development. Peru's road density is half that of its neighbors, Ecuador and Chile, partly due, perhaps, to the large undeveloped areas in the Selva and the high concentration of economic activity in the Costa. The roads connecting the Costa with the Sierra and the Selva are generally rudimentary, the roads in the Sierra are at best passable, and the roads in the eastern piedmont and in the Selva are mainly dry-weather tracks. The development of the highway network since the early 1960s has been based upon a program of construction of primary roads as well as the extension of the secondary system. These ambitious road programs have run into a number of difficul-ties arising from inexperience and underesti- mation of the problems involved in building roads in the Andes, and, since the early 1970s, with the country's growing financial difficulties, only the international financing agencies have permitted Peru to keep any momentum in construction. 1.06 The development of the road transport industry followed the improve- ment and extension of the highway network. The Ministry of Transport and Communications (MTC) estimated that over 75% of the vehicle-km on roads are on the Pan American Highway and the ports roads, and the remainder are on the rest of the network, including the Lima-La Oroya Central Highway. The compo- sition of traffic by vehicle type shows a larger proportion of heavy vehicles on the roads with lower standards, with heavy vehicles accounting for about 20% of the traffic on paved roads, 40% on surface-treated roads and 50% on gravel roads (of which 15%, 32%, and 46% respectively are trucks). Traffic levels are estimated to have increased by about 6% per year in the last decade, with a somewhat faster growth at yearly rates of 7-8% before 1972. The vehicle fleet has shown a similar growth. 1.07 The General Directorate of Land Transport (DGTT) of MTC is respon- sible for planning (in consultation and coordination with MTC's Sectoral Planning Office), constructing, and maintaining the country's road network. DGTT is also responsible for the State Railways. C. Railways 1.08 Peru has never had a fully integrated railway system. Several separate east-west railway lines developed, largely as part of the mining and export of mineral deposits in the Sierra. These lines still serve that main objective. In the 1930s, the railway system consisted of about 4,200 km of track; at present, after the closing of several lines (the latest badly damaged by the 1970 earthquake), the system has been reduced to 2,150 km.  - 3 - 1.09 The Central and Southern Railways are by far the most important in the country, and they have an important role to play in their respective areas of influence. The Central Railway links the mineral-producing area of Cerro de Pasco and La Oroya with the port of Callao. It also hauls some agricultural products from the Sierra to Lima and general cargo in the opposite direction. It is the highest standard gauge railway in the world (4,829 m) and one of the most difficult to operate because of the steep grades (over 4%), the many switchbacks and the sharp curves. 1.10 The couthern Railway connects the Pacific port of Matarani with Puno in the Sierra and, by ferry over Lake Titicaca, with Bolivia. From Puno, another line goes to Cuzco over the main plateaus. Although the grades of the Southern Railway are not as steep as those of the Central, they are quite -evere when compared with those of normal railways. The Huancayo- Huancavelica and Cuzco-Santa Ana narrow gauge lines constitute natural extensions of the Central and Southern Railways respectively. 1.11 Centromin, a large state-owned mining company, owns and operates two standard gauge railway lines: Cerro de Pasco-La Oroya (132 km) and Canucha-Pachacayo (GU kin). Both li.es feed traffic to the Central Railway, supplying it with more than half its total freight tonnage as well as passengers. 1.12 The Empresa Nacional de Ferrocarriles del Peru (ENAFER), created in 1972, owns and operates the Central and Southern Railways following their purchase from private interests. ENAFER has, since its creation, almost continuously needed Government subsidies, primarily because depreciation allowances have been insufficient for necessary renewal of assets, but also because operating revenues have not been consistently sufficient to cover direct operating expenditures. Although there has been a substantial upgrad- ing of track and rolling stock, particularly in 1974-1975, large investments are still required for track rehabilitation, rolling stock and spare parts, and an investment plan, mainly for rolling stock, is now funded by the Government. D. Water Transport 1.13 Domestic coastal and river shipping plays an important role in the overall movement of cargo traffic in Peru. Coastal shipping is concen- trated in the movement of bulk cargo, particularly crude oil and oil products and, to a lesser extent, iron ore to supply the SIDERPERU steel works at Chimbote. PETROPERU, the state oil company, ships crude oil from its loading installations at Bayovar, terminal of the North Peruvian pipeline, to the refineries near Talara and Cailao, as well as products, including natural gas, from Talara mainly to Callao. Domestic river traffic, although growing, is still much lower than coastal traffic, but more diversified, and is mainly composed of dry cargo rather than petroleum products. 1.14 The extensive river system of the upper Amazon River and its tributaries provides a natural transportation network for the whole of eastern Peru. The Amazon River within Peru is navigable year round by ships of 20 ft. draft up to Iquitos. Further inland, the tributaries provide a vast network navigable by vessels of 10 ft. and 4 ft. draft, respectively, for distances of  650 and 7,944 km during the wet season. However, since this system is oriented toward Brazil and the Atlantic and does not connect with the populated and developed regions of the country, it has been largely under- utilized. The lack of ports and the general underdevelopment of the region are contributing factors. It was with the idea of utilizing such an extensive transport network more fully for the development of the region that the Trans-Andean transport corridor concept was developed, calling for a highway link from the coast to the Amazon headwaters at Pucallpa and from there, by river, to cover vast areas of the Selva. 1.15 A stated objective of MTC is to promote a wider participation of Peru's transport services in the international market in order to reduce the amount of foreign exchange spent in the transport of goods to or from Peru. At present, Peruvian shipping lines, principally the Compania Peruana de Vapores (CPV), carry about 22% of Peru's imports and exports; the objective is to capture 50% of both imports and exports. To implement this policy, Peru is expanding CPV's fleet. CPV is a Government-owned autonomous shipping line that, like the port authority, Empresa Nacional de Puertos (ENAPU), is part of MTC. 1.16 PETROPERIU with two tankers, and the Navy Ministry with five tankers, complete the list of Government-owned shipping lines. In turn, six private owners have a total of 15 ocean-going vessels. PETROPERU's tanker fleet is old and in need of replacement by larger and more modern units. CPV needs more bulk carriers. Such vessels are built by Servicio Industrial de la Marina (SINA), a self-supporting entity within the Ministry of the Navy. 1.17 The overall traffic development in Peruvian ports reflects the state of the economy in recent years. The country's ports have experienced a net decrease in traffic since 1972, which now may change. With the exception of iron ore exports handled at San Nicolas private port, ENAPU handles most of the country's port traffic, with total tonnages about evenly balanced between imports and exports (Table 1.1). The main commodities handled, in addition to iron ore and oil, are general cargo as well as exports of zinc concentrate and other minerals from Callao, sugar from Salaverry and fishmeal from Chimbote and Pisco. The single most important import commodity is wheat, handled mainly through Callao. 1.18 The financial impact of overall traffic decline on ENAPU has been lessened, partly by the fact that the substantially reduced bulk iron ore exports are handled by the private San Nicolas port. Also, since most port charges are quoted in dollars, the effect of local inflation has been lessened. 1.19 The management and the planning of the port sector have been some- what impaired by the dualism of ENAPU and MTC's responsibilities. This problem is being studied under Bank Loan 1196-PE. MTC keeps for itself all planning and construction responsibilities, and ENAPU, which will ultimately be respon- sible for operating and maintaining the facilities, has often not been consulted by MTC. While construction at Iquitos, which is an existing port (on the Amazon) under ENAPU responsibility, is complete, ports at Yurimaguas and Pucallpa (on tributaries), under MTC are still under construction; all of these ports are also being financed under Bank Loan 1196-PE.  -5 E. Aviation 1.20 The aviation subsector is presented in Chapter II. F. Pipelines 1.21 A major event affecting the Peruvian economy since 1977 was the opening of the 900-km long North Peruvian pipeline from the oil fields in the Selva northeast and across the Sierra to the coast at Bayovar. The pipeline and a branch line to the main oil field were built at a cost of US$900 mil- lion and have an installed capacity of 200,000 barrels per day (b.p.d.) of crude oil. However, they are operating below capacity, at an average level of about 120,000 b.p.d., because of insufficient production in the fields and inadequate capacity of branch lines. G. Coordination and Planning 1.22 The creation, in 1969, of MTC by incorporating the former Ministry of Development and Public WkTorks with agencies in the various transport modes, and the installation of its Sectoral Planning Office (OSP), strengthened the institutional basis for rational coordination and planning in the transport sector. MTC has three Directorates through which it directs and controls the various modes: DGTT, responsible for road and rail transport; DGWT, respon- sible for shipping and ports; and DGTA, responsible for civil aviation. Six agencies, including operating companies for railways (ENAFER), shipping (CPV), ports (ENAPU), airports (CORPAC) and the public transport agency which serves metropolitan Lima (ENATRU), as well as the Organismo Regulador de Tarifas de Transporte (ORETT), come under the Ministry. 1.23 Under the supervision of MTC, ORETT is responsible for reviewing and proposing tariff structures for the fixed facilities such as airports (CORPAC) and ports (ENAPU) as well as the public transport operators such as railways (ENAFER), both airlines and the various bus and truck companies. In recent years, ORETT has kept tariffs for air transport, as most other modes, at a reasonable level in spite of inflation. ORETT's tariff policy has resulted in incomes sufficient for almost all of the independent transport agencies to cover their normal operating expenses. The most important exceptions are ENAFER and ENATRU, whose operating revenues are insufficient to cover adequate replacement programs. 1.24 Communication and coordination among the agencies and the corres- ponding MTC directorates are generally deficient. An excessive number of legal and accounting controls, reviews, and clearances are involved in MTC's routine operations and normal activities. The preparation and approval of terms of reference, selection of consultants and contractors and the signing or approval of contracts and payments demand excessive time. 1.25 OSP is responsible for the preparation and formulation of transport policy and planning, under the general guidelines of, and coordination by, the National Planning Institute (INP). OSP has prepared the sectoral parts of the national budgets for the Ministry of Economy and Finance (MEF) since 1973.  - 6 - More recently, OSP has embarked on more ambitious planning (started under a UNDP-financed technical assistance project for transport planning) by producing a Ten-Year Draft Transport Master Plan (Plan Director) now updated until 1990, followed by six preliminary regional plans for the various develop- ment regions into which the country is divided. H. Bank Operations in the Transport Sector 1.26 The Bank has a long established relationship with the transport sector of Peru, strengthened through its 12 lending operations covering the most important modes (Annex 1). The Bank's contribution to road development has been substantial, ranging from institution building and maintenance to construction of feeder roads and main highways. In particular, the cons- truction of the key east-west penetration route of the country, the 700 km long La Oroya-Pucallpa road, has been a large and time-consuming task. This ambitious undertaking proved to exceed the Government's managerial capacity. Imperfect engineering design caused by the extreme geological variations of the region contributed to the problem. Projects in the area have run into difficulties, and, although much has been achieved and completed, parts of the projects eventually have had to be reformulated. The other Bank operations have been in sectors in which, although the requirements are not as high as for highways, the Bank has had a long and fruitful association with sound and justified projects, i.e., ports, and to a lesser extent, railways. Projects now contemplated by the Bank address basic problems confronting Peru in the transport sector, such as meeting the needs of highway maintenance and rehabilitation. II. THE AVIATION SUBSECTOR A. General 2.01 Peru, for reasons of topography, has long relied on air transport as one of the means of regional integration. As is the case with other Andean countries, aviation has been particularly useful to overcome the difficult crossing of high mountain ranges. One of the two main airlines, Faucett, which is privately owned, was founded as early as 1928 and is, therefore, one of the oldest in the Americas. The other important carrier, Aeroperu, was created by the Government in 1973 as the result of a reorganization of SATCO, the airline element of the Peruvian Air Force, which had operated since 1960. These two carriers have had about equal shares of the domestic traffic, with Aeroperu dominating the international traffic. On the ground, the Governmental agency, Corporacion Peruana de Aeropuertos y Aviacion ComerciaL (CORPAC), izs charged with operating and maintaining airports and enroute facilities. CORPAC now administers 56 airports, or almost all the airports for commercial air transport in Peru. About 110 civil aircraft are registered in Peru, of which about half are used for air taxi and crop-spraying operations. The major employer in aviation has been CORPAC, with about 2,700 employees, com- pared to about 1,100 for Faucett and 1,400 for Aeroperu.  - 7- B. The Aviation Traffic and Network 2.02 The most important part of the domestic traffic is the movement of passengers with air freight significant for high value air cargo and movement to isolated areas of the country. Passenger traffic at the CORPAC airports increased from about one million in 1971 to more than 2.0 million in 1979, an average growth of 9% per year. Sustained growth has been aided to a great extent by the provision of improved and expanded air services. Since 1972, the number of jet aircraft in domestic services has grown from one three-engine Boeing 727-100 to a total of four such aircraft, three two-engine BAC-1-11 and three two-engine Fokker F-28 aircraft. For air cargo traffic, the development from 1971 was more rapid, growing at an annual average of 11% to over 100,000 tons handled by CORPAC airports in 1979. However, as road transport develops, air-freight transport on some routes and for certain commodities will undoubtedly decline. Nevertheless, air cargo will continue to grow rapidly at specific airports, particularly in areas where surface transport may remain unavailable or unreliable for several years. The total number of domestic passengers transported by the two main airlines was about 1.5 million in 1979, divided equally between Aeroperu and Faucett. Private aircraft moved some 60,000 passengers, and military aircraft another 30,000. Military aircraft transported a large share of domestic air cargo, or some 20,000 tons, compared to Faucett with about 15,000 tons in 1979. 2.03 The route structure developed by Aeroper4 and Faucett is of the "hub and spoke" type, with Lima as the center and all main routes radiating out to the various cities in the country. See route structure map IBRD 15020. The majority of flights using jet aircraft are non-stop to and from a city. The most important airports in terms of traffic were Lima, Cuzco, Iquitos and Arequipa, with 67% of domestic and all international traffic. For the proposed project airports - Tarapoto, Tingo Maria, Puanuco and Pucallpa - traffic is more limited, but aviation's share of total transport is high, particularly for long-distance passenger travel. For Tarapoto, about 92% of passenger travel by air goes to destinations which lack scheduled service by any other mode of transport. For Pucallpa, this proportion is about 32%, and, for Tingo Maria, it is about 27%. In addition, a very substantial share of travel in areas where road services exist is nevertheless undertaken by air. The share of air transport of total travel to TRuanuco, Tingo Maria and Pucallpa from Lima ranges from 53% for Pucallpa to 14% for Quanuco. For air cargo, the situation is different in that air cargo has an important share only in the traffic to and from Tarapoto. Growth of international traffic in recent years has been slow compared to the early years in the 1970s, given an average of 3% passenger growth per year for the period 1971 to 1979. With improved economic conditions and strong tourism growth, a 7-10% vearly growth for the next five years can be expected. C. Commercial Airlines 2.04 The two commercial airlines, Aeroperu and Faucett, have both suffered from inadequate airport infrastructure which has limited them to aircraft which are relatively costly to operate on many routes. The airlines, as most other transport enterprises, have also suffered in Peru from the economic difficulties of the last few years. The effect on domestic traffic has been slower traffic growth; rapidly rising operating costs have not been covered by increased revenue despite a number of air tariff increases. Both companies  - 8- during the last four years have therefore shown losses on their operations after including depreciation. More timely domestic tariff increases could have alleviated part of this problem, but the main reason was the slowdown in traffic growtl-h Now, with .ilore favorable economic conditions, traffic is improving. A, a Government-ovmed airline, Aeroperu is forced to serve more locations in Peru than Faucet: along routes which do not always recover even marginal cost. On the other hand, Aeroperu had good growth in 1979 on its international routes as a result of its purchase of two new three- engine wide-body L-1011 aircraft. Also, Faucett has been helped by its new passenger route, Iquitos-Miami, which began in mid-1979. The future, there- fore, appears more promising, since both airlines in the past have had suffi- cient cash generation from operations. This cash generation, however, has been insufficient for an optimal fleet replacement program. 2.05 In 1978, the last full year with available data, Aeroperu produced 355 million passenger-kilometers in domestic traffic compared to 453 million for Faucett. To this figure should be added 634 million passenger-kilometers in 1978 for Aeroperu international traffic, which increased substantially in 1979, as mentioned. The unduplicated route network for the two airlines was 47,760 kilometers in early 1980. D. Traffic Projections 2.06 Domestic air traffic in Peru grew rapidly in the early 1970s as a result of the introduction of jet aircraft by both Faucett and Aeroperu. This growth then tapered off because of economic problems until it restarted in 1979. Traffic growth has generally been rapid for the project airports despite the airport limitations, but at high cost to the users. Passenger and cargo traffic from 1971 to 1979 is shown in Table 2.1 for these airports and the country as a whole. An average yearly growth of 15% was recorded at the project airports during 1971-1978 and continued in 1979, whereas cargo traffic growth was more uneven as a result of the opening of new road connections. 2.07 The consultants (CAIM, APS, LAGESA, LLN) who carried out the feasi- bility studies for the airports selected for improvements (Pucallpa, Tarapoto, Tingo Maria and Huanuco) generally relied on three methods for traffic fore- casting for passenger and cargo traffic at these airports: analysis of histori- cal series (trend projection), projections of traffic by city pairs summed up for each airport and projection of population and travel propensities as a function of population. Generally, the most conservative of these forecasts (historical time series) has been selected. This is quite similar to the five- year city-pair forecast done by the airlines. The consultants' forecast, despite being conservative, has generally been the one adopted for the economic and financial evaluation, with some adjustments for individual years. Generally, long term passenger growth ranges from 7 to 10% per year (Table 2.2). On the basis of the passenger and cargo forecasts, projections of flights have been established. These differ somewhat from the consultants' forecast since transit passenger traffic has been incorporated. Separate projections have been used for the overall financial forecasts for CORPAC, as further explained in Annex 3.  - 9 - III. THE EXECUTING AGENCIES A. Aviation Administration 3.01 Since March 1969, MTC, in accordance with Law 17526 which created this Ministry, has been responsible for civil aviation in Peru. Specifically, within MTC, the Directorate General of Air Transport (DGTA) has been charged with the responsibility to plan, direct, coordinate, execute and control the activities of air transport and civil aeronautics as well as to construct, maintain and administer the use of the corresponding infrastructure. These last responsibilities, transferred from the much older Corporacion Peruana de Aeropuertos y Aviacion Comercial (CORPAC) by that law, have now been reassigned, giving CORPAC additional responsibility for constructing airports requiring foreign financing. Another Government office associated with air transport is the Ministry of Aeronautics (MOA), which is one of the three Ministries governing the Peruvian Armed Forces. MOA has been the primary governing Ministry for the Government-owned airline Aeroperu since its creation out of the Peruvian Air Force transport operation SATCO in 1973 (para 2.01). 3.02 DGTA was originally formed out of the previous Directorate of Civil Aviation in the Ministry of Aeronautics. DGTA now consists of two director- ates, the Directorate of Air Navigation and the Directorate of Air Infrastruc- ture. The latter is generally responsible for design and construction of Government-financed airports, whereas the former is charged with most of the Government's responsibilities for air safety and other regulatory functions. Exceptions are various functions assigned to other entities of MTC, such as the Sectoral Planning Office, ORETT, and advisory councils and offices: Superior Councils of Transportation and Communications, General Administration, Office of Documentation, Inspector General, Office of Investigation and Development, Legal, Organization and Methods, and Public Relations. B. Laws and Statutes Governing CORPAC 3.03 CORPAC was created in 1943. However, with the establishment of MTC, certain responsibilities were transferred to DCTA but partially reassigned to CORPAC under the Budget Law for 1981 (para 3.01). In September 1972, Decree Law 19527 was approved by the Ministerial Council which formally set forth the organization and functions of CORPAC, which had been in operation since 1969. Briefly, this Law established CORPAC as an autonomous administrative and financial entity having legal person, which carries out policy, as determined by the Minister, in the planning, organizing, directing, coordinating and controlling of activities in the operation and maintenance of commercial airports, including the services and installation of equipment required. CORPAC also undertakes the same functions for air navigational aids, aeronautical radio communications and other technical services necessary for the safety of air operations in the country. Furthermore, CORPAC is responsible to DGTA for information and technical assistance in the subsector and for air traffic control. The law also established its domicile in Callao, which is the location of the Lima Airport, where the administrative offices of CORPAC are located. 3.04 A provision of this law also established the initial capital of 2,000 million Peruvian Soles, which was approximately the amount of existing  - 10 - assets within CORPAC at the time this law was promulgated. The amount of capital that CORPAC may have is redetermined each year. In 1979, it was increased by Supreme Decree No. 22577 to 10,000 million Peruvian Soles. The funds of CORPAC are to be derived from its own internal cash generation, funds from the Govern- ment and loans approved by law. CORPAC funds may be used for acquisition of required assets, for CORPAC operations and for the undertaking of any contracts for goods or services as may be required. 3.05 The law also established a Board of Directors which consists of a President, presently a General from the Air Force, who has been named by the Minister of Aeronautics, one Director from each of the Ministries of Economy and Finance and Industry and Commerce, and four Directors named by MTC, one of which is named the Vice President. These members are approved by a Supreme Resolution for a term of three years. The General Manager is selected through a ballot by the Board of Directors. He meets at least once a week with the Board to review matters of importance, but he has no vote. 3.06 Finally, the law provided for the formalization of the Statutes of CORPAC, which was accomplished under Supreme Decree No. 031-73-TC in October 1973. This document essentially restated, in more detail, those areas of responsibility covered in Decree Law 19527, with some additions such as providing for the approval of tariffs presented by the Board of Directors to MTC and approval by the Board of Directors of all persons named to the positions of General Manager, Mianagers and Division and Department Chiefs. The statutes also set out the organization with four managers - operations, technical services, maintenance and administration - and gave the general responsibilities of each. The organization and areas of responsibility under each manager have been reviewed and found to be satisfactory. The organization of CORPAC is shown in Chart 21676. 3.07 The Statutes also provide for the presentation of financial state- ments, which have been audited by a Public Accountant, to the Board of Directors for its review and approval not later than March 31 of the following year. The financial statements must then be presented to MTC, MEF and the Controller General of the Republic. A more detailed discussion of the financial perfor- mance of CORPAC is covered in Chapter VI. C. Operations and Administration of CORPAC 3.08 The number of commercial airports managed by CORPAC has grown from about 25 in 1967 to 29 in 1970 and 56 at the present time (Table 3.1). Some are small air strips with little traffic; as of 1979, only about 24 airports had more than 5,000 passengers per year. In order for CORPAC to carry out its responsibilities, it is staffed with a total of 2,662 employees, of whom 695, or 26%, are in operations, technical services, maintenance and security. The staff for the operation of the airports totals 1,504, of whom 650 are assigned to Lima Airport and 854 are located in airports throughout the provinces of the country. The remaining 463, or 17%, are responsible for staff and adminis- trative functions in CORPAC's administrative offices. An analysis of the total employee complement by function shows that 4% of the staff hold manage- ment and professional positions, while 44% fulfill secretarial and clerical functions. The remaining 52% are engaged in semi-technical and non-technical positions. This indicates that, on the average, there are about 25 employees  - 11 - for each professional position (professionals are normally university graduates). Given the nature of CORPAC operations, this relationship is reasonable. A review of CORPAC's salary structure shows that its employees are relatively well paid for the environment in which they operate. A review of all the major divisions and departments shows that, in general, they are adequately staffed in terms of quantity and quality of employees. However, a few areas deserve additional comment. 3.09 The planning office is staffed with employees who have been with CORPAC for many years and are qualified to fulfill its functions. Presently, the planning office, in coordination with the managers for operations, tech- nical services, maintenance and administration, develops the operating and capital investment budget for the coming year and the capital investment budget for the next five years, 1981-1985. Since the redefinition of CORPAC responsibilities in 1972, the planning has been restricted to capital invest- ments in equipment and minor civil works at existing facilities. However, on certain occasions, CORPAC is specifically authorized by MTC to perform major construction of civil works. For 1980, about 22% of total capital investment for airport civil works was in CORPAC's budget. CORPAC is also doing certain works financed in the MTC budget for 1980, and, therefore, its effective participation is even higher. MTC has now transferred responsibility for foreign-financed airport construction to CORPAC. Since CORPAC was responsible for airport construction for 26 years prior to 1969, it is perfectly capable of carrying out this additional responsibility. With the change of these responsibilities, there will be a budget and employee transfer from MTC. Given the magnitude of future investment plans, it was agreed, during negotia- tions, that CORPAC would update its five-year capital investment plan on a yearly basis and, not later than November of each year, through the closing date of the loan, would provide the Bank with a copy of the next year's plan and an opportunity to comment on it. 3.10 The financial accounts of CORPAC have been reviewed and found to be in order, and the auditing arrangements are satisfactory (para 6.07). However, there is a need to improve the cost accounting system. Funds are included in the project to engage an accounting consultant for this purpose, and agreement was reached during negotiations regarding this matter (paras 4.18(c) and 6.07). The construction and maintenance capability of CORPAC is adequate. However, given the magnitude of the planned capital investments, assistance would be provided under the project to strengthen this area (para 4.18(d)). D. Proposed Executing and Financial Responsibilities 3.11. CORPAC would be the proposed borrower. The recent change placing the responsibility for foreign-financed airport construction with CORPAC will be a major step toward placing the collection of revenues and control of expenditures in a single organization. It will permit CORPAC to operate the airport system on a self-financing basis and eliminate the subsidy that the Government has, in the past, given to aviation through constructing airports at no charge to CORPAC.  - 12 - IV. THE PROPOSED PROJECT A. Objectives 4.01 The project is designed to: (a) allow more economical aircraft now within the commercial fleet to be used at additional existing airports on a regular service; (b) improve the flow and security of air traffic within Peru; and (c) reduce the aircraft ground handling time. To do so, it would consist of improving three airports, constructing one, replacing obsolete navaid and communications equipment and providing additional aircraft handling and airport electrical equipment. These airports, supporting development in the eastern part of Peru, were constructed for much smaller aircraft many years ago, at minimal construction cost. In addition, the project would provide final engineering for the replacement airport at Cuzco and strengthen the technical and administrative sections of the airport operating agency. B. General Description 4.02 The project, to be implemented by CORPAC over a five-year period, would consist of four parts: Part I, pavement overlay at Pucallpa, reconstruc- tion of runways at Tarapoto and Huanuco and construction of a new airport for Tingo Maria; Part II, provision of communications at these sites and navaids at these and other sites throughout Peru with equipment to calibrate them (Map IBRD 15019); Part III, provision of aircraft apron handling and airport electrical equipment; Part IV, provision of technical assistance in the form of engineering consultants for the final design of Cuzco, accounting consultants for CORPAC and airport engineering advisors (from ICAO) for CORPAC; and Part V, provision of communications equipment throughout Peru. C. Cost Estimate 4.03 The total estimated project cost, including contingencies and import duties, is about US$128 million. The foreign exchange component is about US$77 million, or about 60% of the total project cost. The cost estimate (in prices experienced at the end of January 1981) is summarized on the next page. A detailed itemization of the project components is given in Table 4.1. The exchange rate for that period was SI. 350 = US$1.00.  - 13 - Peru (S/. (millions) US$ (millions) Local Foreign Total Local Foreign Total Part I Land 3 - 3 1/ - 1/ Civil Works 5,145 6,440 11,585 14.7 18.4 33.1 Equipment 455 1,015 1,470 1.3 2.9 4.2 Part II Navaids 1,365 1,575 2,940 3.9 4.5 8.4 Communications 245 385 630 0.7 1.1 1.8 FFI Aircraft 490 1,995 2,485 1.4 5.7 7.1 Part IlI CFR and Aircraft Apron Handling Equipment 315 945 1,260 0.9 2.7 3.6 Electrical Equipment 140 420 560 0.4 1.2 1.6 Part IV Technical Assistance 455 1,225 1,680 1.3 3.5 4.8 Contingencies (Parts I-IV) Physical 10% 805 1,260 2,065 2.3 3.6 5.9 Price 7,906 12,300 20,206 9.2 14.4 23.6 Sub-Total (Bank-Financed Portion) 17,324 27,560 44,884 36.1 58.0 94.1 Part V Communications Equipment (Costs Subject to the Final Design) 3,407 4,540 7,947 9.7 13.0 22.7 Contingencies (Part V) Physical 10% 341 454 795 1.0 1.3 2.3 Price 2,858 3,518 6,376 3.8 4.7 8.5 Sub-Total (Non Bank- Financed Portion) 6,606 8,512 15,118 14.5 19.0 33.5 GRAND TOTAL 23,930 36,072 60,002 50.6 77.0 127.6 1/ Less than 0.01.  - 14 - 4.04 The cost estimates for the construction portion of the project were developed by the airport engineering consultants, CAIM, APS, LAGESA and LLN, following the economic and technical feasibility study prepared by the same firm. The unit costs were checked during appraisal against similar construc- tion costs in Peru and updated to reflect costs of January 1981. They were later verified as being correct for that period. The estimates for the electronic and other equipment were prepared by CORPAC and are based on cur- rent manufacturers' quotations. These estimates were also updated to January 1981. All costs are considered reasonable. Land required at Tingo Maria and Tarapoto is in the process of being acquired. All other land in the construc- tion areas is already owned by CORPAC. Land acquisition is not expected to delay the project. 4.05 The cost estimates for the construction portion of the project are based on final engineering; the estimates for the equipment are based on actual manufacturers' quotes. Thus, an average of only 10% of all construc- tion and equipment items has been included in the cost estimates to allow for physical contingencies. 4.06 Price contingencies measured in US dollars were estimated using the assumption that prices would increase 12% per year throughout the period of project execution. It was considered that the relationship between dollars and soles would reflect local inflation. The 12% rate is higher than that generally used in Bank-financed projects, but it reflects recent experience for this type of project and equipment. '). The Project Components 4.07 The project would consist of the following five components, only the first four of which would involve Bank financing. The fifth component would be financed by a proposed loan through German bilateral aid. (i) Part I (a) Pucallpa 4.08 The existing 2,500 x 30 m runway, taxiway and aircraft apron pave- ments, now being served by BAC 1-11 and F-28 aircraft, are too weak to support the B-727 aircraft planned to be used in the future. The air navigational aids and communications equipment are poor; the crash, fire, rescue (CFR) equipment and visual aids are inadequate and the meteorological equipment is obsolete or non-existent. 4.09 The project would provide an asphaltic concrete overlay for all pavement and replacement or new equipment of the following types: visual aids, distance measuring equipment (DME), telecom equipment, meteorological equipment and CFR equipment. The project would also renovate the existing terminal building and the CFR/maintenance shed (Map IBRD 15021). (b) Tarapoto 4.10 The existing paved runway can be operated in only one direction because of mountainous terrain in the other approach/departure path. In  - 15 - addition, the runway is headed toward the town, and noise sometimes is a problem. Because of the orientation, the airport cannot be used during periods of low clouds or at night. The existing omni-directional radio range (VOR), non-directional beacon (NDB) and communications equipment is old and unreliable, and the CFR and meteorological equipment is obsolete. 4.11 A new 2,500 x 45 m runway with flexible pavement would be constructed on a new alignment crossing the existing runway at its threshold but being clear of the close-in mountainous terrain at the far end. This alignment would also clear the town. The existing runway would be used as a taxiway to get to the existing apron and terminal building. New runway edge lighting, Cat I approach lighting and visual approach slope indicators (VASIS) would be provided for the new runway. The existing VOR and NDB would be replaced, and a new DME would be added. In addition, an instrument landing system (Cat I ILS) would be installed so that landings in poor visibility, low cloud and/or at night could be made, and the airport could be used as an alternate for Iquitos. The communications and meteorology equipment would be replaced, and new CFR equipment would be provided. The existing terminal, cargo and maintenance buildings would be expanded (Map IBRD 15022). (c) Huanuco 4.12 The existing gravel strip is located at the foot of a range of mountains adjacent to a river. Both approaches and departures to either end of the runway must be curved because of terrain obstructions. As a result, operations by large aircraft or during anything other than visual conditions in daytime are not allowed. 4.13 A new 2,600 x 30 m runway with flexible pavement would be constructed on a new alignment crossing the touchdown point of the existing runway but having a straight approach to one threshold and a large radius curved approach to the other. This arrangement would allow large aircraft to operate at the airport, but would not remove the problems associated with night or poor visibility daytime operations, which is not a major limitation at this site. A paved taxiway to a new paved apron would be provided as well as new meteorological and CFR equipment (Map IBRD 15024). (d) Tingo Maria 4.14 The existing gravel runway heads directly toward a mountain and is located adjacent to the town across the Puallaga river. Mountains in the approach to the other end of the runway require a shallow "S" turn across the center line of the runway for aircraft landing or taking off. The mountain at the end makes "missed approaches" difficult and precludes any operations from this end of the runway. The close proximity of the runway to the town causes a noise problem. Operations other than daytime and visual conditions are prohibited. Large aircraft may not use the airport. 4.15 An entirely new airport with clear approaches would be provided at a location approximately 27 km north of Tingo Maria in an open valley along the same Huallaga river. A 2,600 x 30 m runway with flexible pavement, a taxiway and an aircraft apron would be provided. Terminal, cargo and mainte- nance CFR buildings would be provided. Runway lighting, VASIS, VOR/DME, NDB, communications, meteorology, CFR equipment and a short access road to the highway would also be provided (Map IBRD 15023).  - 16 - (ii) Part II 4.16 The proposed project would provide the navaids and replacements needed over the next four years at about 26 locations throughout Peru listed in Table 4.2. The equipment would consist of VORs, DMEs and NDBs. The project would also provide an aircraft equipped to calibrate the various navigational aids, including lighting and communications and the ground laboratory necessary to keep the electronic flight equipment in calibration, and would provide the necessary training for ground and flight technicians. (iii) Part III 4.17 With the introduction of larger aircraft at many of the airports, new aircraft apron handling equipment is required, consisting of tractors, baggage and cargo loaders and carriers, fork lifts, etc. The project would provide such equipment, as listed in Table 4.3. Throughout the airport system, there is a requirement for prime and standby electrical power. The project would provide electrical generation sets as listed in Table 4.4 and CFR equip- ment as listed in Table 4.5. Table 4.6 lists supplemental apron equipment. (iv) Part IV 4.18 The project would provide technical assistance in the following four areas: (a) Final engineering for the four project airports, at an estimated cost of US$1,540,000, covering about 200 man-months at US$7,500 per month. An advance of US$800,000 has been extended under the Project Preparation Facility (PPF) to finance estimated foreign exchange cost for this item. (b) A technical and economic feasibility study has been completed which shows that a new airport would be justified at Cuzco. Tn order that construction of this airport could be under- taken in a timely and orderly fashion, final engineering of the new airport project is required. The project would include funds to cover the foreign cost element (estimated to be about 70%) of engaging consultants for such engineering. (See Annex 2 for Terms of Reference.) The estimated cost for this engineering contract is US$2,800,000 and would cover about 370 man-months at about US$7,500 per month. (c) To assist CORPAC in designing and installing a modern commercial cost accounting system, the project would include funds to cover the foreign cost element (estimated to be about 70%) of engaging accounting consultants for such purpose. This contract is estimated to cost about US$160,000 and would cover 24 man-months at about US$6,500 per month.  - 1 7 - (d) To assist CORPAC in supervising the design and construction of the Part I airports, the project would include funds to cover 100% of the foreign cost element of obtaining two airport engineering advisors from ICAO for a period of two years (four man-years). It is estimated that the cost would be about US$286,000 and be about US$6,000 per month for the 48 months. (v) Part V 4.19 A final engineering design is now under way for communications equip- ment, original installations and replacements needed over the next four years at about 33 locations throughout Peru listed in Table 4.2, funded by German bilateral aid. The results of this work are expected by June 1981. Administra- tion of this contract is being handled by CORPAC, as would any forthcoming communications procurement contracts. It is expected that bilateral aid from Germany would finance the equipment recommended by the final design. E. Execution 4.20 CORPAC would be the borrower and would therefore carry the foreign exchange risk of the loan. Parts I, II and III of the project would be executed by CORPAC. The contracts for the consulting engineers for the Cuzco design would be administered by a committee consisting of representatives of COPESCO, CORPAC, DGTA and the Ministry of Finance, but technical supervision of the consultants' work would be carried out by CORPAC. It would be a condition of disbursement for the design of the Cuzco airport that an agree- ment satisfactory to the Bank is executed between CORPAC and COPESCO. The accounting consultants would be engaged by CORPAC. The airport engineering advisors from ICAO would be provided under a UNDP/Government project agreement; however, CORPAC would be the executing agent for that agreement. 4.21 The final engineering for the project airports is to be financed by funds from the PPF. To reimburse the PPF, an additional US$800,000 is included to cover the foreign cost component of the engineering contract under this proposed loan. The contract would be administered by DGTA, but technical supervision of the consultants' work would be carried out by CORPAC. The final cost estimates were received in January 1981. 4.22 A portion of the Part II navaid installations would be carried out by CORPAC's own forces and is expected to take about four years to complete. The airport construction is expected to take one-and-one-half years each at Tarapoto and Huanuco, three years at Tingo Maria and one year at Pucallpa. At the peak, the airport construction would employ about 400, 300, 500 and 200 men respectively. The equipment installations would employ about 10 men each. 4.23 Construction and procurement contracts would begin to be issued by the middle of 1981. The first construction contracts would be for the air- craft movement areas. They would be followed four or five months later by the building contracts. Last would come the visual aids, water sewerage and electrical distribution contracts. All equipment procurement would be completed by the end of 1983. All construction would be finished by the end of 1985. During negotiations, the project implementation schedule was established (Charts IBRD 21677 and 21722).  - 18 - F. Procurement 4.24 Nine different types of contracts would be issued, namely: (a) aircraft movement areas; (b) terminals and other buildings; (c) visual aids and electrical distribution; (d) water and sewerage distribution systems; (e) navaids, meteorological and/or communications equipment procurement and/or installations; (f) CFR equipment procurement; (g) apron equipment procurement; (h) electrical generation equipment procurement; and (i) aircraft equipment and training procurement package, all of which would be awarded after inter- national competitive bidding by prequalified contractors. It is estimated that local contractors would win more than 75% of the construction contracts. However, since suitable navaids, visual aids, communications equipment, apron handling equipment, flight inspection aircraft and associated calibration equipment, etc. are not manufactured in Peru, it is expected that contracts for equipment would be awarded to foreign contractors, but, on any equipment contract, local bidders (and those from Cartagina Agreement member countries or from any other such grouping acceptable to the Bank) would be granted a margin of preference of 15% of the CIF value of foreign bids or the applicable customs duties, whichever is lower. G. Financing and Disbursement 4.25 The proposed Bank loan would furnish the funds to cover the foreign exchange component of Parts I-IV, US$58.0 million. The foreign exchange component for Part V would come from a proposed German bilateral loan. CORPAC would furnish the local component for all parts of the project, except that required for Part IV(a) and IV(b), from internally generated funds (para 6.13). The Government would furnish the local funds for the first part of Part IV(a) and IV(b). The local component would include about 25% of the foreign component for equipment as taxes or about S/. 2,992.5 million. 4.26 Disbursement of funds from the loan would be on the following basis: (a) 100% of foreign expenditures for equipment and its installation; (b) 60% of total expenditures for civil works (exclusive of land); and (c) 70% of total expenditures for local and foreign consultants and 100% of foreign expenditures for technical assistance and principal and interest on the PPF advance (para 4.18(a), (b), (c) and (d)). Disbursement would be made against standard documentation. A schedule showing the estimated rate of disbursement is given in Table 4.7. The closing date of the loan should be December 31, 1986. H. Ecology 4.27 The ecological and environmental effects of the construction of the project components were taken into account during the siting and preliminary design studies for each project airport. Except for Tingo Maria, the new work would take place on land already impacted by airport operations. At Huanuco,  - 19 - there might be a slight increase in noise because of the increase in opera- tions permitted by the expansion, but, at Tarapoto and Tingo Maria, this effect is offset by operations being directed or taking place at a further distance from the populated areas. Operations at Pucallpa do not affect the town in either case. 4.28 Because of runway reorientation or relocation, low flying aircraft would be rerouted away from the densely populated areas. While at Tingo Maria, certain farmland would be taken out of production, more desirable flatland would be released for urban development. At none of the project sites would it be necessary to relocate people. None of the new sites contain houses. Because of the extensive regrading of areas, drainage would be affected; however, in general, it would be improved. Stagnant pools would be eliminated, and existing water courses would be cleaned and straightened. V. ECONOMIC EVALUATION A. Project Selection 5.01 Air transport in Peru has developed over a long period of time, with an almost continuing limitation being a lack of adequaLe infrastructure. This limitation has constrained, and still prevents, the use of the most economical aircraft for present traffic volumes. In the selection of the highest priority project airports, the relatively more developed airport conditions in the south and along the coast formed a main consideration. Taking into account ongoing construction, since mostly completed, at Arequipa, Iquitos and Puerto Maldonado, six airports along the Lima-Iquitos corridor were selected for feasibility studies in 1975. The results of these studies indicated that improvements or new construction were required and justified at this time at four of the airports: Huanuco, Pucallpa, Tarapoto and Tingo Maria. These airports constitute one of the major parts of the proposed project. They are all close to towns supporting areas with promising develop- ment at considerable distance from Lima. The ongoing decentralization by the Government into regional development organizations increases the need for communication to these towns with countrywide expertise available only in the capital or in regional centers such as Iquitos. Because of the lack of surface transport, travel between Tarapoto, Tingo Maria and Pucallpa on one side and Iquitos and Cuzco on the other will continue to be almost exclusively by air for many years to come. 5.02 Another large part of the proposed project is a badly needed equip- ment replacement program for CORPAC. This program relates particularly to the aeronautical communications and navigational aids systems, which, in the essential parts, are now 15-20 years old and rapidly becoming obsolete. This factor, together with a justified requirement for improved coverage by the navigational aids, would considerably reduce the cost of air transport in the whole country and be partly paid for by increased user charges reflecting improved service from foreign airlines on flights to, from and over Peru. Within Peru, and particularly in the Sierra and Selva, these investments would also improve the regularity of air transport and would have an impact on traffic growth similar to the introduction of jet aircraft in the early 1970s, or some 14% growth per year (Tables 2.1 and 2.2).  - 20 - B. Project Evaluation 5.03 Progress toward the main project objectives of regional integration of a large country and fundamental changes to urbanization trends cannot readily be measured. Reduced transport costs and less costly equipment operations have therefore been used to determine the direct quantifiable results of most of the project components. This analysis considerably under- estimates the advantages of various subprojects, since relatively small-scale improvements to a system which already handles substantial traffic normally produce effects well in excess of the direct cost changes. The economic evaluation has used cost data for January 1981 as the foundation for benefits and costs. 5.04 The quantified economic benefits for the airports consist primarily of cost savings by changing from older jet aircraft to newer, more cost-effi- cient aircraft. The largest immediate beneficiary in this case would be the Government-owned Aeroperu, which operates services to all these airports, and, to a lesser extent, the privately owned Faucett, now with services to three of the airports. Benefits have been calculated for both normal traffic and generated and/or diverted traffic; for the latter, benefits have been taken as only 50% of the cost saved. A large part of the cost savings relates to fuel, which otherwise could be exported, or to a smaller requirement for imported equipment and spares. 5.05 In the equipment portion of the project, the benefits for replacement of old navaids and communications equipment are partly based on reduction of the high maintenance and operating cost of obsolete equipment compared to that for new transistorized equipment. For navaids established at new sites, aircraft time savings due to the improved flight procedures possible have been evaluated. This has also been the main saving for the aeronautical communications network, which enables a reduction of average flight time both for domestic and inter- national flights. In this last case, the cost saving to foreign aircraft would be recaptured by a planned 15% increase in tariffs for enroute navigation charged by CORPAC for these services. The costs for the aircraft required to perform flight checks of air navigation equipment were split between existing aids and new aids. For existing aids, the avoided costs for hiring aircraft were used as benefits of a CORPAC-owned aircraft. For new aids, the cost of flight checking, including the aircraft investment, was treated as part of the cost of these aids, with the main benefits relating to reduced aircraft trip times for domestic flights because of shorter airway distances. 5.06 Typically, the reduction in passenger-mile cost represents a rela- tively conservative 4.P5 US cents/passenger-mile for a change from the F28 and BAC III aircraft now used to B-727-100 aircraft presently operated by both airlines to other airports. A typical cost of about US$1,747 per hour, representing an average hourly cost of these aircraft types, has been used for aircraft time saved in the air because of improved aids and communications. A cost of US$3,450 per hour was used for international flights which, at two minutes saving per flight (or some 60-75 gallons of fuel), was equal to the 15% tariff increase mentioned. An average reduction of one minute per flight due to improved communications and two minutes per flight for better and more navaids provided the main saving for scheduled flights within Peru. These are conservative reductions compared to experience in other countries, where improved approach procedures alone would give a two-three minute saving.  - 21 - C. Project Airports 5.07 The population in the areas served by the Part I airports is now close to 900,000. It is expected to grow to 1.2 million by 1990, or about 5% of the Peruvian population. Huanuco has 385,000, but is the least isolated. Tarapoto has 240,000, followed by Pucallpa with 185,000 and Tingo Maria with 85,000. The most important presently in terms of traffic are Tarapoto and Pucallpa, followed by Tingo Maria and Huanuco. Of these airports, only Tarapoto has significant cargo traffic, about 10,000 tons, compared to 3,000 tons for Pucallpa and less for the others. 5.08 In terms of investment, Tarapoto is the highest cost airport. There, also, the economic impact of better air services is likely to be highest. This area was connected to the coast by a gravel road essentially finished in 1979. The distance to Lima by road is some 1,550 kilometers, which means that virtually all passenger traffic and a substantial part of cargo traffic goes by air. Several agricultural projects in the area and others such as a new vocational training school make Tarapoto a natural regional center. It will have an even greater growth potential when road links up the Huallaga valley and to the new port facilities (financed under Loan 1196-PE) at Yurimaguas are improved. This potential, in all likelihood, will concentrate high value production such as cattle raising in the Tarapoto area. Air cargo in this area is going through various development stages. The first stage, now more or less concluded, occurred when the area depended on air transport even for low value basic commodities such as corn and cement; the second stage has begun through the use of mainly Peruvian Air Force aircraft at Tarapoto and surrounding air strips to move industrial commodities into the area and meat from the area. A third stage will develop as soon as Tarapoto infrastructure permits the use of scheduled airline aircraft with competitive cost levels for air cargo and as the road system in the area continues to be improved. A further and long-term stage will take place when the road to Tingo Maria, which is part of the edge road of the Selva, has been improved to a standard permitting transport by refrigerated trucks. Until that stage, air cargo will remain competitive, particularly for perishable commodities. 5.09 Another aspect of the importance of Tarapoto is its position as an interchange point between regular scheduled air services by the two airlines and air taxi services to a large number of air strips in the north, some in support of oil exploration in a large area where Tarapoto is the closest airport. Consequently, this airport, despite its present limitations, is one of the busiest in Peru in terms of aircraft movements. A third aspect is Tarapoto's role as the closest alternative to the only airport with paved runways, Iquitos, in an area as large as a quarter of Peruvian territory. The present conditions of the airport and runway orientation preclude its being named an alternate for Iquitos under bad weather conditions and, thus, in effect, exclude its use completely. The weather and lack of aids such as an ILS system also lead to a number of flight cancellations which, because of the traffic volume, is a serious constraint. The airline cost savings due to the use of Tarapoto as an alternate for flights to Iquitos and Pucallpa instead of distant airports such as Chiclayo or Lima have not been possible to quantify. Nor has a value been obtainable relating to the cost of bad weather flight  - 22 - cancellations. A benefit value relating only to a cost saving due to carriage flight of passenger traffic in a more cost-effective aircraft omits not only such indirect development effects as better regularity of the air services but also the direct effects on aircraft operations. Despite these shortcomings, the estimated economic return reaches 22%. 5.10 Pucallpa is, in some respects, in a situation similar to that of Tarapoto as a regional center for a large geographic area with an interchange to air taxi services. It is, however, located at a lower altitude, which, in the Amazon basin, implies a much less diversified agricultural base and, therefore, more limited growth prospects. Pucallpa is also connected to Lima by an all-weather road and has a thriving port (both improved under Loan 1196-PE). More cost-effective passenger travel is therefore a most immediate objective for the improvement which, at the existing airport, can be achieved at much lower cost than at Tarapoto since the present runway needs only to be overlaid. The economic return, on the same limited basis mentioned for Tarapoto, there- fore reaches 42%. 5.11 Tingo PMaria is another airport close to a small university town with secondary economic effects similar to those of Tarapoto. Relocation of the airport to a new site will achieve much improvement in flight regular- ity under safe conditions and will extend the area of influence of the airport to several nearby communities in the upper parts of the Huallaga valley. Traffic, consequently, has similar growth prospects as for Tarapoto except for air cargo. The economic return is 13%, not including the value of the existing airport land, which, because of its close proximity to the town, would be valuable for urban development purposes. 5.12 Huanuco, closer to Lima, along the road to Pucallpa, has considerable air traffic despite present airport limitations, because of a relatively large population base. A relocated runway, at low cost, would enable much safer use of larger aircraft in daylight and good weather. Since weather conditions at this altitude are much better than those at the other airports, weather-related limitations to regularity are not likely to become a serious problem. A shift to more cost effective aircraft could take place, and present aircraft damages resulting from the present unpaved runway could be avoided. The area of in- fluence would be limited to the present densely populated valleys close to Huanuco with somewhat less growth potential than Tarapoto and Tingo Maria. Based on aircraft-related cost improvements only, the economic return reaches 13%. D. Total Project Return 5.13 The weighted average project return for the four airports above is 22%, with good first year returns, and, for the total project, is 20%. For the various parts of the equipment program, the return varies from 13% to 21% with first year returns as high as, or higher than, those for the rest of the project (Tables 5.1-5.4). As stressed earlier, these estimates have been biased in a conservative direction since the real losses in aircraft time because of the inadequate network of communications and navaids (particularly in the less developed eastern part of Peru) are higher. This factor is of critical importance since the area relies almost exclusively on air and river transport.  - 23 - 5.14 A sensitivity analysis for the project components indicates that almost no rates are likely to fall below 10%. The first year returns are normally high, with the lowest being 11% (or the estimated opportunity cost of capital in Peru) (Table 5.4). Considering the fact that the traffic forecasts are conservative in view of the past development of domestic air traffic, most of the economic rates may, in fact, be higher than the best estimate. Loss of that generated traffic would be equivalent to 15%-20% lower traffic benefits. Economic returns in such a case are still 12% or higher. E. Project Risks 5.15 The most serious project risk is that higher-than-anticipated airport construction costs may not be compensated for by similar inflationary cost increases for the various benefits. The sensitivity test above indicates that, with a 15% increase in construction costs, in real terms, all of the economic returns are still acceptable. VI. FINANCIAL ANALYSIS A. Existing Situation 6.01 In 1976, CORPAC was able to cover all of its working expenses from operating revenues. It was not able to cover total operating expenses, resulting in a net operating revenue deficit of S/. 15.9 million (Table 6.1). This was the result of generally depressed economic conditions and associated slow traffic growth and low tariffs being charged for its services. However, the financial position of CORPAC has improved significantly since 1976. In the period 1977 to 1979, CORPAC was able to cover all of its operating expenses from operating revenues, which resulted in a rate of return on revalued net fixed assets of 0.8 in 1977, increasing to 12.4 in 1979. This improved perfor- mance was caused primarily by increases in traffic and aircraft size and tariff levels. In October 1979, CORPAC received approval to increase its tariffs in general by 30%. 6.02 In addition to its operating revenues, CORPAC has a source of revenue which flows primarily out of sales in the duty-free shop in the airport at Lima. This revenue source is significant for CORPAC since it makes a contribution toward any of its capital investment or debt service needs. The result of the contribution from non-operating revenues is that CORPAC has been able to cover all operating expenses and limited capital investment and debt service require- ments in recent years without subsidy from the Government. However, there have not been sufficient funds for CORPAC to make significant investments in telecommunications, navigational aids, and general apron service equipment, which are now badly needed. 6.03 By law, CORPAC must pay certain taxes on its operations. In addi- tion to taxes on salaries and rentals, it must pay a tax on revalued capital investments. As may be seen in Table 6.1, these taxes represent about 8% of  - 24 - operating expenses. CORPAC had been required to pay tax on its net income at a rate of from 45 to 55%, depending on the amount of the net income. However, the Government, in realizing the major investment requirements of the aviation subsector for the coming years, issued Law No. 22921, dated March 4, 1980, which reduces CORPAC's tax rate to 10% of net income. The income which remains will be used for capital investment and the principal of debt service. 6.04 Almost all of the tariffs of CORPAC are based on US dollars (Annex 3). As a result, most revenues adjust automatically for devaluation of the Peruvian Sol. The current Government policy is to permit CORPAC to increase its tariffs as necessary to cover operating expenses. The procedure for granting tariff increases is based on the presentation of revenue and cost data by CORPAC staff to the General Manager, who submits it to the Board of Directors. After Board approval, the proposed tariff increases are submitted to the Ministry of Transportation and Communications for approval. Within the Ministry, the Organismo Regulador de Tarifas de Transporte (ORETT), the entity which reviews requests for tariff increases, performs an analysis of the cost data and proposed tariff increases (para 1.23). If it is satisfied with the justification, its approval is given and the Minister issues a Ministerial Resolution approving the new tariffs. Since the process is carried out entirely within the Ministry, it usually takes only one month to obtain approval. 6.05 The CORPAC balance sheets for the years 1976 through 1979 are pre- sented in Table 6.2. From them, it may be seen that net accounts receivable represent about 23% of operating revenues, except in 1979, when they were approximately 14%. In 1979, CORPAC carried a provision for doubtful accounts amounting to S/. 690 million (US$2.76 million) in its balance sheets. This represents an amount which has accumulated over the past few years for service provided primarily to Aeroperu. In order to relieve this account, the Govern- ment has agreed to pay CORPAC the past due amounts from Aeroperu in 1981. Accounts payable represent about 15% of working expenses, which is a satisfac- tory relationship. The balance sheets reflect revaluation of assets, which are revalued annually in accordance with the law. The amount by which they are revalued is determined by the Government, and this amount is a reflection of annual inflation in the construction industry. In accordance with existing law, the financial statements of CORPAC must be prepared and audited by an external certified public accountant no later than three months after the end of the fiscal year, which ends December 31 (para 3.07). 6.06 The financial accounts of CORPAC are kept in the central adminis- trative office of CORPAC at the airport in Lima. All revenues are collected by. CORPAC and retained by it for payment of working expenses and other ex- penses, including investment and debt service. The taxes based on operations (para 6.03) are paid to the Government on a monthly basis. The tax on net income is paid when the final financial statements have been prepared. In accordance with recent legislation (para 6.03), the remaining net income may be used only for capital investment and the principal of debt service.  - 25 - 6.07 The manner in which the accounts of CORPAC are kept and audited has been reviewed and found to be in order. However, the present system does not keep the accounts in sufficient cost center detail so that CORPAC may know the actual cost of providing each of its services. CORPAC recognizes this deficiency and has requested assistance in improving the cost accounting procedures. It is recommended that a financial consultant be retained, on terms and conditions acceptable to the Bank, by March 31, 1982, for a period of two years to assist CORPAC with the improvement of its cost accounting system (paras 3.10 and 4.18(c)). It was agreed during negotiations that CORPAC would implement the measures recommended by the consultants which are satisfactory to the Bank and CORPAC. B. Financial Objectives 6.08 The current Government policy is that CORPAC should generate suffi- cient revenues to cover its operating expenses, investments and debt service. In recent years, CORPAC has been able to meet these objectives, but capital investments and debt service requirements have been relatively small. However, with the planned capital investment program for the next five years and its associated debt service, it will be necessary for CORPAC to increase its total revenues annually to continue to meet these established objectives. Therefore, in the financial projections, which are stated in current US dollars, all revenues have been increased annually for traffic growth and estimated US dollar inflation (Table 6.3). Because of cash flow requirements in the year 1983, an additional real term increase of 15% in operating revenues is required on January 1 of that year. This increase has been made in the tables and is carried throughout the projection period. The financial assumptions are set out in Annex 3. 6.09 During the projection period, it should be possible for CORPAC to achieve a rate of return of at least 12% on revalued net fixed assets achieved in 1979. However, in order to allow for the possibility of changed financial conditions, it was agreed, during negotiations, that CORPAC would increase its revenues in such an amount that it would be able to meet its operating expenses, local cost of capital investments and debt service requirements and generate an annual rate of return on net fixed assets of no less than 8%. It was also agreed that the Government would take necessary steps concerning user charges to permit CORPAC to raise user charges to the extent necessary to provide funds to carry out the project. The annual rates of return are shown in Annex 4. The implied high rates of return in Annex 4 result from the significant amount of works in progress which will not be taken into Gross Fixed Assets until 1986. When this is done, the rates of return will be lower. 6.10 While CORPAC has exercised prudent management over its accounts receivable and accounts payable in recent years (para 6.05), it was agreed during negotiations that CORPAC's accounts receivable would be no more than 25% of operating revenues. 6.11 While it is the current practice of CORPAC to have its financial statements audited by an external auditor (paras 3.07 and 6.05), it was agreed during negotiations that certified copies of the audited annual accounts, satisfactory to the Bank, would be prepared by independent auditors and furnished to the Bank not later than four months after the end of each calendar year.  - 26 - 6.12 For many years, the combined four project airports would not be able to cover total operating expenses. However, the four project airports would be able to cover their combined working expenses beginning in the year 1983. A summary and individual income statements for the project airports are shown in Tables 6.4 through 6.8. C. Financial Plan 6.13 The total cost of the project is estimated to be US$127.6 million, of which US$58.0 million would be in the form of a Bank loan to CORPAC. An additional amount equivalent to US$19.0 million would be in the form of a co-financing loan assumed to come from German bilateral financing. These amounts would represent approximately 60% of total project costs. The balance equivalent, US$50.6 million, would be provided by: CORPAC, US$49.4 million; MTC, US$0.4 million and COPESCO, US$0.8 million. 1981-1985 Peruvian S/. million US$ million (a) Bank loan 27,274 58.0 (b) Co-financing 8,934 19.0 (c) CORPAC 23,231 49.4 (d) MTC 188 0.4 (e) COPESCO 375 0.8 60,002 127.6 6.14 Since it is expected that the planned investment program would strain CORPAC's internally generated revenues in the early years of the project, it was agreed during negotiations that CORPAC would consult with the Bank on, and not undertake, any investment of more than US$1.0 million at any one airport unless it is economically and technically justified. D. Financial Projections (i) Operating Results 6.15 CORPAC revenues and expenses by category for 1980 and projected through 1985 are set out in the projected income statements, Table 6.3. Summarized forecast results for the project years are as follows:  - 27 - CORPAC (Current US$ million) 1/ 1980 1981 1982 1983 1984 1985 Operating Revenues 28.0 33.8 41.0 57.1 69.1 83.6 Working Expenses 18.7 22.9 27.4 33.2 41.7 50.2 Depreciation 2.1 2.5 2.9 4.1 10.6 13.4 Net Operating Revenues 7.2 8.4 10.7 19.8 16.8 20.0 Non-Operating Revenues 5.6 6.8 8.3 10.0 12.1 14.7 Non-Operating Expenses 3.8 4.6 5.6 6.8 8.2 10.0 Net Non-Operating Revenues 1.8 2.2 2.7 3.2 3.9 4.7 Net Income Before Interest and Taxes 9.0 10.6 13.4 23.0 20.7 24.7 Interest .2 .2 1.9 4.0 6.4 8.1 Taxes 2.1 3.1 3.6 5.0 5.7 6.9 Net Income After Interest and Taxes 6.7 7.3 7.9 14.0 8.6 9.7 Rate of Return (Before Taxes) 27.5 27.4 28.3 40.7 17.9 14.1 1/ May not agree because of rounding. 6.16 In every year during the projected period, CORPAC would be able to cover all operating expenses from operating revenues. It should be agreed during negotiations that CORPAC would prepare its operating and five-year capital investment budget by not later than November of the preceding year and would furnish a copy to the Bank for its comments (para 3.09). 6.17 The summary and individual project airports projected income state- ments are set out in Tables 6.4 through 6.8. Only one of the airports, Pucallpa, covers all working expenses in all the projected years, and two others, Tarapoto and Tingo Maria, begin to cover working expenses in the years 1983 and 1986 respectively. The airport of Huanuco never generates sufficient revenues to cover all working expenses during the projection period to 1990. After the new investments are put into service and their associated depreciation, which is based on revaluation, is taken into account, none of the project airports cover their operating expenses. However, the combined income statements for the four project airports show that, as a group, they would be able to cover all working expenses by 1983 with a working ratio of 81, gradually decreasing to 55 in the year 1990. Since these four airports are part of a total system, they generate a like amount of revenues at other airports, primarily Lima, which are not considered in their individual financial projections. (ii) Cash Flow 6.18 A projected cash flow for CORPAC, based on the assumptions contained in paragraph 6.08, is shown in Table 6.9, and the supporting detailed invest- ment program is set out in Table 6.10. In order for CORPAC to accomplish its  - 28 - investment program, it would be necessary for it to make the increases to revenues indicated in paragraph 6.08. While the cumulative cash surplus would be adequate, a movement of any of the major investment components in the first years of the project to an earlier or later year than presently planned would result in significant cash deficits for any given year. A summary of the cash flow for 1980 through 1985 is set out below: CORPAC (Current US$ million) 1/ 19_8 1981 1982 1983 1984 19 5 Sources Internal Cash Generation 11.1 13.1 16.2 27.1 31.2 38.0 Proposed Bank Loan - - 22.0 16.5 15.0 .4 Other Foreign Loans 2/ - - 1.7 17.3 11.8 13.0 Total Sources 11.1 13.1 39.9 60.9 58.0 55.4 Applications Proposed Bank Project - - 35.9 27.2 23.2 7.9 Other Capital Investments 5.4 .8 1.7 31.8 19.7 21.7 Total Capital Investments 5.4 .8 37.6 59.0 42.9 29.6 Total Loan Repayments .1 - - - - 2.2 Total Interest Payments .2 .2 1.9 4.0 6.4 8.1 Taxes 2.1 3.1 3.6 5.0 5.7 6.9 Total Applications 7.8 4.1 43.1 68.0 55.0 46.8 Cash Surplus/Deficit 3.3 9.0 (3.2) (7.1) 3.0 8.6 Cumulative Cash Surplus 3.3 12.3 9.1 2.0 5.0 13.6 1/ May not agree because of rounding. 2/ Other foreign loans include a German Bilateral Loan for communications equipment of US$19 million and a total loan for the new Cuzco airport of US$63.0 million, or about 64% of the total estimated costs, which have been computed using the same terms and conditions as the proposed Bank loan. 6.19 The projections indicate that CORPAC might require minor additional debt financing in 1983 and 1984 when liquid ratios (Annex 4) are less than one. In order to ensure that such borrowing would not adversely affect CORPAC's ability to carry out the project, the Bank should be consulted before additional debt is incurred. Therefore, it was agreed during negotiations that CORPAC would not incur any long-term debt unless its net revenues for the fiscal year next preceding such incurrence, or for a later 12-month period ended prior to  - 29 - such incurrence, whichever amount is greater, shall not be more than 1.5 times the maximum long-term debt service requirement for any succeeding fiscal year on all long-term debt, including long-term debt proposed to be incurred. 6.20 Projected balance sheets for 1980-1985, which reflect revalued assets and stated current US$, are presented in Table 6.11. VII. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations, agreement was obtained from the Government and CORPAC regarding the following: (a) that CORPAC would update its five-year capital investment plan on a yearly basis and, not later than November of each year, through the closing date of the loan, would provide the Bank with a copy of the next year's plan and an opportunity to comment on it (paras 3.09 and 6.16); (b) that an accounting consultant to CORPAC would be engaged, on terms and conditions acceptable to the Bank, by March 31, 1982, to improve the cost accounting system (paras 3.10 and 6.07); (c) that CORPAC would implement measures to improve its cost accounting system, recommended by the consultants, which are satisfactory to the Bank and to CORPAC (para 6.07); (d) that CORPAC would increase its revenues in such an amount that it would be able to meet its operating expenses, local cost of capital investments and debt service requirements and to obtain a return of not less than 8% on revalued net fixed assets (para 6.09); (e) that the Government would take necessary steps concerning user charges to permit CORPAC to provide necessary funds to carry out the project (para 6.09); (f) that CORPAC's accounts receivable would be no more than 25% of operating revenues (para 6.10); (g) that certified copies of the audited annual accounts, satisfac- tory to the Bank, would be prepared by independent auditors and furnished to the Bank not later than four months after the end of each calendar year (para 6.11); (h) that CORPAC would not undertake any investment of more than US$1.0 million at any one airport unless it is economically and technically justified (para 6.14); and (i) that CORPAC would not incur any long-term debt unless its net revenues for the fiscal year next preceding such incurrence, or for a later 12-month period ended prior to such incurrence, whichever amount is greater, shall not be more than 1.5 times the maximum long-term debt service requirement for any succeeding fiscal year on all long-term debt, including long-term debt proposed to be incurred (para 6.19).  - 30 - 7.02 It would be a condition of disbursement for the design of the Cuzco Airport that an agreement satisfactory to the Bank is executed between CORPAC and COPESCO (para 4.20). 7.03 The proposed project constitutes a suitable basis for a Bank loan of US$58.0 million to CORPAC. This amount would include repayment of detailed engineering for project airports, which has been financed under the project preparation facility. The terms would be 17 years, including a grace period of four years. February 25, 1981  PERU AVIATION DEVELOP'MENT PROJECT Port Traffic 197) Tons (000) L O A D E D U N L O A D E D COASTAL SHIPPING TOTAL Dry Liquid Dry Liquil Dry Liquid Dry Liquid Cargo Cargo Total Cargo Cargo Total Cargo Cargo Total Cargo Cargo Total TOTAL GENERAL 8,439 3,161 11,600 2,200 126 2,326 1,430 10,041 11,471. 12,070 13,327 25,397 TOTAL ENAPU 2,162 575 2,737 2,184 126 2,310 1,010 5,701 6,712 5,357 6,402 11,759 A. SUB TOTAL ENAPU SEAPORTS 2,144 561 2,705 2,150 114 2,264 658 5,485 6,143 4,953 6,159 11,112 1 Cabo Blanco - 76 76 - - - - 256 256 - 332 332 2 Talara - 402 402 73 4 77 - 2,246 2,246 73 2,652 2,725 3 Paita 82 5 87 53 4 57 43 15 58 173 23 202 4 Eten - - - - - - - 381 381 - 381 381 5 Pacasmayo 18 - 18 - - - - - - _8 - 18 6 Chicama 13 - 13 - - - - - - 13 - 13 7 Salaverry 162 20 182 85 - 85 - 350 350 2.7 370 617 8 Chimbote 282 28 310 253 - 253 489 284 773 1,024 312 1,336 9 Besique - - - - - - - - - - - - 10 Casma - - - - - - - - - - - - 11 Huarmey 14 - 14 - - - - - - 14 - 14 12 Supe 44 - 44 23 6 29 - 185 185 67 191 258 13 Huacho 23 - 23 - - - - - - 23 - 23 14 Chancay 4 - 4 2 - 2 4 - 4 1) - 10 15 Callao 968 13 981 1,265 12 1,277 119 634 753 2,152 659 3,011 16 Cerro Azul - - - - _ - - _ _ _ _ _ 17 General San Martin 133 17 150 130 - 130 1 240 241 ?t4 257 521 18 Matarani 159 - 159 164 88 252 2 - 2 3.5 88 413 Matarani Bolivia Transit 88 - 88 102 - 102 - - 190 - 190 Mollendo - - - - - - - 479 479 - 479 479 19 Ilo 154 - 154 - - - - 415 415 154 415 569 B. SUB TOTAL RIVER PORTS 18 14 32 34 12 46 352 217 569 404 243 647 20 Iquitos 18 14 32 34 12 46 164 217 381 216 243 459 21 Yurimaguas - - - - - - - - - - - 22 Pucallpa - - - - - - 188 - 188 188 - 188 23 Puerto Maldonado - - - - - - - C. SUB TOTAL OTHER PORTS 6,277 2,586 8,863 16 - 16 420 4,339 4,759 6,713 6,925 13,638 1 Los Organos - - - - - 2 Negritos - 101 101 - - - - 53 53 - 154 154 3 Bayovar - 2,485 2,485 - - - - 3,887 3,887 - 6,372 6,372 4 Pimental 94 - 94 - 9-4 - 94 5 Coishco - - - - _ 6 San Nicolas 5,835 - 5,835 - - - 420 95 515 6,255 95 6,.350C 7 Atico - - - - - 8 Ilo Southern 348 - 348 16 - 16 - 304 304 364 304 668 9 Puno - - m Source: ENAPU Memoria Anual 1979 January 1981  - 32 - TABLE 2.1 PERU AVIATION DEVELOPMENT PROJECT Airport passenger and cargo traffic 1971-79 Airport Passengers 1971 1976 1978 1979 (arriving and departing) Project Airports Huanuco 11709 24391 31887 33010 Pucallpa 52330 121578 110672 144126 Tarapoto 43611 125738 121618 123527 Tingo Maria 20461 38482 53719 58764 Total project airports 128111 310189 317896 359427 Cuzco 117259 276154 355703 380303 CORPAC Total domestic traffic 1219386 2688062 2666580 3066115 Total international traffic 845760 1295772 1042519 1077856 Total CORPAC airport traffic 2065146 3983834 3709099 4143971 Airport Cargo and Mail (arriving and departing tons) Project Airports Huanuco 160 98 110 111 Pucallpa 1194 902 2003 2950 Tarapoto 5119 6080 6932 10341 Tingo Maria 269 281 275 331 Total project airports 6742 7361 9320 13733 Cuzco 1278 1546 2264 2165 CORPAC Total domestic traffic 36323 47224 62419 78818 Total international traffic 10513 16826 22662 23648 Total CORPAC airport traffic 46836 64050 85081 102466 Source: CORPAC January 1981  - 33 - TABLE 2.2 PERU AVIATION DEVELOPMENT PROJECT Airport Traffic Forecasts Annual Departing and Arriving Passengers (in Thousands) (yearly growth in brackets) Actual Actual Forecast 1978 1979 1985 1990 1995 Huanuco Normal 32 33 50 69 97 Generated _ - 23 33 46 32 33 (14.2%) 73 (7.0) 102 (7.0) 143 Pucallpa Normal 111 144 190 248 324 Generated - 46 60 79 111 144 (8.6) 236 (5.5) 308 (5.5) 403 Tarapoto Normal 122 123 228 367 565 Generated - - - 67 103 122 123 (10.8) 228 (13.8) 434 (9) 668 Tingo Maria Normal 54 59 90 138 212 Generated - - - 36 56 54 59 (7.3) 90 (14.1) 174 (9) 268 Aircraft Traffic (landings) Actual Actual Forecast 1978 1979 1985 1990 1995 Huanuco Sched.airlines 312 317 485 680 950 Other flights 17 61 90 145 235 Pucallpa Sched.airlines 1275 1343 1765 2200 2750 Other flights 1265 1826 2280 3050 4200 Tarapoto Sched.airlines 1719 1716 3450 4350 5500 Other flights 5418 6584 8700 11900 16300 Tingo Maria Sched. 634 609 870 1140 1755 Airlines Other flights 306 475 745 1095 1615 Source: CORPAC, CAIM, APS, LAGESA, LLN Study, Mission estimates January 1981  - 34 - TABLE 3.1 PERU AVIATION DEVELOPMENT PROJECT CORPAC Airports R UNW A YS Runway Runway AIRPORTS 1--i 4-i 1 I Strength Dimensions r= coS aU . 4 0 - , S- 0 > For: (Metres) ci 5 1-4 w co4 S 1 ANDAHUAYLAS - - - - X DC006 2,900 x45 X 2. ANTA X - - - - BAC-1 -1 3,050 x30 x 3. AREQUIPA X -B - -727 3,000 x 45 x 4. AYACUCHO X B - - - - -727 2,800 x 45x 5. BELLAVISTA - - X D~- C-3 1,380 x 45 6. C. COCHA - - - -- - X DC-6 2,400 x45 7, CAJAMARCA - - X - - - DC-4 1,820 x36 x 13 CAMANA - - X D- C-3 1,OOO x 1 80 * 9 . CIRO ALEGRIA - - X -- DC-6 1,660 x 47 10. Cuzco X B ~ -727 3,400 x 45x 11. CH-ACHAPOYAS -- - X D - - C-3 1,100 x 40 x * 1 2 CFIICLAYO X -B - -727 2,520 x45 X X x i3. CHIMABOTE- - X - - - BAC-1-1 I 1,800 x45 x 14. GALILEA - X - DC-6 2,000 x45 15. 1-IUANUCO -X DC- - 0-4 2,500 x 50 x 16. IBERIA - - X -- DC-3 1,360 x 18 17, [LO X E) ~ -- - C-6 2,500 x45 x 18. INTUTO - -- X -- HERCULES 2,000 x45 19. 1,~APARI - D C-3 960 x20 20. IQUITOS - DC _ _ 0-8-63 2,500 x 45 X X x 21. JAUJA X - -D . C-6 3,000 x50 X 22. JUANJU[ -- X DC - 0-A 1,400 x A5 X 23. JULIACA -- X -- - - DC-6 4,000 x45 x 24. l-IMA - X B-- - 8747 3,507 x45 X X x 25. M0LLENDO -- - - - X DC-4 1,500 x45 X 26. ,M0QUEGUA - - - - X DC0-4 l,600 x45 2 MOYOBAMBA - - - - X - DC0-4 130x4 218. PACASMAYO -. - X --- - DC0-4 1x0x3 30. PATRIA x - DC-6 ~~~~~~~~2,000 x 1 00 x 31. PICOTA - - - X -- 0C-3 1,080 x 30 32 .PISCO X - - - - -- 00-8-63 3,020 x45 x X x 33. PIURA X - -B - - -727 2,500 x45' x X x 34. PUCALLPA x - - - - - BAC- 1-1 1 2,500 x 30 X X x 35. PUCACACA - - X DC -3 I, 163 x40 36. PTO. BERM\~UDEZ -- - - - D C-3 850 x 1 00 37. PTO. INCA - - X DC--0-3 1,000 x80 30. PTO. MIALDONADO - X DC- 0-6 2,000 x 45 X 39 PTO. VICTORIA - X DC 0-3 850 x 30 40. QUINCEMIL - X -C--0-6 1,800 x 30 X 41. REQUENA - - X D00-3 I ,2010 x30 X 42. RIOJA-- X - D-C0-6 1 800 x45 -43. S. J. DE SISA - - . X -l -47 I 900 x 30 44. SAN RAMON . - - - X DC 0-3 1 1000 x1I00. 415. SAPOSOA - - X - -- I DC 0-3 950 x 40 46. SATIPO --x-- DC 0-3 1,180 x 30 4!. TACNA X B-- - - - -727 2, 500" x 4 -~ 48 TALARA X - - - - 0-8 2,450 x-15 X X X 45.TARAPOTO X -- ----.0727 2,500 x 30 x so1 TiNGO MARIA - - X DC- ~-6 ,100x5 I TOCACHE x DC-4 ~~~~~~~~~~~2,000 x 60 52. 1TRUJILLO X - L .. -- BACI1-11 I,0 x AxJj X X x 53. TUMBES - C0-6 21,500 x 45 x