Mexico - Airports Development Project

Document of The World bank FOR OFFICIAL USE ONLY Report No. 4874 Hi-YjECT COMPLETION REPORT .-f :ICO - LOAN 1022-ME REGIONAL A2PrfORTS , > OPMENT PRC:ECT Decetnber 30, 1983 Latin America and ahe CaribbeaT' Regional Office This document has a restrictAi distribution and may be used by recipients only in the periormr ince of their e.flicial duties. its contents may not otherwise be disclosed without Wore 3ank 2uthori-atien.  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT MEXICC - LOAN 1022-ME REGIONAL AIRPORTS DEVEiLOPMENT PROJECT TABLE OF OONTENTS Page No. Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Data Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 1 II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL. 2 III. PROJECT IMPLEMENTATION . . . . . . . . . . . . . . . . . . 4 IV. TRAFFIC AND OPERATIONS . 9 V. FINANCIAL PERFORMANCE OF THE BORROWER AND THE BENEFICIARY. . . . . . . . . . . . . . . . . . . . . 11 VI. INSTITUTIONAL DEVELOPMENT. . . . . . . . . . . . . . . . . 14 VII. ECONOMIC REEVALUATION. . . . . . . . . . . . . . . . . . . 15 VIII. ROLE OF THE BANK . . . . . . . . . . . . . . . . . . . . . 17 IX. CONCLUSIONS. . . . . . . . . . . . . . . . . . . . . . . . 18 TABLES 3.1 Appraisal and Actual Estimates of Project Cost . . . . . . 19 3.2 Project Cost by Airport. . . . . . . . . . . . . . . . . . 20 3.3 Schedule of Disbursements. . . . . . . . . . . . . . . . . 21 4.1 Actual and Forecast Traffic at Project Airports. 22 5.1 ASA - Summary Revenue and Expenditure Accounts 1975-1981 . . . . . . . . 23 5.2 ASA - Summary Balance Sheets as of Decenber 31, 1975-1981. . . . . . 24 5.3 ASA - Operating Accounts 1980-1981 . . . . . 25 5.4 ASA - Financial Ratios 1975-1981 . . . . . . . . . . . . . 26 7.1 ASA - Project Economic Returns .27 MAPS IBRD 10803 IBRD 10804 This document has a restricted distribution and niay be used by recipients only in the perforrnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PROJECT COMPLETION REPORT MEXTCO - REGIONAL A.IRPORTS DEVELOPMENT PROJECT (LOAN 1022-NE) PREFACE 1. This report presents a Project Completion Report of the Mexico Regional Airports Development Project for which Loan 1022-ME for US$25.0 million equivalent was approved on June 6, 1974. 2. The Project Completion Report (PCR) was prepared by the Latin America and Caribbean Regional Office. In accordance with the revised procedures for project performance audit reporting, the PCR was read by the Operations Evaluation Department (OED) although it is not proposed to undertake an audit of the project by the OED staff. The PCR was also sent to the Borrower by OED but no comments have been received from theB Rc-rower t'n the above-mentioned Report.  - ii - PROJECT COMPLETION REPORT MEXICO LOAN 1022-ME REGIONAL AIRPORTS DEVELOPMENT PROJECT BASIC PROJECT DATA Item Original Plan Actual Total Project Cost (US$ million) 59.3 114.8 Overrun (%) - 93.6 Loan Amount (US$ million) 25.0 25.0 Disbursed (US$ million) - 25.0 Date Physical Components Completed 7/77 12/82 Proportion Completed by Above Date (Z) 44.4 100.0 Economic Rate of Return (Z) 22.0 17.0 Financial Performance Institutional Performance OTHER PROJECT DATA First Mentior, in Files 5/23/72 - Negotiations 4/29/74 - Board Approval 6/6/74 - Loan Agreement 6/28/74 - Effectiveness 9/16/74 - Closing Date 6/30/78 6/30/82 Borrower NAFINSA NAFINSA Executing Agencies Airports Dept. Airport of SOP Dept. Civil Aviation of Dept. of SCT SAHOP Original Plan Actual Fiscal Year of Borrower Jan. I-Dec. 31 Same Fiscal Year of BeneflJIary (ASA) Jan 1 - Dec. 31 Same  - iii - PROJECT COMPLETION REPORT MEXICO LOAN 1022-ME REGIONAL AIRPORTS DEVELOPMENT PROJECT MISSION DATA No. of No. of Man/ Date of Item Month/Year Days Persons Days Report Identification Jan. 1973 5 1 5 2/20/73 Preappraisal July 1973 7 2 14 8/13/73 Appraisal Sept. 1973 25 4 100 11/14/73 (Issues) 5/28/74 (Grey C) Appraisal April 1974 7 3 21 TOTAL 140 Supervision I July 1974 7 1 7 Aug.'74 Supervision II Dec. 1974 2 1 2 Jan. '75 Supervision III July 1975 10 1 10 Sept.'75 Supervision IV Dec. 1975 9 2 18 Jan. '76 Supervision V May 1976 7 2 14 June '76 Supervision VI Feb. 1977 10 2 20 March'77 Supervision VII Sept. 1977 4 1 4 Oct. '77 Supervision VIII Nov. 1977 10 1 10 Dec. '77 Supervision IX June 1978 5 1 5 July '78 Supervision X April 1979 8 3 24 May '79 Supervision XI July 1979 4 3 12 July '79 Supervision XII Sept. 1979 14 1 14 Oct. '79 Supervision XIII Jan. 1980 11 2 22 Jan. '80 Supervision XIV June 1980 11 2 22 July '80 Supervision XV Nov. 1980 6 1 6 Nov. '80 Supervision XVI Dec. 1981 5 2 10 Jan. '82 Completion Sept. 1982 9 2 18 TOTAL 218 CRAND TOTAL 358 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Mexican Peso (Mex $) Appraisal Year Average Exchange Rate: US$1 = Mex $12.5 Intervening Years Average US$1 - Mex $22.8 Completion Year Average US$1 = Mex $48.0  - iv - PROJECT COMPLETION REPORT MEXICO - REGIONAL AIRPORTS DEVELOPMENT PROJECT (LOAN 1022-ME) HIGHLIGHTS 1. The PCR finds that the project largely met the objectives envisaged at the time of appraisal (para 9.01). It did so, however, with substantial time and cost overruns (+93%). These were partly due to budget limitations (para 3.08), but also changes to the scope of the project due to much higher traffic in petroleum producing areas (para 3.09), where two of the largest airports were located. Project completion was delayed from 1978 until 1982 but some airports were already operating in 1979 or. a regular basis. 2. In addition to larger facilities at the two airports above, Villahermosa and Minatitlan, the scope of the project was changed so that one airport was deleted as the local municipality had extended the present airport (Guaymas) and one airport (Campeche) was deleted when the Government went beyond the scope of the limited Bank project. In both cases, traffic had not developed sufficiently to justify their retention in the Bank project. 3. The institution building components of the project had limited impact (para 6.03), but development in this area did take place. Secretaria de Comunicaciones y Transportes (SCT) is now in charge of a more rational structure of institutions in the subsector (paras 6.01 and 6.02) more or less meeting the Bank objectives. 4. Partly as a result of higher than expected traffic increase at certain airports but mostly due to the same inflationary factors that increased construction costs, benefits 4 were much higher than expected leading to an economic rate of return of 17%. T!e project thus well achieved its economic objectives (paras 7.04 - 7.07). 5. Financial performance of the main project beneficiary, Aeropuertos y Servicios Auxiliares (ASA), was good, reflecting a period of substantial growth (para 5.02). The Government, however, has not increased tariffs sufficiently to meet some of the financial covenants (para 5.03). The key introduction of passenger departure fees was carried out early under the project but tariff levels were not increased continuously to keep pace with inflation.  - I - T. INTRODUCTION 1.01 Mexico covers an area of nearly 2 mill.lon km2. Much of the country is sparsely populated because of its difficult topographv and inadequate rainfall, and, althouagh extensive schemes for agricultural development have iLncreased the areas under irrigation, the population is urbanizing rapidly - a matter of concern to the Government. Close to 60% of the population of 54 Inillion in 1973 was urban; this proportion was 52% in 1960 and 43% in 1950. In 1972, about 18% of Mexico's population lived in the district centered by Mexico City. Although overall population growth was 3.5% per annum between 1960-1970 - one of th-e highest rates in the world - urban population growth was higher than 5% per annum, while rural. growth was only about 1.5% per annum. 1.02 The Government's aviation policy is based on the premaise that air transportation plays an important role in national development and population diffusion. Domestic aviation has been one of the fastest growing transportation modes. The Government is attempting to use aviation as of one of several means to encourage a more even urban development. It is felt that, by creating a dependable air transportation system at a reasonable cost to the users, the population in widely dispersed communities of the nation will be drawn closer together and be assisted in their development, as well as being encouraged to remain in their communities rather than migrate to Mexico City. 1.03 A National Airport Plan (NAP) was developed in 1964 by a Government-wide committee which provided for a total of 75 airports in Mexico. By 1973, nine of these airports, catering to long range aircraft, had already been improved, while two more were tunder construction; 22 others were for medium range aircraft and the rest for short range. Except for those already improved (about 20), the existing facilities were substandard for the types of aircraft then being added to tbe air carrier fleets. The NAP envisaged improving all of these facilities to meet "he present and future demands. 1.04 In 1972, the Bank was asked to consider financing the construction of 15 regional airports in the medium range group. Desk analysis prior to appraisal determined that only nine of these would meet Bank economic justification criteria. During the appraisal in October 1973, two more complete airports were dropped but the minor improvement of one of these, Campeche, was included in the proposed project. The project consisting of seven complete and one improved airports was approved by the Board in June 1974. 1.05 The Borrower was NAFINSA (Nacional Financiera S.A.) and the executing agencies were SOP (Secretaria Obras Publicas, later changed to SAHOP, Secretaria Asentamientos Humanos y Obras Publicas), and SCT (Secretaria de Comunicaciones y Transportes). The Beneficiary was ASA (Aeropuertos Servicios y Auxiliares), the operator of the airports.  II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL A. Origin of the Project 2.01 The airports to be replaced by the project generally had lightly paved, short runways obstructed by man-made or natural obstacles which prevented physical expansion or threatened the safety of flight. Originally intended for relatively light single and multi-engine piston powered aircraft, the airports were totally unsuited for the modern heavier, faster, more efficient, turbo jet air transports coming into service. The NAP was developed to establish a priority list for airports which should be improved. Cursory plans were developed by SOP for fifteen of the airports and the Bank was asked unofficially (during a June 1972 supervision mission of Loan 793-ME) to comment on these plans SOP dropped this list to twelve, and then following preliminary discussions with the Bank, to nine for its official request to the Bank. B. Preparation, Appraisal and Negotiation 2.02 The preparation of the project was carried out by Bank staff in close collaboration with SOP, SCT, ASA, SHCP, Presidency and NAFINSA. From the beginning, one of the major objectives of the Bank was to assure the establishment of a more positive cooperation between the various Governmental organizations having aeronautical responsibilities. General coordination by transportation of SOP, SCT and Presidencia was begun as part of the Second Railway Loan 825-ME and a Transportation Coordination Committee was established in 1973. During negotiations, it was agreed that this Committee would be continued and strengthened. 2.03 The Bank staff had recommended that the Executing Agency for the airports project be ASA, since ASA would be the beneficiary in the first instance, and that SOP act as ASA's agent in designing and constructing the project. This arrangement was declared unworkable during negotiations and SOP and SCT were made joint Executing Agencies with the much greater responsibility placed on SOP, who actually provided all of the engineering required for the design of the project. 2.04 During appraisal, two of the nine airport projects presented by the Government failed to meet minimum economic returns for a feasible Bank project. Upon review during negotiations, one of these was determined capable of earning a satisfactory return if only minor improvements were made at the existing site (Campeche) and the construction of the proposed replacement airport were delayed for at least five years. Thus, the project finally accepted consisted of the construction of seven airports and the exp4'nsion of one other. Two of the airports were planned to have cross wind runways at some future date when such runways became justified but originally only single runways would be constructed at each airport.  2.05 While the Government insisted that ASA maintain its original status as simply the airport operator, it was agreed that with its own funds, ASA would reorganize its accounting system and establish a modern commercial cost accounting system. In addition, to place ASA on a firm financial footing, it was agreed that international and domestic passenger departure fees would be established. C. Project Description a. Physical Construction of seven new airports at Villahermosa, Tuxtla Gutierrez, Minatitlan, Poza Rica, Los Mochis, Tapachula and Guaymas were the main part of the project. All these airports were to have asphaltic concrete runways, of 45 meters width and a length between 1,800 and 2,500 meters depending upon elevation and estimated use, lead-in taxiways, aircraft aprons, terminal buildings, control towers, fire stations, fuel storage and hydrant systems, electronic and visual aids, communication systems, automobile parking areas, fencing, and internal and external access roads of about 5 km each, except for the airport at Minatitlan, which will be about 33 km long. Expansion of the existing airport at Campeche, was also incladed as follows: lengthening the runway by about 30 meters and strengthening it, enlarging the existing terminal building, providing new runway lighting, obstruction removal and navigational aids. To replace existing installations destroyed to clear project sites, the Project also included the construction of an elementary school at Minatitlan, the relocation of part of a gas pipeline at Villahermosa and the relocation of about 15 km of a high-tension powerline at Campeche. b. Engineering * Design, construction contract management and supervision of construction by Airports Department of SOP of all contracts, except for those relating to electronic navigational aids and communications. Procurement and installation of all electronic navigational aids and communications by Civil Aviation Department of SCT. c. Administrative Design and implementation of a new cost accounting system for ASA covering all its airport operations and its headquarters. Maintain in operation the Government's Transportation Coordinating Committee (para 5.09).  - 4 - III. PROJECT IMPLEMENTATION A. Effectiveness and Start-Up 3.01 There were no special conditions of effectiveness. The Loan Agreement was signed June 28, 1974, and the loan became effective September 16, 1974. The Closing Date was established as June 30, 1978. B. Revisions 3.02 The first of three major revisions in the project occured because of land ownership problems at the Los Mochis airport site in November 1975 one month after the award of the earthmoving contract. SOP apparently did not have clear title to the airport land prior to starting construction, despite Section 3.07 of the Guarantee Agreement which specifically made this mandatory. After about 1,000 m of the flight strip had been cleared, a group of Ejidos claimed the land underlying the first 700 m. The Bank notified the Borrower that disbursements to cover work on the disputed land could not be made until the problem had been resolved. SOP relocated the entire airport 800 m along the runway centerline to avoid the disputed land. Additional land purchases were completed in December 1976 and the Bank advieed the Borrower that disbursements at Los Mochis could now proceed. 3.03 The second revision was more serious. Despite the agreement by the Government to limit construction at Campeche to an expansion of the existing airport, a supervision mission in February 1977 discovered that a contract for a completely new airport at the site earlier reviewed by the appraisal mission had been awarded in September 1976. After considerable discussion within the Bank and with the Government, it was decided to delete Campeche from the project description. In addition, since the city of Guaymas had expanded its existing airport with its own funds, the Government had delayed construction of the new airport from July 1976 to late in 1977. Finally, the Government's request to delete Guaymas completely was combined with the deletion of Campeche and the project description was changed in August 1977. The funds for both projects remained in the loan for use at other project airports. 3.04 The final revision concerned the construction of a cross wind runway for light aircraft at Tuxtla Gutierrez. This runway had been shown on the master plan of the airport, but during the preparation of the project, it had been agreed that construction would be delayed until such a runway was justified; a point in time not expected in the near future. However, a supervision mission in January 1980 discovered that PA contract to construct this second runway had been awarded in October 1979 one month after the previous supervision mission. At that time, the construction was being funded by the contractoir because SOP did not have money for that purpose in its budget. After discussions with SOP, documentation was finally provlded which  - 5 - allowed the Bank to accept the second runway as justified. Hlowever, fundirng for the runway was determined to be solely the responsibility of the Government and Rank financing was not affected. C. Implementation 3.05 During preparation of the project, it was decided that SOP would separate the various types of work they were responsible for into four packages for each airport: (a) airport buildings; (b) aircraft movement areas and access roads; (c) visual aids and electrical supply and distribution and (d) fuel storage and distribution. (SCT was to procure its necessary equipment directly from designated suppliers.) 3.06 International advertising was carried out and a list of prequalified contractors was prepared showing for which contract type and location the contractor wished to be considered. For the 40 possible SOP contracts over 130 contractors registered. Of these, less than 10 were international firms. Although international firms were invited to propose, none did and all contracts were awarded to local firms. 3.07 The original schedule agreed at negotiations called for the eight (b) type contracts to be awarded at about three week intervals with the other three contracts (which would take less time to complete) to follow so as to allow the completioris of all to coincide. However, from the very beginning, delays were encountered. The first award was to be nade in November 1974. This was delayed until February 1975. All eight of the type (b) contracts should have been awarded by the end of April 1975. The last two were indefinetely delayed and finally deleted from the project (para 3.03). As time went on, the delays became progressively worse. 3.08 The reason for the delays undoubtedly was the SOP airport budget. For instance, in December 1975 the request for Mex $428.5 million was reduced to Mex $200 million by the Government. Since other airport work in addition to the Bank project was in progress, SOP made reallocations of the available funds and the Bank project work program was stretched out. This financial problem continued through to the end of the project and was intensified when political considerations caused SOP to take on work not programmed originally during that time period, such as the sudden decision to enlarge Puerto Vallarta terminal or to build a completely new airport at Campeche rather than the modest expansion envisaged by the project. 3.09 An additional factor affected this problem. Traffic at Villahermosa and Minatitlan increased at a much greater rate than expected. As a result, the terminal buildings at both airports were about doub)?d in size which further delayed the project, as well as increasing their construction costs.  - 6 -- 3.10 The final factor affecting the project delays was the value of the contracts. Since they all had escalation clauses, adjustmerits for inflation kept raising the costs which further diluted the avaiLable budgeted funds. To avoid fully disbursing the loan premnturoly because of rising costs, thie disbursement rate was dropped from tho orIlginal 42% of total costs to 27%. Whle thlis extendloc thbe availability of loan ftunds it also added Lo tho 4elays. 3.11 As the various airports neared completion, SCT procured the required electronic air navigational aids and communication equipment. These were Installed by SCT and SENEAM (Servicios de la Navegacion y del Espaclo Aereo Mexicano) technicians. During the appraisal, this organization was then called RAMSA - Radio Aeronautica Moxicana, S.A. - and was partially owned by the airlines. It was nationalized in 1978 and now reports to SCT. 3.1Z With the exception of Guaymas and Caxapeche, all the proposed airports were conpleted and are now receiving regular scheduled service by the type of modern aircraft for which the project was conceived. Poza Rica was completed and dedicated by the President March 18, 1.978 and service by AeroNexico started March 29, 1979. Villahermosa was finished in April 1979 and service by both AeroMexico and Mexicana started May 5. The runway at Tuxtla Gutierrez was put in commercial operation when AeroMexico and Mexicana began operations August 25, 1980. However, in October 1976, 1800 m of the runway had been provided with a seal-coat of asphalt so that an insect control program (cattle screw worms) could operate its aircraft on an interim basis from the new airport. Tapachula was completed and AeroMexico began operations in December 1962. The runway had been used by agricultural aircraft as early as two years before. L.os Mochis was completed in December 1982. A regional airline, AeroCalifornia, began operations with DC-9 aircraft in October 1982. Minatitlan was finished in December 1982. Mexicana transferred its operations to the new airport in October 1982. The 35 km access road from Minatitlan and Coatzacoalcos besides providing acces3 to the airport is being heavily travelled by local. residents, as well as farm and manufacturitng vehicles (both for supplies and employees). In addition to being used by the large commercial transport aircraft, each airport now has a population of smaller (general aviation) aircraft based at the airport 3.13 The constructior of all of the facilities funded by the loan was of good quality. Any minor problems which developed were rectified. D. Reporting 3.14 SOP provided a quarterly construction cost report through out the project but despite repeated efforts by the Bank, ASA never provided any reports voluntarily. Attempts were made by various supervision missions to have the Borrower, NAFINSA, compile a composite report of SOP and ASA without success. In fact, during the latter part of the project, ASA was reluctant to provide any information.  -7- E. Procurement 3.15 There were no problems with the procurement handled by SOP. Bank guidelines were followed throughout. 3.16 SCT was authorized to negotiate directly with certain equipment suppliers rather than advertise. SCT did this but combined project purchases with non-project purchases in such a way that determining amounts to be reimbursed was very difficult. Repeated requests ti SCT and NAFINSA to clarify the records were unsuccessful and fii.ally NAFINSA stated that no more applications for reimbursement from Category II, Equipment, would be made and requested that all remaining funds in that Category be transferred to Category I, Civil Works. The Bank complied. F. Performance by Contractors 3.17 Twenty-four major and six minor contracts were issued by SOP. The civil works contractor at Los Mochis ran into financial trouble because of the delay of work and eventually was replaced by SOP. Except for this, all of the work was of acceptable quality and the contractors performed well. The work done by and for SCT was also acceptable and no problems were encountered. G. Performance of Consultants 3.18 SOP and SCT did not engage consultants for the project. They performed all engineering design and construction supervision with their own forces. This work was acceptable. (SOP did subcontract some of the architectural design work with local architects but the control of the project remained with SOP.) H. Project Costs 3.19 The original bid prices of the earthwork contracts exceeded the appraisal estimates by an average of about 12%. The contract prices for the first four building contracts all awarded in 1976 exceeded estimates by an average of about 8% but the last two contracts awarded the latter part of 1978 exceeded the estimates by about 44%. The fuel system contracts rose from 65% above estimates for contracts awarded in early 1977 to 500% over estimates for the last contract awarded in December 1978 for an average of about 225% over estimates for the six contracts. The visual aids contracts followed a similar pattern. The contract awarded in mid-1977 was 39% over estimates, while that awarded in December 1978 was 184% over estimates. The six contracts averaged 104% over the original estimates. 3.20 The very high costs of the fuel systems could be explained by the boom in fuel pipeline work in Mexico during that period. The 100% rise in the visual aids costs reflect the very high foreign component of this type of material and the devaluation of the Mexican peso from 12.5 to about 22.5 per U.S. dollar. Table 3.1 compares the appraisal estimates with the actual final costs of each contract. Table 3.2 shows the project cost per airport.  - 8 - I. Disbursements and Financial Sources 3.21 The reduction of the Government budget allocation to SOP plus an increase in the scope of this project in addition to others not contemplated at the time of appraisal Further aggravated by an unrealistic implementation schedule established by SOP for the project, combined to make disbursements run substantially behind the appraisal forecast. Table 3.3 compares the appraisal and actual schedule of disbursements. Full disbursement had been expected by June 30, 1978, but only 44% of the loan had actually been disbursed at that time. In total, disbursements ran four years behind the appraisal schedule, with final disbursements made in mid-1982. 3.22 All funds not provided by the loan were provided by the Government in the annual SOP investment budget.  - 9 - IV. TRAFFIC AND OPERATIONS 4.01 Air traffic in Mexico hasi grown very rapidly 4. the last few years. The best indicatcr is passenger-movewaents which have developed as follows for the whole of Mexico: Arriving and Departing Passengers (millions) Domestic International 1976 10.8 4.0 1977 13.8 4.2 1978 14.8 5.3 1979 19.3 6.5 1980 22.6 7.1 1981 24.8 7.4 4.02 For the project airports traffic compare' to forecast is indicated in Table 4.1. Two of the project air orts are in areas of rapid petroleum development which clearly influenced traffic growth. In the others, traffic is slightly below the SAR forecast. Delays in completing the new airport is the dominant factor affecting the airport which shows the least growth (Los Mochis). For the year 1982 despite the fact that the airport was not quite finished, traffic has increased dramatically and for 1983 traffic is now expected to be close to the original forecast. 4.03 The results compared to the SAR forecasts of aircraft movements show more uneven growth. Shifts to heavier aircraft, as well as from air-taxi services to scheduled flights, have been very difficult to predict with accuracy. The overall number of flights, nevertheless, is not as important as the number of scheduled flights and passengers for the operations and financial situation of the airports. 4.04 Two airports were deleted from the Bank-financed project (see para 3.03) Guaymas and Campeche. Traffic at both has developed less than anticipated. As an example, Guaymas in 1981 had only 49,494 passengers, compared to a forecast for 1981 of 79,100 and Campeche in 1981 4,003 passengers, compared to a forecast for 1981 of 13,800. For the six project airports in 1981, total arriving and departing passengers were 1,254,000, compared to a forecasted 950,000 or 32% higher than expected. This was primarily the result of higher traffic at Villahermosa and Minatitlan indicated above. 4.05 As anticipated, jet aircraft now operate to the six project airports. Due partly to higher traffic growth, a shift to larger aircraft has taken place more rapidly than anticipated. Both main airlines, AeroMexico and Mexicana now operate 155-seat aircraft for Minatitlan, Tuxtla-Gutierrez and  - 10 - Villahermosa with 85-seat aircraft to the other airports. This change to more cost-effective aircraft has meant a substantial decrease in real terms in air fares. The average single air ticket to the three largest airports above changed from US$33.2 in 1976 to US$33.5 in early 1982. At the same time, as a close comparison, consumer prices in the United States increased some 66%, and operating cost per hour for 2-engine jet aircraft in Ut.S. domestic trunk service grew from US$835 in 1976 to US$1,718 ir 1981. These cost changes in view of the proximity of the United States broadly represent US$ cost changes in this period.  - 11 - V. FINANCIAL PERFORMANCE OF THE BORROWER AND THE BENEFICIARY 5.01 Although virtually all of the loan was provided to SAHOP through Nacional Financiera S.A. (NAFINSA) on behalf of the Government, the main beneficiary is ASA (see para 1.05). Most of the financial provisions in the Guarantee Agreement with the Mexican Government, therefore, relate to ASA and its financial performance has been the most important. The Loan Agreement with NAFINSA essenOially only integrates the loan with the SAHOP budgets for conrstruction. SCT, apart from its responsibility for ASA, has had no direct influence on the financial performance. Indirectly, however, SCT has been a limiting factor constraining tariff increases for ASA and SENEAM (see para 6.02). A. Financial Performance 5.02 The financial perfornance of ASA reflects a period of substantial growth. Not only has traffic over five-year period 1976-1981 more than doubled, but the integration of fuel services (para 6.02) has made a major impact on already rapidly expanded yearly revenues and costs. The development in the 1976-1981 period is shown in Tables 5.1-5.2. Despite these favorable developments, the overall financial performance of the borrower for certain years has fallen short of meeting some of the financial covenants. The main reason for this is inadequate tariff increases in relation to inflationary increases in operating costs. Recently, this has been recognized and a substantial increase, particularly in passenger departure fees, has taken place in 1982 after ASA became responsible for the collection of these changes late in 1980. Still even with these changes, working and operating ratios have been higher than expected, particularly for the project airports (Table 5.3) where for 1980 a figure of 150 for the operating ratio was the target and 155 was achieved, despite higher traffic. In 1981 this improved to 117. Return on net fixed assets has, for most of the years, been higher than the 6% target for the operations as a whole (Table 5.4): Return of Net Fixed Assets Operating Ratlo See Table 5.4 See Table 5.1 1975 6.7 107 1976 .1 129 1977 2.0 134 1978 8.0 114 1979 12.0 100 1980 13.3 100 1981 7.3 103 Mostly, however, the return on Net Fixed Assets has been achieved through interest income or the passenger departure fee. Without these the operating ratio indicates a negative return on assets. Furthermore, assets have not been continuously revalued since 1976.  - 12 - 5.03 In sumtnary, not all of the financial targets have been met, alshough the most important ones have for most of the time, if fue- revenues are included. Fuel supply services are not nornally a part of air-ort operations. A cost accounting system was established, reNaluation of assets did take place, independent auditors were retained and a Government return (see Table 5.4) of 6% was achieved in 5 years of 7. The project airports, however, had an operating ratio slightly exceeding 150 irn 1980 and ASA without passenger departure fees did not earn a 4% return (para 5.07 below). The most serious shortcoming, however, is that governtment counterpart funds to the executing agency (SAHOP) have not been adequate and, in fact, delayed implementation by some three years, d,spite the deletion of two airports, Campeche and Guaymas, from the project. B. Compliance with Loan Conditions Conditions Not Complied with in Guarantee Agreement 5.04 Article Ill, Section 3.01(d). The funds required for the project were not provided in quantities large enough to meet the agreed project schedule (para 3.08). 5.05 Article III, Section 3.05(a). In two instances major changes to the project were not presented to the Bank for review prior to the initiation of construction(paras 3.03 and 3.04). 5.06 Article IV, Section 4.06(ii) and (iii) - ASA did not provide the Bank with its annual audit and financial statement as required, and in fact, refused to provide this information on two Enissions. 5.07 Article IV, Section 4.09(a)(ii) - ASA was not able to meet the 4% rate of return on its operations when the passenger departure fee is not included in its revenues (tables 5.1-5.2). 5.00 Article IV, Section 4.09(a)(iii) - ASA has been able to meet the 6% rate of return on its airports operations (e:xcluding fuel supply services) even with the passenger departure fee included in its total revenues only once (1979). rhis, in combination with Para 5.07, indicates that airport user charges for other than passengers, i.e., airlines, are not high enough (para 5.02). Net revenues from fuel supply services has cornpensated for this shortfall since 1978. Conditions Met in Guarantee Agreement 5.09 Article III, Section 3.06 - The Government is maintaining its Transportation Coordinating Committee and SAHOP did engage consultants to formulate an airport development plan for the country. T:!is plan has been followed in all new airport development. 5.10 Article III, Section 3.07 - SAHOP did purchase all land required for development of the project prior to construction on that land with one exception. In that case, a claim arose after work had started. Frota that moment until all claims had been resolved, no further work was done at that airport (Los Mochis) (para 3.02).  - 13 - 5.11 Article III, Section 3.08 - SCT has continued to maintain an adequate air traffic control and aeronautical communication system throughout the country first through RAMSA and now through SENEAM. 5.12 Article IV, Section 4.08 - ASA did identify all its assets and entered the new valuations in its accounts effective December 1976, however, no further revaluation has been carried out since that time (para 6.03).  - 14 - VI. INSTITUTIONAL DEVELOPMENT 6.01 The Mexican Government has several entities concerned with civil aviation. At the level of central government, the main departments are Secretaria de Obras Publicas y Asentamientos Humanos (SAHOP), previously called SOP, responsible for civil works construction and maintenance, including airports, and Secretaria de Comunicaciones y Transportes (SCT), responsible for operatin& the transport system. At the time of appraisal, SAHOP was building and maintaining most major airports with an agency under SCT called Aeropuertos y Servicios Auxiliares (ASA), operating these airports and other agencies providing services like air traffic control and fuel supply. Air traffic control and communications was then provided by a semi-private company called Radio Aeronautica Mexicana S.A. (RAMSA) and fuel at small airports provided by Distribuidora de Gasolina S.A. (DIGAS) and at larger airports by Nacional de Combustibles de Aviacion (NACOA). RAMSA, despite being a separate company, was also under the responsibility of SCT. 6.02 In late 1978, the Government bought the private shareholding in RAMSA and established a new Governmental agency to handle its functions. This new agency is called Servicios de Navegacion y del Espacio Aereo Mexicano (SENEAM). In 1978-1980 this was followed by an integration of fuel services provided by NACOA and DIGAS into ASA. Finally, in 1981 the responsibility for maintaining runways, taxiways and other airport civil works was transferred from SAHOP to ASA. At the same time, responsibility for collecting airport passenger fees became the task of ASA although the proceeds still goes to the Central Government (Hacienda). 6.03 It is obvious that a project only affecting 4% of the air passengers in Mexico can have only limited impact on the institutions involved. Nevertheless, particularly in the early stages of the project, some institutional improvements did take place. An ASA cost accounting system was established, an identification and revaluation of assets was made, maintenance cost and responsibilities formerly under SOP have been transferred to ASA and coordination between the agencies has improved, though still short of what is desirable.  - 15 - VII. ECONOMIC REEVALUATION A. General 7.01 As indicated in para 4.01, air transport has been a rapidly growing mode of transport in Mexico. Its potential was recognized by the government in a National Airport Plan developed in 1964. The Bank-financed project can be best described as the second group of a-rports in this development effort. At the time of appraisal nine new airports were completed and two were under construction. Mexico is a country of widely dispersed communities and some rapidly growing urban centers, primarily Mexico City. To help integrate the country and promote a more even urban development, the Government has attempted to create a dependable air transportation system at a reasonable cost to users. The two major Mexican airlines were encouraged to buy more efficient aircraft but substantial infrastructure improvements were needed at the same time. The economic evaluation focused on the effects of such improvements on the eight airports that were part of the Bank project individually, since most were part of a hub and spoke system with Mexico City as the hub. 7.02 The evaluation focused on the transport cost savings to the operators directly affected, i.e., primarily the main airlines. As was shown in para 4.05, these savings were largely passed on to the travelers. Other benefits were savings due to the better use of land for abandoned previous airports sites and time savings to passengers. This reevaluation mainly reestimates the actual aircraft cost savings based on present traffic with anticipated growth. In two cases, benefits from better land use and passenger time savings were considered important enough to be included in the new estimate. In the other cases, the residual land values had not been received either because the land had been ceded for community use or because the old airport continued operating for small private aircraft. 7.03 The eight project airports in 1981 served almost 1.3 million passengers of which, Campeche and Guaymas, the two airports deleted from the Bank project only accounted for 53,000. This gives an indication that their exclusion from the project was a correct decision from an economic point of view in both cases (see 3.03). 7.04 A complicating factor for the economic analysis is the high inflation rate under this period and that the peso has been undervalued at certain times. Construction costs with 1975 as base ( = 100) in 1981 was 407 whereas consumer prices had only increased to 335 and the exchange rate changed only from 12.5 pesos/$ to 27.5 pesos/$ from 1975 to 19$1). To convert construction costs and benefits to the same yearly base can, therefore, yield different results depending on the methodology used. Converting all peso amounts to US$ using current exchange rates, thus ignoring any correction for real cost increases, leads to an overvaluation of construction costs in US$. This  - 16 - overvaluation compensates for much of the effect of real (US$) construction cost increases. The rate of return using this method is 17% for the six airports with individual rates varying from 12% to 21%. (See Table 7.1). 7.05 Ignoring exchange rate influences, another method converts construction cost by an index for these costs to the price level of 1981, to be compared with benefit calculations in the prices (in pesos) of that year. This preferred method gives, again, a return of 17% for the six airports with individual rates varying from 12% to 22% for the different airports. 7.06 For both methods, the price level for costs and benefits has been 1981 assuming an 18-20 year life of the investment and a continued growth of traffic of ?OX, compared to an average annual growth rate for all domestic air traffic in Nexico of 18% the last five years and about 16% for the six project airports. 7.07 The returns estimated above indicate that the project despite delays and cost overruns is economically viable. The main reason why rates are lower than the 22-29% indicated in the SAR is primarily that real cost increases did take place to a larger extent than anticipated, especially for the most expensive airports. Thus, the total cost in current US$ wenr from about US$59 million to US$115 million despite deletion of two airports.  - 17 - VIII. ROLE OF THE BANK 8.01 The Bank colitributed throughout project preparation and execution by reviewing and commenting on project selection and primarily its engineering aspects. During implementation, the project composition was changed so that one of the airports (Campeche) was dropped when the Government wanted to construct a complete new airport. On the basis of traffic development since, both the original appraisal decision to stay at lower level of development of this site and this Bank action were clearly justified. The Bank also showed flexibility to change the scope of the project as warranted by developments unforeseen during project preparation. As a result of very successful petroleum development traffic in Villahermosa and Minatitlan, terminal buildings there needed a very substantial increase in size which the Bank approved. The Bank also agreed to a deletion of the new airport at Guaymas to allow these buildings, as well as other higher priority work to be carried out. 8.02 The Bank's role in institution-building has been more limited. Some of the financial covenants have not been consistently met but by and large the institutions in the sector are now better coordinated than before and a more realistic distribution of tasks have taken place, with ASA now, for example, responsible for all airport maintenance. 8.03 At the time of the Completion Report Mission, there was serious considerations within ASA, SAHOP and SCT, that the entire responsibility for airport design, construction and operation would be transfered to ASA under the new administration. If this, in fact, happens, then most of the coordination and administration problems forseen by the Bank's Executive Directors during Board Presentation that have not already been taken care of will be rectified.  - 18 - IX. CONCLUSIONS 9.01 The Regional Airports Project has been successful despite cost and time overruns. The primary objective of providing a number of local population centers with much improved airport Infrastructure has been met thereby providing significant direct savings to users and assistance in integrating thie country. 9.02 Unfortunately, the financial capability of the Mexican Government was overestimated and some of the priorities had to Se modified. Generally, however, changes made were well justified and the project well executed despite cost increases mainly due to inflation.  MEXICO - LOAN 1022-ME PROJECT COMPLETION RFPaIT REGIONAL AIRPORTS DEVELOPHENI PROJECT Prices Shaun in Current Mexican Pesos Appraisal and Actual Estimates of Project Cost Poza Rica Villahermosa 'tuxtla Gutierrez blinatitlan lapachula Los Sotbis ConttTact type Civil Contractor Constructora Ballesteros. S.A. Contratista Nacional, S.A. Constructors. de la Cerd., .A. ngnroy Arquirectc. SA. Proyectos y Ad... S.A. Cfe S.A. de C_T. Award, Start Finisk Dates 2/75, 5/75, 3/79 11/74, 1/75, 5/79 11(74, 1(75, 6t81 L3[74, Z175, 1(82 3175, 4175, 10162 6f]5, 8115, 11182 Appraisal Est. 32.890.000.00 55.100.000.00 66.790.000.00 76.760,000.00 42,160,000.00 37,330,000.00 Contract Est. 40,895.586.03 76.265.979.52 74.998.597-54 88.549.282-81 35.977,168.30 39.022.033.69 Final Cost 85,432,338.22 139,710,230.27 294,557,685.32 630.152.646.23 95.450.000.D3 215.673.640.00 Buildings Contractor lecalcos Especialistas en Ingenieria Latiinoamericana. Grupo Constructor J. de R.S.A. Estruc-tras y Cicnrarin..es. Constru-t-ra to. S-A. nenieros rq- Conscruccion, S.A. S.A. S.A. tectos de Vxico. S.A Award, Start Finish Datcs 8176. 9J76. 3179 9/76, 10176. 5/79 11!75. 12/75. 6/81 10/76. 11/76. 7182 8/78. 9/78. 10/82 8/78. 10/78, 12/82Est Appraisal Est. 14,200,000.00 i6,331,000.00 17,054,000.00 16.420.000.00 18.116.000.00 22,600.0OD.00 Contract Esc. 16,523,117.03 16,937,227.25 20,976,975.95 15,860,56-.58 40.Z65.975.67 36.261.286.24 Final Cost 43,823.117.03 251.785.056.00 96.219.975.95 76.386,000.00 94,264,760.10 131,245.872.21 Est. Visual Aids C Contractor ATG, S.A. Ingenieria Latinoacericana, A.T.G., S.A. Ingenieria Latiuoaoericaca, Abastecedores Geerales, A.T.G., S.A. Award, Start S.A. S.A. S.A. Finish Dates 4/177, 4177, 3/79 4177, 5177, 5/79 9177, 10177. 6/81 10/78. 11/78. 7182 8178. 9)78. 10182 10178. 11/72. 11/79 Appraisal Est. 2,720,000.00 3.627,000.00 3,500,000.00 3,670,000.00 3.480,000.00 3,155,000.00 Contract Est. 7.015.195.93 6.803.387.00 4.880.462.16 9.657.924.91 7,686,974.34 9.094,528.87 Final Cost 11.015,195.93 26.240,951.31 66,010.462.16 29.485.000.00 16.800.000.00 28.680.000.00 Fuel Storage and Distribution Contractor Ingenieria Paparelli, S.A. Ingenieria Latinoamericana, Constructora E.l., S.A. Constructores e lngenieros. S.A. Ingenieria Latin- lIgoni-ria Latir- S.A. acericana, S.A. acericana, S-A. Award, Start Finish Dates 3177. 4177. 3/79 4/77. 5/77. 5/79 8177. 10177. 6181 10/78. 11/78. 12/82 Est. 8/78, 9/78, 10/82 10/78. il/78. 11/82 Appraisal Est. i,580,000.00 2,780.000.00 2.460.000.00 1,610,000.00 1.660,000.00 1.580.000.00 Contract Eat. 4,985,980.21 4,822,934.45 4,708,358.00 5,349,573.Z9 5,486,432.29 5,6-4.693.06 Final Cost 5.985.980.21 13,251,313.14 6,578.358.00 9.056,595.35 Est. 14.456,639.66 12,570,000.00 :Navaids Contctor 8cTr/ENeAt SCT/S'I EAM SCT7S5NEAM ..LCSL%EA?' SulISEIEA