Mexico - Lazaro Cardenas Industrial Port Project

Document of The World Bank FOR OFFICIAL USE ONLY >X)i -2-45o -ME, Report No. 50251b4ME STAFF APPRAISAL REPORT MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT May 29, 1984 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 disciosed witnout Worid Bank autihorization.  Currency Equivalents Currency Unit = Peso (Mex$) US$1.00 = Mex$ 25 in December 1981 = Mex$ 55 in February 1982 = Mex$ 70 in August 1982 = Mex$ 120 in June 1983 = Mex$ 150 in December 1983 Fiscal Year January 1 - December 31 Weights and Measures Metric: British/US Equivalent I meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 kilogram (kg) = 2.20 pounds (lb) 1 metric ton (m ton) = 2,205 pounds (lb) 1 liter (1) = 0.27 gallon (gal) 1 hectare (ha) = 2.47 acres Abbreviations BANPESCA - Banco Nacional Pesquero y Portuario, S.A. CFE - Comision Federal de Electricidad CGPPI - Coordinacion General de Proyectos de Puertos Industriales CNCP - National Port Coordination Commission DGCF - Directorate General for Federal Roads DGGI - Directorate General for Irrigation Works DGOM - Directorate General for Marine Works DGOPD - Directorate General for Port Operation and Development DGP - Directorate General for Planning DGVF - Directorate General for Railway Infrastructure ESP - Port Service Company FERTIMEX - Fertilizantes Mexicanos, S.A. FONDEPORT - Fondo Nacional para los Desarrollos Portuarios N de M - National Railway PMT - Productos Mexicanos de Tuberias, S.A. SAHOP - Secretariat for Human Settlements and Public Works SARH - Secretariat for Agriculture and Hydraulic Resources SCT - Secretariat for Communications and Transport SEDUE - Secretariat for Urban Development and Environment SICARTSA - Siderurgica Lazaro Cardenas-Las Truchas SPP - Secretariat for Programing and Budgeting TEU - Twenty foot equivalent units TUM - Multiple Use Terminal  STAFF APPRAISAL REPORT FOR OfFICUAL USE ONLY MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT TABLE OF CONTENTS Page No. I. PROJECT SUMMARY ...................... ..................... 1 II. THE INDUSTRIAL PORTS PROGRAM ........ 3 A. Industrial and Urban Development............... 3 (i) Background. 3 (ii) The Industrial Ports Program ............ 3 B. Transport and the Port Subsector ........ 5 (i) Transport Development and the Economy. 5 (ii) Ports and Maritime Transport.................. 7 C. Institutional Framework .....9 (i) Transport Planning and Organization .......... 9 (ii) Port Administration ...... 9 (iii) The Industrial Ports Program .................. 10 D. Developments in the Lazaro Cardenas Region ......... 11 E. Past Bank Participation and Experience ............ .. 13 F. Role of the Bank and Lending Strategy ............... 13 III. THE PROJECT ... .............. 14 A. Objectives ...................................... 14 B. Description ................... ...... ............. 14 C. Implementation, Costs and Financing ............. ...... 17 D. Project Execution and Coordination ................. 18 E. Financial Framewor' .. ... ...................... 18 (I) ESP ...................... ...... ....... .*.. 19 (ii) FONDEPORT ........................ . ..... .. 20 (iii) The Federal Government ....................... 22 This report is based on the findings of an appraisal mission which visited Mexico in September/October 1983 and a post-appraisal mission of January 1984. The missions comprised Messrs. P. Engelmann (Engineer), Z. Raanan (Financial Analyst), B. Baratz (Environmental Affairs Specialist), and C. Batey (Flood Control Specialist) and Ms. K. Sierra (Economist). Mr. D. Hill (Engineer) also participated in the post-appraisal mission. The report has been edited by Miss V. Foster. This document has a restricted distribution and may be used by reipients only in the perorac ofi their official duties. Its contents may not othewise be discbsed without World Bank authorizaion  (ii) TABLIE OF CONTENTS (continued) Page No. F. Economic Justification and Benefits .................. 23 (M) Port Traffic Forecast ............................. 23 (ii) Economic Justification .......................w... 24 G. Project Risks and Sensitivity Analysis .............. . 27 IV. PROJECT IMPLEMENTATION DETAILS ............. ..28 A. Cost Estimates, Finance and Disbursements ............. 28 B. Execution and Procurement ............................. 30 C. Special Account ............. ........................ . 32 D. Accounting and Auditing ...... ........................ 32 E. Semi-Annual Consultations and Project Monitoring ....0 33 V. AGREEMENTS REACHED AND RECOMMENDATION ........ ........ 33 TABLES 2.1 Population of Principal Urban Centers, 1960, 1970, 1980 36 2.2 Regional Distribution of Economic Activity 37 2.3 Industrial Ports Program Investments, 1979-1984 .38 2.4 Investments at Lazaro Cardenas Industrial Port, 1979-1984 39 2.5 Historic Transport Investment 40 2.6 Total Traffic through Mexican Ports by Major Commodity Groups, 1978-1982 ....... ........................... 41 3.1 Lazaro Cardenas Actual and Forecast Traffic, 1979-1989..... 42 3.2 Economic Evaluation and Sensitivity Analysis......o.. 43 4.1 Project Cost Estimates ................................... 44 4.2 Dredging Program .............. . ................................... 45 4.3 Financing Plann....................... 46 4.4 Estimated Schedule of Disbursements.............-...000. 47 4.5 Executing Agencies.................................... 48 ANNEXES 1. Environmental Conditions in Lazaro Cardenas................ 49 2. Outline Methodology for Economic and Financial Analysis of Dredging Program ............ ........... 52 3. Description of the Equipment Component ..................... 55 4. Flood Protection ................. 0..... 58 5. Details of Training Component .. 64 6. Financial Analysis ..66 7. ESP Action Plan ........... . ........ ..............84 8. Port Traffic Analysis.. .............. . .................. 85 9. Details of the Economic Evaluation ........................ 95 10. Reporting and Monitoring Requirements ..................... 107 11. Related Documents and Data Available in the Project File... 109  (iii1) TABLE OF CONTENTS (continued) CHARTS 25805 Organization of SCT 26028 Organization of the Empresa de Servicios Portuarios, Lazaro Cardenas 26069 Organization of FONDEPORT 26010 Project Implementation Schedule MAPS IBRD 17796 - Population and Industrial Distribution IBRD 17797 - Transportion Network and Industrial Port Locations IBRD 17795 - Existing Facilities and Project, and Future Master Plan  MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT I * PROJECT SUNMARY Borrower: Banco Nacional Pesquero y Portuario, S.A. (BANPESCA). Project Executing Agency: Secretaria de Comunicaciones y Transportes (SCT) Guarantor: United Mexican States. Amount: US$76.3 million, including capitalized front-end fee. Terms: Fifteen years, including three years of grace at the standard variable interest rate. Project Description: The proposed project supports the Government's strategy for devel- opment of the Industrial Ports Program, to achieve a more balanced distribution of population and economic activity, a more organized expansion of the industrial plant, coordinated development of port infrastructure and services and the overall strengthening and mod- ernization of transport activities. Specifically, the proposed project would help: (i) ensure efficient operation of existing terminals in the industrial port of Lazaro Cardenas; (ii) streng- then the administration and finances of the industrial port; (iii) improve access to, and increase the utilization of, industrial port installations; (iv) provide effective pollution and flood control in the port area; and (v) maintain a dialogue on remaining institutional and related policy issues affecting the performance of the port subsector. To achieve these objectives, the project includes: (a) construction of roads, rail installations and provi- sion of maritime access to industries, facilities and services; (b) acquisition of general cargo handling equipment; (c) installa- tion of sewerage treatment systems for effluents; (d) provision of equipment and shops for solid waste management; (e) land prepara- tion and services for small and medium-sized industries; (f) provision of flood protection works; and (g) consulting services and training. Risks: The proposed project faces three risks: (i) institutional, since it is the first project under the newly established Industrial Ports Program; its execution and operation will require coordina- tion among various sectoral Government agencies. The project has been designed to reduce these risks; (ii) prolongation of the economic recession could affect projected traffic levels and the pace of industrial investment at the port. Sensitivity analyses indicated that the economic return of the project would not be affected significantly by foreseeable variations in traffic volumes, or project costs; and (iii) delays in industrial invest- ment and production could affect the viability of the maritime access component of the project. This component has been tranched in order to minimize the risk.  -2- Estimated Project Costs: Local Foreign Total -(in US$ million)- Road, Rail and Maritime Access 11.4 23.7 35.0 Equipment 3.2 8.5 11.7 Environmental Protection 2.7 3.3 6.0 Small and Medium Scale Industrial 1.3 1.1 2.4 Park Flood Protection 8.1 18.9 27.0 Technical Assistance and Training 1.1 2.9 4.0 Total Base Cost i/ 27.9 58.2 86.1 Physical Contingencies 3.1 5.9 9.0 Price Contingencies 5.4 12.0 17.4 Total Project Cost 1/ 36.4 2/ 76.1 112.5 Front-end fee 0.0 0.2 0.2 Total Cost 36.4 76.3 112.7 Financing Sources: Local Foreign Total (in US$ million) Proposed IBRD Loan - 76.3 76.3 Government 3/ 36.4 - 36.4 Estimated Disbursements: (in US$ million) Bank Fiscal Year 1985 1986 1987 1988 1989 1990 Annual 5.8 22.5 18.4 16.7 10.5 2.4 Cumulative 5.8 28.3 46.7 63.4 73.9 76.3 Rate of Return: The project has an overall economic rate of return of 23 percent. The maritime access works would be evaluated and approved in tranches, and would have a minimum economic rate of return of 12 percent. 1/ Totals may not add up due to rounding. 2/ Includes local taxes estimated at US$12,100,000. 3/ Includes ESP and FONDEPORT internally generated funds.  -3- II. THE INDUSTRIAL PORTS PROGRAM A. Industrial and Urban Development (i) Background 2.01 Mexico's deep-rooted structural problems have persisted through the high growth period of the mid- to late-1970s, the economic crisis of 1982 and the subsequent recession. These social and economic problems include poverty, income and wealth inequality, unemployment, and urban and regional imbalances. The Industrial Ports Program, which this project supports, was formulated in 1978 in response to the problem of regional income disparities. Mexican policy-makers in past and present administrations have been concerned that, if the trend toward concentration of population and economic activity in Mexico City and the central region were to continue at the same pace as in the past, the resulting regional distortions would exacerbate social imbalances, and that the already difficult urban problems in the Mexico City Metropolitan zone, such as an acute water supply problem, pollution, traffic and the high cost of urban services, would prove to be unmanageable. Between 1970 and 1980, the population of the Mexico City Metropolitan zone increased at an average annual rate of 5.7% (Table 2.1). The State of Mexico grew at an even faster rate of 7% p.a., or over double the national growth rate. By 1980, some 24% of Mexico's population lived in the Mexico City Metropolitan zone, while 35% lived in the central region, defined as the Federal District and six surrounding states (Map IBRD 17796). Manufacturing and production are even more highly concentrated in the Mexico City area than is population. A 1975 survey indicated that, while the Federal District and the State of Mexico contained about 25% of the total population, they accounted for about 50% of total value added in manufacturing (Table 2.2). The Mexico City area produces some 37% of the national non-agricultural GNP and provides employment for 45% of the industrial workers. 2.02 During the last administration, the Government took a series of steps toward the definition of a national spatial development policy. The Law of Human Settlements (1976) provided the legal basis for the planning and implementation of a spatial development strategy later defined In the National Urban Development Plan (1978). The policies presented aim at achieving a national urban system which, by the year 2000, would consist of three cities of more than three million people each (Mexico City, Guadalajara and Monterrey), 11 other cities with more than one million inhabitants an! 17 others with over half a million each. The priority of these policies in Hlexico's medium- to long-term development strategy has been reaffirmed in the present administration's National Development Plan issued in May 1983. (ii) The Industrial Ports Program 2.03 The Industrial Ports Program was a key element of the overall Government strategy to relocate population, employment and industrial development away from the central plateau to coastal areas. In addition to decentralization, the Program had the objectives of improving national  -4- transport infrastructure and of expanding the industrial base and the promotion of exports. The public sector's role centered on the development of infrastructure, including prepared industrial park land with waterfronts and multiple use port facilities, at several industrial ports, which would allow industry to take advantage of direct access to maritime transport. Private sector initiatives at the industrial ports were supported by actions taken under the Industrial Development Plan of 1979. This Plan had, as one of its objectives, the promotion of industrial investment in accordance with regional priorities. Under the Plan's industrial investment incentive scheme, industry locating at the industrial ports received tax rebates and special prices for energy inputs. 2.04 The Industrial Ports Program was given high priority in Mexico's public sector investment program, and construction of access channels, rail and road connections, industrial park and port land development, water and sewerage supply and urban development at four industrial ports were initiated. The four industrial ports included in the Program were (MAP IBRD 17797): (a) Lazaro Cardenas on the Pacific Coast. This existing port was first developed in the early 1970s to serve the Siderugica Lazaro Cardenas- Las Truchas (SICARTSA) steel plant, and subsequently developed to provide a wharf for the fertilizer plant, Fertilizantes Mexicanos (FERTIMEX), and a multi-purpose cargo terminal. It was to be expanded to accommodate a grain terminal; food processing, foundry and steel pipe plants; an oil refinery; chemical plants; and ship construction and repair facilities; (b) Altamira on the Gulf Coast. Located about 15 km north of Tampico, an entirely new port was to be developed in about 60 sq km of flat, barren terrain adjacent to a straight, sandy coastline. Major steel and related industries, grain import and food processing facilities and petrochemical and aluminum industries were expected to locate on this site; (c) Laguna de Ostion on the Gulf Coast. Located north of Coatzocoalcos, a new port was to be constructed for major oil terminals and petrochemical industries; and (d) Salina Cruz on the Pacific Coast. A new oil terminal and a new industrial port were to be constructed within two new harbor basins, adjacent to an existing general cargo port, along with petroleum- related industrial facilities. 2.05 Between 1979 and 1983, a total of US$755 million was invested by the Government at these sites, exclusive of investment in industrial plant (Table 2.3). Most of these resources were directed at Lazaro Cardenas (37% of total) (Table 2.4) and Altamira (34%). Investments peaked in 1981 and then fell, in real terms, in line with the urgent need to reduce public sector investment after the 1982 economic crisis. Until the recession and the need to reassess the proper scope and timing of the Program, infrastructure at the four sites was built at an extremely rapid pace. During the initial stages of  -5- planning and execution, there was insufficient technical, economic and financial analysis. Government planners relied upon global appraisals of potential demand for port facilities and for industrial park land, and some of the civil works were implemented without proper physical studies, which, in turn, led to failures e*ie to inadequate designs, particularly at Altamira. In addition, not enough Ahasis was placed upon the design and implementation of an administrative and financial framework to operate the completed works. Of the four sites, Lazaro Cardenas is the most advanced, requiring limited additional investments to make the port fully operational and to provide flood and environmental protection. A.t Altamira, a new harbor with a 12 m draft has been created, and large areas of land have been prepared for industrial development. The first stage of a public multi-purpose terminal with 270 m of wharf is almost complete, but terminal operations have not yet begun. At Laguna de Ostion and Salina Cruz, civil works for new ports were started by PEMEX, but were suspended before any usable installations were completed and are not being carried forward at this time. 2.06 Industrial development at the industrial ports has progressed at a much slower rate than expected when the Program was conceived, partly because of the recession, which has halted new investment thrcughout Mexico, but also because of overly optimistic projections of demand for industrial land at the port sites. By the end of 1983, only four of the 13 industrial establishments which had been expected to locate at Altamira had been constructed. None of these have waterfront parcels. Lazaro Cardenas has fared better, with four new industrial plants (besides SICARTSA and FERTIMEX) or specialized terminals currently under construction. 2.07 In its recently published National Development Plan (May 1983) the new administration has reaffirmed the priority of the Industrial Ports Program, not only as a means of promoting decentralization but also as an element in its efforts to expand exports. The investment strategy being pursued by the new administration focuses on completion, at a minimum cost, of necessary works at Lazaro Cardenas, and on a full review of the proper pace and scale of other investments under the Program. In addition, more emphasis is being placed on the role of these ports within the overall national ports system, and on the establishment of effective admir.istrative and financial frameworks. While well conceived investments in the Industrial Ports Program can contribute to overall and regional economic growth, these alone will not have a major impact upon slowing Mexico City's growth. To achieve this, the Government must improve its pricing policies in the central region by, inter alia, eliminating water and energy subsidies, and by enforcing existing environmental restraints. The Industrial Ports Program will serve as a positive offset to these difficult measures. B. Transport and the Port Subsector (i) Transport Development and the Economy 2.08 Mexico has an extensive transport network comprising over 200,000 km of roads, of which 67,000 km are paved; about 20,000 km of railways; some 33  -6- ports, of which 13 serve international traffic; about 50 airports capable of handling medium- and large-size aircraft; and over 20,000 km of crude oil, refined products and gas pipelines. During the 1960s and early 1970s, substantial amounts were invested in transport -particularly roads, railways and aviation-- with the transport sector receiving about 20% of all public investment. The network was generally in place at that time and was considered sufficient to meet expected demand. Emphasis was placed on operational improvements and pricing and on using transport investment to foster decentralization and the development of outlying areas. As a consequence, the sector's share of public investment declined. This investment policy, however, proved to be untenable with the surge of economic activity in the late 1970s, which was accompanied by accelerated growth in traffic in all modes. Between 1978 and 1981, serious port and rail bottlenecks emerged, clearly affecting the operation of basic industries and the conduct of international trade. Transport problems were evident with respect to grain imports and the movement of iron ore and pellets to the steel industry. 2.09 It was evident that the transport network was unable to cope with the accelerated growth and that, even with operational improvements, capacity restrictions would continue to be severe. The Industrial Ports Program was to contribute toward the solution of these problems. Although conceived mainly as a means to decentralize industry, it was also intended to resolve port capacity problems for containerized and break-bulk general cargo, and for many bulk commodities. The railways were also targeted for improvements while, except for a one-year increase in 1981, the roads budget was maintained at a relatively constant level. Major airport construction and reconstruction outside of Mexico City was also carried out between 1979 and 1981. Although there were instances of premature investment and some works suffered from poor programing, the overall response of the Government to the situation in those years was appropriate. 2.10 The budgetary restrictions which accompanied the economic recessions in 1982 and 1983 again shifted the emphasis in the transport investment program. Transport investment was reduced in real terms to about US$l billion, roughly equivalent to 1979 levels (Table 2.5). The investment budget focuses on maintenance and reconstruction of existing infrastructure and on the completion of ongoing construction at a minimum cost. At the same time, the Government has deferred the initiation or continuation of major investments such as the full-scale Industrial Ports Program, taking advantage of the current lull in transport demand caused by the economic situation to reorder its transport investment priorities. Most of the necessary decisions will depend on the expected timing and structure of the economic recovery, projected levels of non-traditional exports and import substitution and their impact on transport facilities, and the prospects for industrial decentralization. 2.11 Besides the scale and composition of transport investments, key transport sector issues relate to transport pricing and regulations. For land transport, the main sector issues include the pace of fuel price adjustments to  - 7 - bring them in line with international levels and thereby eliminate subsidies4/, as well as the overall balance between road user charge receipts and road e-.pentditures, and the equitable allocation of such taxes among the various types of users. Railway tariffs, which for some commodities do not even cover the railways' variable costs, need to be restructured. The costs and benefits of current road freight transport regulations in Mexico should be reviewed. In the port subsector, the main issues relate to inadequate recovery, through port dues, of port infrastructure investment costs (para 3.29) and the excessive centralization of port administration. The railway-related issues are being addressed through the ongoing Fourth Railway Project and the preparation of a proposed Railway Sector Project. Through the proposed Second Highway Sector Project, the Bank will assist the Government in analyzing road pricing and regulatory issues. The proposed port project serves as a vehicle toward dialogue in, and resolution of, port pricing and administrative issues. (ii) Ports and Maritime Transport 2.12 Much of Mexico's foreign trade is with the US, for which overland routes are used predominantly. However, maritime transport increased as a percentage of international transport over the last decade, and this trend is expected to accelerate as Mexican foreign trade diversifies and new export markets are obtained. Excluding salt and gypsum bulk exports (which pass through specialized terminals in Baja California), and petroleum and derivatives traffic, about 55% of international traffic was transported by sea in 1978, as compared with 45% in 1970. International trade through the port system consists mainly of the export of minerals, agricultural products and petroleum, and the import of capital goods, grain and food supplies. In 1982, 101 million tons of international traffic passed through the port system, of which 81X was petroleum-related traffic. Domestic coastal shipping, mainly of petroleum, is also important. In 1982, some 50 million tons were transported by coastal shipping, of which 78% was petroleum-related (Table 2.6). Containerized traffic has tripled since 1979, and it grew from 7Z to 23% of all general cargo traffic between 1979 and 1982. 2.13 About 60% of all general cargo is handled by the ports of Tampico and Veracruz. The system's capacity had been generally adequate until the late 1970s, when general cargo and bulk traffic, particularly grain, increased at a 4/ Since December 1981, the Government has followed a policy of gradually raising domestic fuel prices toward international levels. From December 1981 to April 1984, gasoline prices have risen from US$1.06/gallon to US$1.30/gallon for extra and US$0.42/gallon to US$0.96/gallon for regular. Diesel prices have been raised even more significantly from US$0.18/gallon to US$0.63/gallon. Gasoline prices are above international levels (based on mid-1983 Caribbean market prices FOB) of US$0.82/gallon for regular, while diesel prices are still below international levels (US$0.80/gallon). The Bank, through its macro-economic discussions with the Government and its economic and sector work, will continue to monitor progress on the fuel pricing issue and help the Government to assess the implications of its pricing policies.  - 8 - fast pace. Between 1970 and 1976, both international and coastal shipping general cargo and dry bulk tonnages had increased at a modest rate of between 4% and 5% per year. After 1976, traffic growth took off, with general cargo and dry bulk traffic increasing at annual rates of 17% and 12% respectively. These large increases led to capacitv problems, and, by the late 1970s, some two million tons of Mexican imports and exports were being handled by US ports with extensive overland movements. In 1982, the port system, feeling the effects of the recession, experienced a 19Z decline in non-petroleum traffic. 2.14 The lull in transport demand was accompanied by a decline in real terms, in 1982 and 1983, in port-related investment levels from the highs reached in 1981. The 1984 budget for the port subsector reflects the Government's short- to medium-term investment strategy of focusing on port rehabilitation works and completion of ongoing projects at a minimum cost. Capital expenditure in port infrastructure works in 1984 will total about Mex$ 9.6 billion, of which the Industrial Ports Program represents 48%. 2.15 SCT, currently developing a medium-term port investment program covering the years 1984-1988, is still in the process of reordering its priorities and scaling down its program to reflect levels of resources which can realistically be expected. The current draft calls for port investment totaling Mex$ 63 billion (1983 prices) in 1984-1988. This represents 6% of the- total SCT transport investment program over the period. The Industrial Ports Program dominates the draft port infrastructure investment program, representing 45% of total investment over the period. Among the commercial ports, greater emphasis is being placed on the Pacific Coast ports, particularly Manzanillo, a port which serves Guadalajara. Until 1987, the program is directed toward completion of works already well advanced and toward rehabilitation and reconstruction works. Construction of new capacity is planned in 1987 and beyond at Ensenada (container terminal), Guaymas (mineral berth) and Mazatlan (roll-on/roll-off facility), while the program contemplates construction of 600 m of new quay at Manzanillo, scheduled for completion in 1988. A similar pattern is followed for Gulf Coast ports where, until 1987, only rehabilitation works would be carried out. Thereafter, initiation of investments in additional capacity is contemplated at Salina Cruz (one additional berth), Tampico (one additional berth), and Veracruz (mineral berth). 2.16 This strategy of concentrating, in the early years of the program, upon rehabilitation and reconstruction is reasonable, and it gives SCT ample time to carry out the economic analyses which are required to determine the appropriate timing for investments in increased capacity. In particular, investments in new capacity at Manzanillo and Salina Cruz should be analyzed to determine the most appropriate timing for such investments as well as alternative operational improvements, while those at Tampico can be analyzed only in conjunction with ongoing studies of Altamira's potential role. The Bank is providing assistance under the ongoing Port Development Preparation Project (Loan 1964-ME) and under the proposed Second Highway Sector Project to improve planning capabilities and to determine resource requirements. The economic criteria used in analyzing port investment projects and the port investment program would be reviewed annually as part of the project monitoring and consultation program (para 4.12).  -9- C. Institutional Framework (i) Transport Planning and Organization 2.17 The current Administration introduced a far-reaching institutional reform soon after taking office in December 1982 by incorporating all transport agencies under SCT (Chart 25805). Previously, highway and airport development was under the jurisdiction of the Secretariat for Human Settlements and Public Works (SAHOP). The earlier, dispersed institutional arrangement had hampered coordination of planning and investment; it tended to limit the scope of the Bank's dialogue on sectoral issues. A new Subsecretariat for Infrastructure in SCT now handles infrastructure development for almost all transport, and a Subsecretariat for Operations has responsibility for operational, regulatory and tariff matters. A Directorate (:eneral for Planning (DGP), which reports directly to the Secretary, is in charge of overall planning. 2.18 SCT is presently reorganizing the Directorate General for Planning and the other modal planning offices within the Subsecretariats for Infrastructure and Operations. It is expected that planning units in the various modal directorates will be responsible for identifying and proposing capital investments and will provide the technical details required for the analysis of such investments. The Directorate General for Planning will have the responsibility for carrying out the economic feasibility analysis and providing a multimodal consistent analytic framework for the preparation of the medium-and long-term investment program. In addition to SCT, the Secretariat for Programing and Budgeting (SPP) plays an important role in ensuring consistent and complementary modal planning. The Directorate for Public Infrastructure of SPP is responsible for reviewing and approving the proposed SCT investment and operating budgets and conducts a serious review of all major investments in the sector. Although small, this unit has proven effective and capable during the first year of this administration. (ii) Port Administration 2.19 Up to early 1977, the Secretariat for the Navy was responsible for the administration of Mexico's commercial ports, but the administrative reform of that year transferred this responsibility to SCT. Responsibilities for the port subsector are mainly divided under two Subsecretariats. The Directorate General for Marine Works (DGOM) is responsible for port construction and dredging while the Directorate General for Port Operations and Development (DGOPD) is responsible for overall port operations. Some of the functions of these two Directorates overlap with those of the National Port Coordinating Commission (CNCP), which is responsible for coordinating port development planning and policy, as well as for serving as a vehicle to consult port users on port development. CNCP has also been recently reorganized and now has Directorate Generals responsible for port administration, port systems analysis and industrial ports. In practical terms, the responsibilities of CNCP via-a-vis those of DGOM and DGOPD are sti3l evolving in response to the overall reorganization of the sector. Other institutions or entities performing specialized functions include: (a) Fondo Nacional para los Desarrollos Portuarios (FONDEPORT), a trust fund recently placed under SCT's jurisdiction,  - 10- which has responsibility for the development, sale, and/or lease of land adjacent to port areas (Chart 26069); and (b) BANPESCA, a Government-owned bank responsible for providing financing for port development. 2.20 With a few exceptions, the ports are operated by local port service companies (ESPs) which are jointly owned by the Government, port unions and port users. The nature of these companies and their efficiency vary. SCT has decided to widen the powers of the ESPs by giving them broader responsibility, including that for port equipment acquisition and maintenance, cargo storage, and collection of all port tariffs and dues. The ESPs' administrations and operations will also be strengthened through the addition of more highly qualified staff for administration, finance, statistics, maintenance, and operational supervision. These new concepts are being introduced first at Lazaro Cardenas' ESP, which will serve as a model for the strengthening of other ESPs. The proposed project would support this institutional strengthening in Lazaro Cardenas through, inter alia, the introduction of cost-based tariffs, the definition of financial objectives and targets, the introduction of financial and investment planning, the implementation of a training program designed to upgrade skills of existing staff and to train new personnel, and the implementation of an equipment maintenance program (para 3.19). (iii) The Industrial Ports Program 2.21 Institutional arrangements for the Industrial Ports Program are complex and have undergone a series of changes, the latest the result of the institutional reorganization being carried out in the trarsport sector. During 1982, the planning for the program was managed by the Coordinacion General de Proyectos de Puertos Industriales (CGPPI). CGPPI's functions were transferred to CNCP in 1983. Since CNCP is not an executing agency (except for studies and technical assistance), all investments at the industrial ports are carried out by the relevant entity empowered with project implementation. Besides the executing agencies within, or the responsibility of, SCT (DGOM, the Directorates for highway (DGCF) and railway infrastructure (DGVF), the National Railways (N de M), and FONDEPORT), several other entities are involved with the Industrial Ports Program. These include SARE, which is responsible for the execution of industrial water supply and flood control; SEDUE, responsible for urban development and environmental protection; and the local and state authorities. 2.22 A major objective of the proposed project would be the Implementation of a proper administrative, operational and financial framework for the industrial port at Lazaro Cardenas. It is expected that the experience there will serve as a basis for institutional improvemcnts in the port subsector generally. CNCP drew up draft legislation proposing a single local port authority to manage the Lazaro Cardenas industrial port. This proposal was rejected by other Government agencies and a compromise proposal agreed upon whereby the industrial port would be operated by two entities: ESP and FONDEPORT. ESP will be responsible for all cargo handling and urine services (tugs, pilots, etc) at both the public cargo terminal (the Multiple Use Terminal or TUM) and the private wharfs constructed by the industries located  - 1.1 - at the industrial port. ESP is currently being strengthened to allow it to perform this role adequately (para 2.20). FONDEPORT will set up a local entity to administer and operate the industrial park lands on a commercial basis (para 3.23). D. Developments in the Lazaro Cardenas Region 2.23 Lazaro Cardenas is located in a region made up of two of Mexico's least developed states -- Michoacan and Guerrero. The area's development bad been promoted as early as the 1930s by Lazaro Cardenas, then President, but it was not until the 1960s that plans to develop Lazaro Cardenas were initiated on a large scale. In that decade, a dam and a hydroelectric power plant were built 15 km from the mouth of the Rio Balsas. In 1976, the SICARTSA steel plant was completed; as part of the development of the steel complex, the initial stage of a deep water port was constructed. Expansion of SICARTSA is currently under way. Construction of a second major industrial plant, FERTIMEX, began in 1979, and the port was subsequently designated as one of the four industrial ports. The basic communications needs of the area were met in the 1970s with the completion of rail and road links to Mexico City, about 400 km away. 2.24 The port of Lazaro Cardenas is located on channels dredged along the right branch of the Rio Balsas (Map IBRD 17795). The land area of the industrial port covers some 3,000 ha of adjoining channels which have been dredged to depths varying between 10 and 14 m. Currently operational areas of the port include the TUM and a specialized terminal at SICARTSA and FERTIMEX. The TUM is made up of five cargo berths for ocean-going vessels: a container terminal and four break-bulk general cargo berths. 2.25 The industrial park, which is owned and operated by FONDEPORT, is located on an island between the right and left arms of the Rio Balsas. Several industries or plants under construction there will also have direct maritime access. A grain terminal is expected to be operational in 1985 as is Industrias NKS, a foundry. Although almost completed, initiation of production at Productos Mexicanos de Tuberias, S.A. (PMT), a pipe manufacturing plant, has been delayed because of the recession; it is now expected that this plant will begin production in 1986. CELASA, a drilling platform manufacturer, is scheduled to begin construction of its facility in 1985. In addition, FONDEPORT is planning a 40-ha small- and mediumrscale industrial park within the larger Lazaro Cardenas industrial park area. Longer term prospects for industrial developments include a petroleum refinery, a ship repair facility, and a coal terminal to serve a proposed electricity generating plant to be developed by the Comision Federal de Electricidad (CFE). 2.26 The population of Lazaro Cardenas has grown along with the developmeat of the port. The Municipalities of lazaro Cardenas and Guacamayas, with estimated 1980 populations of 25,000 and 15,000 respectively, are the two largest towns in the area. The rest of the region is made up of several small communities and villages in both the states. In 1960, the total population of the region was estimated at 6,500. By 1970, the region's population had grown to 17,000 and reached 60,000 by 1980.  - 12 - 2.27 The rapid growth of industry and population has generated a number of problems related to environmental pollution and to the strains on the road system caused by heavy road traffic generated by the port and the industries located in the area. The rapid growth has also been accompanied by urban management problems, including inadequate facilities and operations of the sewerage and water supply systems, and poor housing. 2.28 Environmental degradation, already a problem at Lazaro Cardenas, is expected to worsen if proper steps are not taken (Annex 1). SICARTSA is currently the main source of pollution in the area. Its pollution history, documented by the Bank as early as 1979, points to problems related to tar, oil, sulphur dioxide, hydrocyanic acid, benzene and dust emissions. SICARTSA has not supplied data to the Bank regarding these emissions, but field reviews made during appraisal indicate that the problems persist. With further industrial development, environmental degradation would be expected to accelerate in the Lazaro Cardenas region unless timely intervention is made to effectively monitor pollution sources and enforce existing regulations. Careful attention must also be given to the construction and operation of physical facilities and the strengthening of institutions to address the problem. Air and water pollution monitoring systems financed under Loan 1964-ME will be installed which will assist in the data collection needed to enforce already existing air and water pollution standards. The problems of municipal and industrial solid and liquid wastes are being addressed under the proposed project (para 3.07) through two components: an industrirl sewerage system for liquid industrial waste in the FONDEPORT industrial park and a solid waste management system for industrial and municipal waste. In addition, the Government agreed, at negotiations, to take all appropriate measures to prevent wastewater discharged by plants and terminals in the Port of Lazaro Cardenas area, and by neighboring communities and facilities, from contaminating the area's surface waters, including the construction of appropriate sewerage systems. Such sewerage systems would include improvements to, and extensions of, the municipal sewerage system, and construction of a system to accommodate pretreated wastewaters of SICARTSA, FERTIMEX and the TUM. The feasibility studies and designs for these systems would be carried out by SEDUE, under financing under Loan 1964-ME. It is expected that the studies would be completed by June 30, 1985. These components would be eligible for financing under an existing Bank project for water and sewerage systems in small- and medium-sized cities (Loan 2281-HE, FIFAPA III), if they meet criteria established under that project. Finally, environmental conditions would be monitored under the project during semi-annual meetings which would be held to review progress in achieving project objectives (para 4.12). -2.29 Solutions for easing future congestion of the urban and regional road system are also needed. While the proposed project addresses part of the problem by including a port access road which will route TUM and FERTIMEX traffic around the town of Lazaro Cardenas, a bridge over the Rio Balsas and a major cross-town connection road may be required. In response to this problem, SCT has informed the Bank that it will carry out a study which would analyze alternative road traffic patterns and select the most economic solution to this urban and regional traffic management problem, prior to making any major road or bridge investments in the Lazaro Cardenas area.  - 13 - E. Past Bank Participation and Experience 2.30 The Bank has been active in supporting the Government's regional decentralization and industrial development programs. It has been especially active in the development of the Lazaro Cardenas area through operations to support the SICARTSA steel plant (Loan 934-ME), the FERTDMEX Plant (Loan 1112-ME), urban development (Loan 1554-ME), the development of the Zihuatanejo-Ixtapa tourist resort about two hours' drive from Lazaro Cardenas (Loan 793-ME), and the Zihuatanejo International Airport (Loan 1022-ME). Additional projects which support the goals of regional decentralization include two medium-size cities water supply and sewerage projects, an urban project for oil-producing southeastern Mexico and a loan for the preparation of a deconcentration program for Mexico City. 2.31 The Bank has provided broad support to the development of transport in Mexico. Nine highway loans have been made, the first in 1960 and the ninth in 1984. There have been four railway loans and an airport loan. A Bank loan for US$20 million (Loan 820-ME) was made in 1972 for a First Ports Project. The main objective of the Bank's participation was to assist in the achievement of more efficient operations and in the introduction of a commercial approach to tariffs and services. While substantial operational improvements were reached at some ports over the last decade, little was accomplished with respect to the rationalization of port tariffs. 2.32 The Port Development Preparation Project (US$14.0 million, Loan 1964-ME) was approved in 1981 to assist in the preinvestment stage of the industrial port development project through provision of planning and management services in program formulation and design, and through studies and detailed engineering for sector and individual project components in the ports program. Disbursements have been slower than expected because of the large budget reductions experienced after 1982, which greatly reduced the ability of Mexican Government entities to utilize loan proceeds. Nevertheless, the studies and advisory services which have been completed, or are currently under way, have provided a firm basis for the proposed project. F. Role of the Bank and Lending Strategy 2.33 The potential Bank role in the transport sector has been expanded because of several important actions taken by the administration which assumed office in late-1982. These actions include reorganization of responsibility for all modes under one Ministry, SCT. Following the new Government's indication that it wished to have a substantial lending program for the transport sector, a sector lending strategy for Bank operations was agreed. In terms of investment, the strategy is to develop relatively quick disbursing lending operations which focus upon short-term investment in maintenance, rehabilitation and modernization, and upon making prior investments operational while assisting the Government in the reassessment of its medium and long term investment requirements. 2.34 As the first Bank loan in over 12 years for the physical development of Mexico's ports, the proposed project is intended as the start of a series of operations in the ports and maritime transport subsector. These operations are to be prepared in the context of Mexico's overall program of port development.  - 14 - 2.35 The Bank's participation in the Industrial Ports Program fits in well with the overall transport sector lending strategy by assisting the Government to focus upon difficult investment decisions and by defini.ng, and assisting in the satisfactory resolution of, issues related to the port subsector. At the same time, the Bank's role in the Program goes beyond the transport sector, with Bank participation serving as a vebicle for dialogue on the administrative and financial aspects of the Industrial Ports Program, and on the proper pace, scale and composition of Mexican decentralization schemes and related pricing and investment policies, as well as on the difficult issue of environmental control. III. THE PROJECT A. Objectives 3.01 The principal objectives of Bank support for the Mexican Industrial Ports Program are to: (a) improve transport facilities for industries through provision of access to international maritime commerce and coastal shipping; (b) encourage economic growth in under-developed coastal regions of the country; (c) augment the country's port capacity and thereby reduce its dependence on foreign ports as it diversifies its international trade patterns; and {d) improve port administration and finances. In addition, Bank support to the ongoing port development program has, as objectives, the introduction of new approaches to investment analysis and project definition, whicn should result in more economical use of resources, and assistance in the institutional and financial development of port entities. 3.02 The proposed project is to complement the major investments recently made in Lazaro Cardenas in order to increase the efficiency of the port terminal, to strengthen the administration and finances at the industrial port, to create transport economies for industries already existing or under construction, to reduce or eliminate environmental hazards associated with the industrial port development, and to provide protection against flood damage. In preparing this project, particular attention was given to selecting least cost solutions in order to provide for the most efficient and economic use of past and future investments. B. Description 3.03 The proposed project would comprise the following components in the Lazaro Cardenas port and industrial area: (a) road construction, rail installations and dredging for improvements of land and maritime access to new port terminals and industrial facilities; (b) equipment for cargo handling and harbor craft;  - 15 - (c) an environmental protection component including facilities and equipment for the collection and treatment/disposal of effluents and solid wastes; (d) industrial park for small- to medium-sized industries; (e) flood protection works along the left branch of the Balsas River; and (f) professional services for studies, engineering, construction supervision, training and management advisory services. The location of the preceding components in the existing port and a general master plan for development of the industrial port are shown on Map IBRD 17795. 3.04 Road construction under the proposed project would consist of about 7.5 km of a two-lane, paved highway with shoulders, connecting the TUM and FERTIMEX plant with the existing major road system. Rail installation would consist of about 8.5 km ef single and double-track rail lines, connecting the CONASUPO grain terminal and PMT plants with existing rail lines. 3.05 Dredging would comprise the extension of the harbor basin for specific industries needing maritime access in order to connect existing navigation channels with special purpose docks to be built by the industrial users. The dredging work to be financed under this project would be done in stages comprising several subprojects over a five-year period. Each subproject of the work would be agreed between the Borrower and the Bank, on the basis of technical, economic and financial feasibility studies conducted in accordance with terms of reference which have been agreed with the borrower (Annex 2) and which were confirmed during negotiations. Each subproject in the dredging program would have a minimum economic rate of return of 12Z and be subject to satisfactory cost recovery arrangements. A mid-term review would be held after the initiation of the second group of subprojects to review the pace of utilization of project funds and the forecasts for future requirements in order to determine the appropriate timing and dimensions of subsequent works. The technical and economic analysis for the first tranche has been completed but confirmation of details of cost-recovery arrangements are still pending. Submission of satisfactory evidence of each subproject's technical, economic and financial feasibility would be a condition of disbursement on each tranche. 3.06 Equipment for cargo handling to be financed under the proposed project is to improve the efficiency and capacity of existing container and general cargo berths at the existing TUM; a list of the proposed equipmen' is given in Annex 3. The harbor craft is to consist of a 35-ton traction power tug, designed to assist vessels inside the harbor during maneuvering, berthing and unberthing operations. The tug would be procured from local shipyards, and Bank financing would be limited to propulsion machinery and navigation equipment.  - 16 - 3.07 The environmental component would consist of the following subcomponents: (a) FONDEPORT wastewater collection ard treatment including two small collector sewers, aerated lagoons, and outfalls discharging into the left branch of the Balsas River which would service major industries locating in the FONDEPORT industrial park area; and (d) a system to collect, process and dispose of municipal and industrial solid wastes. The system would include compactor trucks, tractors, a truck crane, a small toxic waste incinerator and various physical facilities (laboratory, maintenance shop, office, etc). All wastes except FERTIMEX gypsum and SICARTSA slag and scrap would be accepted for disposal. Preparation of the solid waste management system has not been advanced to the level at which it can be fully appraised, but its inclusion in the proposed project is considered highly important because of the urgency of initiating effective environmental protection measures in the port area. At aegotiations, it was agreed that the feasibility studies and designs for the solid waste management system would be presented for Bank review by December 15, 1984. 3.08 At negotiations, it was agreed that the Government would enter into agreement with the municipality of Lazaro Cardenas, regarding arrangements, under terms and conditions satisfactory to the Bank, for carrying out the solid waste management system component; this agreement would include detailed provisions with respect to the construction, operation and cost recovery of the system. Submission to the Bank of the signed and effective agreement regarding the solid waste management system would be a condition for disbursement on that component. It is expected that the draft agreement would be submitted to the Bank for review and comment by March 15, 1985. 3.09 The industrial infrastructure is to consist of site preparation, road construction and utilities for about 125 small- to medium-sized installations in an area of about 40 ha. This area is part of a 120-ba site designated for such industries within the overall area under FONDEPORT's jurisdiction in Lazaro Cardenas. 3.10 The flood control component of the proposed project would provide for levees and channel rectification on the left branch of the Balsas River (Annex 4). The rectification would provide a 250-meter-wide channel generally following the existing river bed and extending from La Villita Dam at the head of the Rio Balsas delta to within 2 km of the Pacific Ocean, a distance of about 12 km. Approximately 8.0 million cubic meters of material would be excavated in channel construction. The proposed plan is designed to protect against flood flows up to 7,000 cubic meters per second (cms). At negotiations, the Government agreed that CFE would regulate the two upstream hydropower projects at the La Villita and Infiernillo Reservoirs so as to limit the water flow in the delta from these plants to 7,000 cms with a flood return frequency of about 200 years. A mathematical model which would verify flood conditions is currently being updated and would be used to confirm the economic analysis of this component. A condition of disbursement on this component  - 17 - would be the confirmation of the economic viability of the flood control protection works component through verification of the economic analysis by this updated mathematical model. 3.11 The professional services to be financed under the proposed project would comprise: (a) supplementary technical studies as may be required for the environmental components; (b) construction supervision for all major civil works and the testing and inspection of major equipment at the manufacturers' plants and upon delivery; (c) training and related equipment for operating, management and administrative personnel of the port and the staff of proposed environmental protection installations (Annex 5); and (d) management advisory services for SCT and ESP and studies related to cost accounting, tariffs and organizational developments. Agreement was reached during loan negotiations on the scope and timing of these professional services. C. Implementation, Costs and Financing 3.12 Civil works and equipment to be financed under the proposed project would be subject to international competitive bidding (ICB) in accordance with Bank Guidelines, with the exception of the civil works for the PONDEPORT sewerage system, which would be procured under local competitive bidding procedures acceptable to the Bank (para 4.06); the propulsion and navigational equipment for the tug (para 3.06), which would be procured through limited international bidding open to a preselected number of qualified suppliers; and the equipment related to training which would be procured under local comparative shopping procedures satisfactory to the Bank. Construction of the tug, which would not be financed under the loan, would be procured under local competitive bidding procedures. Prequalification of contractors would be required for all works. Rails to be financed under the proposed project would be purchased in a larger lot, under ICB, to replenish stocks used by DGVF for the Lazaro Cardenas installations. AlU professional services to be financed under the proposed project would be retained in accordance with procedures described in Bank Guildelines on the Uses of Consultants. In evaluating bids for equipment procured through ICB, Mexican bidders would be allowed a margin of preference equivalent to 15% of the CIF cost of competing imports, or the relevant prevailing customs duty, whichever is lower. 3.13 The total cost of the project is estimated at US$112.7 million, of which US$76.3 million is foreign exchange. These estimates include physical contingencies varying from 10% to 15% for civil works and from 0% to 15% for equipment procurement. Because of uncertainties with regard to local inflation rates and exchange rates over the project period, both local and foreign costs  - 18 - have been calculated in US dollars, and price contingencies have been calculated based on expected changes in international prices. As a result, the local currency estimates may not represent the actual amount of local currency which will be required over the project period. Price escalation in both foreign and local cost components (denominated in US$) has been estimated at 3.5% for 1984; 8% for 1985; 9% for 1986, 1987 and 1988; and 7.5% for 1989. D. Project Execution and Coordination 3.14 The Industrial Port Program Commission, which is made up of representatives of SCT, SARH, SEDUE, FONDEPORT, CNCP and SPP, is the body charged with overall policy making and coordination for the Industrial Port Program. Project coordination would be the responsibility of a monitoring and coordination group established within the Commission which would include representatives of each directorate within SCT, SARH and SEDUE, which is involved in the project, as well as of CNCP, SPP and BANPESCA. SCT would take lead responsibility within the group. A Technical Secretariat within CNCP, which would report to this group, would be responsible for day-to-day project monitoring, including the preparation of reports regarding project execution and achievement of the project objectives. A project coordinator would be appointed in Lazaro Cardenas to oversee supervision of all project works (para 4.05). 3.15 SCT would be responsible for execution of the road, rail and maritime access components of the project and for the Lazaro Cardenas road system study. SARH would be responsible for the flood protection measures and SEDUE for the execution of studies and related civil works and equipment acquisition for the solid waste disposal system. FONDEPORT would be responsible for the sewerage component at the industrial park and the small- and medium-scale industrial park while ESP would be responsible for cargo handling equipment and tug procurement. 3.16 BANPESCA would be the Borrower for the project and would transfer project funds between the Bank and the executing agencies. It was agreed at negotiations that, as a condition of loan effectiveness, BANPESCA would enter into agreements, under terms and conditions satisfactory to the Bank, with ESP, FONDEPORT, and the Government for on-lending of project funds. The agreements with these two entities would be on the same financial terms and conditions as those between the Bank and BANPESCA. E. Financial Framework 3.17 The three principal participants in the project are the Federal Government, ESP and FONDEPORT. Consequently, the financial analysis (Annex 6) deals separately with each of these entities. Of the three, ESP is, at present, the only one constituted as a comercial enterprise (Chart 26028). FONDEPORT, the Federal agency which owns the industrial park lands and has invested in their development, has commissioned studies for guidance on the most appropriate form for the administration and commercial development of  - 19 - these lands. When completed, in about June 1984, these studies are expected to provide the basis for setting up a local FONDEPORT entity. The Federal Government, through SCT, remains the largest investor in the port area to date. The Government partially recovers its investments through dues on ships and cargo passing through the port (an estimated 22% of annual depreciation was recovered in 1983). The Government's port-related operations are, therefore, also treated as a separate proforma entity for the sake of the financial evaluation. (i) ESP 3.18 ESP has been handling cargo and ship traffic in the existing port facilities since about 1975, and, although it has moved over one million tons of cargo every year since then, it has done so with a minimum of capital and manpower of its own, using SICARTSA's crane and the stevedoring union's labor force on a contractual "per-ton" basis. While it has consistently shown some sort of profit (except for 1981, when it was overtaken by rapid inflationary price rises without the possibility of adjusting its tariffs accordingly), its expenditures do not reflect the real costs of equipment used since its equipment is depreciated on a historic cost basis. Nor do ESP's expenses include any infrastructure costs, since the channels, navigation aids, quays and sheds are used for the port operation by Empresa without a concessionary fee. Some of the costs for these items are, however, recovered directly by the Government from the port users through vessel and mooring dues and wharfage. 3.19 The Government has stated its intention to strengthen the ESPs' financial capacity so as to make them financially self-sufficient. In this regard, it is the Government's intention that ESP port tariffs be adjusted as appropriate to reflect costs, and that they be increased periodically as required to maintain these levels in real terms. A cost and tariff study will be undertaken for the Lazaro Cardenas ESP, under the project, in order to determine required adjustnients. In the meantime, the Government has made in 1983 and 1984 frequent adjustments to maintain the ESP's tariff levels in real terms. Other actions being taken by ESP and the Government to strengthen the Lazaro Cardenas ESP are reflected in the ESP action plan confirmed at negotiations (Annex 7). Actions being taken include the transfer to ESP of Government-owned equipment currently being utilized by ESP; transfer of port storage functions to the ESP; the introduction of financial and investment planning; the implementation of a training program (Annex 5); and the implementation of a maintenance program (para 3.20). 3.20 In order to ensure that ESP's equipment and installations would be adequately maintained, CNCP prepared, with the assistance of consultants financed under Loan 1964-HE, a comprehensive preventive maintenance program specifically related to port requirements in Lazaro Cardenas. This program covers civil, mechanical, electrical and marine engineering aspects of port maintenance. The periodic data required have been identified, and the forms to be used to register details of all installations and equipment, to prepare inspection schedules, and to provide required maintenance services have been developed. The implementation of this maintenance program starting in 1985 is included in ESP's action plan. The program would be introduced in parallel to the training program which would prepare qualified maintenance staff (Annex 5).  - 20 - 3.21 The following agreements were reached at negotiations with regard to ESP: (a) ESP to produce, during each of its fiscal years, beginning in 1987, total revenues equivalent to not less than the sum of its (i) total operating expenses; and (ii) the amount by which debt service requirements exceed the provision for depreciation. For fiscal years 1985 and 1986, ESP to produce total revenues which will at least cover its working costs; (b) ESP to complete, by September 15, 1985, a study of its costs and tariffs, and to exchange views with the Bank on the study's conclusions and on an action plan for the implementation of the study's recommendations; (c) the Government to allow ESP, by June 30, 1985, to collect storage fees and to retain an amount sufficient to cover the costs of its operating and maintaining the storage facilities on the public wharves; (d) all existing port equipment currently being used for the operation of the public wharves in Lazaro Cardenas to be transferred by the Government to ESP, as an equity contribution, by December 31, 1984; and (e) the Government to take all appropriate measures to permit ESP to meet its financial targets, including, as and when appropriate, the granting of authorization for ESP to adjust its tariffs and fees. 3.22 Fullfillment of these conditions would mean a considerable increase in the level of tariffs and a continuing increase in tariffs in real terms. The financial analysis shows that tariffs would have to be raised, on average, by at least 35% in real terms in 1985, and again by 7.5% in 1987, in order to enable any contribution in later years toward investment costs. Reaching this latter goal earlier is desirable but not realistic. ESP's action plan includes financial targets to be achieved in fullfillment of these conditions (Annex 7). (ii) FONDEPORT 3.23 FONDEPORT has, in the past, operated only as a Federal agency from its headquarters in the capital. The historic part of the financial analysis, which confines itself to the last two years, shows the healthy position of the enterprise. FONDEPORT has set up a special department to deal with its new responsibility for the development of industrial ports (Chart 26069). FONDEPORT has also commissioned studies on administration, commercialization and promotion of its industrial parks which will provide, inter alia, the basis for decisions regarding the type of administrative structure which should be set up to operate the Lazaro Cardenas industrial park. It is FONDEPORT's intention to manage the industrial park separately from its other (mainly fishing port) operations. These studies will also provide an analysis of market demand for the industrial park land which will serve as a basis for  - 21 - financial and investment planning, and for setting of rents and service charges. While FONDEPORT's financial targets for the Lazaro Cardenas industrial park cannot be set until the studies are completed, FONDEPORT has stated its financlal objectives with regard to the Lazaro Cardenas industrial park. The minimum financial objectives will be to set leases and service charges so that internally generated funds (i.e., operating surpluses and depreciation allowance sufficient to cover annually revalued depreciable assets) cover a reasonable proportion of the average annual capital expenditure incurred or expected to be incurred in Lazaro Cardenas over a five-year period. It Is expected that FONDEPORT will generate sufficient funds for no less than a 20% average participation in its five-year investment plan. 3.24 In discussions held with Bank staff, agreement was reached on the premises which form the basis for the financial projections of the new entity to be set up to administer the industrial park. Although the lands for industrial development cost FONDEPORT nothing, it is intended that their leases would, in the future, reflect their market price, allowing for recovery of investments made in infrastructure and the special benefits to be derived from waterfront location or proximity to the port. The annual rent of Mex$ 35/sq m used in the financial analysis Is a theoretical minimum which would be required in order to generate sufficient funds during the first five years of operation to cover debt service and investments. It is not related to market prices for industrial land nor does it give a reasonable return on net-fixed assets. It is, however, expected that market conditions will allow FONDEPORT to set its rents so as to achieve a reasonable financial return (para 3.23). 3.25 To date, only one lease, that with PMT, has been contracted officially. Its financial terms, which serve as the point of departure for FONDEPORT's lease-revenue projections, require revision every three years (Annex 6). This year, FONDEPORT intends to draw up formal contracts with those enterprises which have already been allocated lands and are constructing plants, and to collect rent retroactively. Leases are likely to be for periods of 20-25 years, with any construction on the land subsequently reverting to FONDEPORT. Where land will not be required for other port-related options, extensions for continued operations by the tenants may be granted. 3.26 In addition to the lands assigned to heavy industry on or close to the waterfront, FONDEPORT intends to develop an area of 120 ha for smaller industries and workshops which either have some functional relationship to the heavier industries in the port area or serve the muuicipal area of Lazaro Cardenas. The first stage of this development (40 ha) would be Included under the project. Development of this park for small and medium Industries is based on the results of a market and feasibility study. The study includes a market survey of potential lessees, and a study of the park's economic and financial feasibility. The market study and financial analysis recommended a monthly rental value of Mex$ 48.15 per sq m2 which would be appropriate to meet demand for land, filling the initial 40 ha area over the first three years. Leasing contracts would have an escalation clause to maintain the lease at its 1983 value in real terms. It is FONDEPORT's intention to achieve an annual return of at least 1OZ on the average current net value of the small- and medium-scale park's fixed depreciable assets. The financial projections show that, in order  - 22 - to maintain a return of 1OX, the rental value would have to be about Mex$ 44 sq m. The administrative framework through which the park is to be managed would be determined as a part of the larger ongoing study with regard to the administration of the whole of the industrial port area. 3.27 The following conditions were agreed at negotiations with regard to FONDEPORT: (a) that a condition of loan effectiveness be the completion of the administration, commercialization and promotion studies; (b) that FONDEPORT: (i) exchange views with the Bank on the findings and recommendations of these studies; (ii) present to the Bank, by December 15, 1984, an action plan for the implementation of the study recommendations; and (iii) carry out the action plan; and (c) that the Government recover the costs of dredging to provide maritime access and industrial waterfronts from the beneficiaries of the works. No dredging subproject would be approved for Bank financing before such arrangements are made. (iii) The Federal Government 3.28 The Federal Government, principally through SCT, has invested some Mex$ 16.4 billion at 1983 prices (about US$131 million) in dredging works, construction of the public wharfs, buildings and infrastructure at Lazaro Cardenas5/. These investments are recovered, only in part, by port dues and mooring fees levied on vessels, wharfage levied on cargo (also through the ship operators), excess storage charges and concession fees from industries operating their own wharfs (only FERTIMEX pays such a concession to date). These dues and fees, which are collected through the Superintendencia (a field agent of DGOPD), and the customs authorities in the case of storage, are uniform among all Mexican ports. Revenues go directly to the Ministry of Finance and are in no way related to funds for port investments, which come from SCT's annual investment budget. In the financial analysis, proforma accounts relating to a notional Government port entity at Lazaro Cardenas have been developed. Projections for 1985-1989 indicate that, in order to generate the required surplus to pay interest, after covering all 'operational' costs, existing dues would have to be increased by 120% in real terms and maintained at such a real level thereafter. 3.29 It is the Government's intention to rationalize port pricing with the general objective of eliminating subsidies and promoting the efficient use of resources. The Government has set up a special pricing commission in the Ministry of Finance which will determine cost recovery principles for 5/ The overall investments in the Lazaro Cardenas Industrial Port Program as shown in Table 2.4, include not only these investments in wharfs, buildings and infrastructure, but also those which have been assigned to FONDEPORT and ESP in the financial analysis.  - 23 - transportation infrastructure and for Government-controlled enterprises. In 1983, the Government raised port dues by levels which resulted in real increases in revenues of 115% between 1982 and 1983. Individual charges were raised between 242 and 2,000% in that year. In 1984, additional increases are planned for August to adjust port dues to reflect price increases caused by inflation. Other actions being taken by the Government include the revaluation of assets owned by the Government in all commercial and industrial ports. Under the project, a study to determine the proper level of port dues, which will serve as a basis for preparation of an action plan to rationalize port pricing, will be prepared. It is anticipated that, upon completion of the ongoing revaluation of countrywide port assets and of the port dues study, a phased but fairly rapid adjustment will be made of port dues, in accordance with the stated Government intention to rationalize pricing and eliminate subsidies. 3.30 At negotiations, agreement was reached with the Government on the following: (a) that the Government would carry out a study, on a countrvwide basis, to determine the proper level of cost-related port dues, by Septemoer 15, 1985. After exchanging views with the Bank on the study's findings, the Government would present to the Bank, by January 15, 1986, an action plan for the progressive achievement of the study's recommendations at Lazaro Cardenas; (b) that the Government would recover, from FO1DEPORT, a portion of flood control investment cost proportional to the estimated benefits to FONDEPORT lands; and (c) that the Lazaro Cardenas Superintendencia would keep accounts showing periodic results with regard to the port's costs and revenues. F. Economic Justification and Benefits 3.31 The project is made up of components designed to minimize transport costs (road, rail, and maritime access, tug and cargo handling equipment); to protect against flooding; to address problems of environmental degradation; and to meet demand for industrial land for small- and medium-scale industries. In the assessment of each project component's economic Justification, alternative project designs were analyzed in order to ensure that the selected project component was appropriate in terms of scope and timing. For the transport- related components, a key variable in the analysis was the traffic forecast given in Annex 8 and summarized in paragraphs 3.32-3.34. Annex 9 describes, in detail, alternatives analyzed as part of the economic analysis, while Annex 4 gives details specifically related to the flood control project. Mi) Port Traffic Forecast 3.32 In terms of port traffic flows, the port at Lazaro Cardenas can be divided into the TUM, operated by ESP, and the specialized terminals under construction at FERTIMEX and at the FONDEPORT industrial park (Table 3.1).  - 24 - Until recently, the TUM handled mainly traffic generated by SICARTSA at the bulk handling facility; traffic there averaged about 700,000 tons of coal imports annually. These declined in 1982 and 1983 because of the recession and a decision to use domestic coal in SICARTSA's operation, but it is expected that substantial coal imports will resume in 1984. Iron and steel traffic fluctuated from lows of 4,000 tons to highs of 346,000 tons over the 1979-1983 period. The port is considered to be adequately equipped to handle SICARTSA-related port traffic over the short to medium term. 3.33 Traffic at the TUM is expected to diversify, however, in keeping with a marked trend toward increased break-bulk and containerized general cargo traffic at the port. Between 1979 and 1983, break-bulk general cargo increased by 102X p.a. from 11,000 to 172,000 tons. This traffic is expected to increase at a more modest rate of 7.6% p.a. between 1983 and 1989. The mix of general cargo commodities is expected to change, with barite and chemical traffic becoming more important. Containerized general cargo has grown even more rapidly, from 2,000 tons in 1981 to 46,000 tons in 1983. This traffic is expected to grow by 26% p.a., reaching 187,000 tons in 1989. 3.34 Grain traffic at the TUM increased at a rate of 39% p.a. between 1980 and 1983, to 475,000 tons. This traffic is expected, however, to be transferred from the TUM to the grain terminal on FONDEPORT land in 1985, which will result in an overall decline in TUM traffic in that year. Besides the grain terminal, other specialized terminals which will begin operations in 1985 and 1986 are: (a) the FERTIEEX berth; and (b) in the FONDEPORT industrial park, berths for PMT, a pipe manufacturer; for CELASA, an oil drilling platform manufacturer; and for a Pemex petroleum products tank farm. (ii) Economic Justification 3.35 Land Access (5% of project costs). The project includes construction of a 7.5-km two-lane paved road which will provide access from the entrance of the FERTIMEX complex and the TUM to the existing main road on the southern edge of Lazaro Cardenas. Currently, road traffic generated by the TUM utilizes a service road which passes through SICARTSA land. This road was not designed to handle the types of traffic which will be generated by the TUM and FERTIMEX. In the economic analysis, several alternatives were evaluated separately: a four-lane highway with and without grade separations at the railway crossing, and a two-lane highway, with and without grade separations. The analysis indicated that the optimm alternative is a the two-lane road with level crossing. Quantified benefits from the provision of road access to the TUM and FERTIMEX plant are vehicle operating cost (including time) savings from reductions in urban road traffic congestion and avoidance of a road in poor condition, which, without the project, would be expected to further deteriorate since it was not designed to bandle the types of traffic which will be generated by the port. An unquantified but important benefit from the project is, through the transfer of traffic to the access road, the avoidance of interference with port operations on the SICARTSA side of the basin. This component has an estimated economic rate of return (ERR) of 20X. The rail access would link part of the FONDEPORT industrial park with the national rail network. The economic viability of rail connections to both the right and left  - 25 - branches of the industrial park was analyzed, and it was concluded that only the right branch rail connection could be justified at this time given projected levels of traffic. Benefits from this component are: (a) reductions in transport costs from avoiding the 10.5 km road journey between these installations and the rail station; (b) avoidance of cargo double-handling; and (c) reduction in grain losses. This component has an estimated ERR of 19%. 3.36 Cargo Handling Equipment (9Z of project costs). Port operations at the Lazaro Cardenas TUM were initiated in 1979 with the opening of two berths adjacent to the SICARTSA complex. Three additional berths (one of which is a container terminal) began receiving traffic in 1981. Civil works at the TUM (container yard, general cargo sheds, container consolidation terminal) were virtually complete in 1983; a quayside gantry crane was installed in 1981. The nature and the level of TUM traffic are changing rapidly, and the TUN is not adequately equipped to handle current and forecast levels of traffic (para 3.33). The project provides for acquisition of break-bulk general cargo and container handling equipment designed to meet projected traffic flows. The types and numbers of container handling equipment were selected on the basis of an optimization study made to determine the least cost solution to the handling of this traffic. In the economic analysis, in the without project case, it would be expected that cargo would not be handled as efficiently as it would be if the port were equipped properly. Quantified benefits from the proposed cargo handling equipment are derived from faster ship-turnaround, resulting in decreased ship waiting and service times with the project. Lower shore cargo handling costs, another important benefit, were not quantified, and, to that extent, the analysis is conservative. The general cargo handling equipment and the container handling equipment have estimated ERRs of 23% and 18X respectively. 3.37 Maritime Access: Dredging Program (32% of project costs). The dredging program would provide maritime access and waterfronts to industries located at the industrial park, allowing these industries to take advantage of direct maritime transport through the already constructed access channels and basins at the port. The feasibility of providing such waterfronts is dependent upon the type and timing of industrial development at the port, which, in turn, is linked to the timing and strength of the Mexican economic recovery. Because of uncertainties with regard to this recovery and the pace of industrial development, only the first tranche of the dredging program, which will provide waterfronts to PMT, a pipe manufacturer, and Celasa, an oil drilling platform manufacturer, has been subject to economic analysis at this time. Subsequent tranches would be approved for financing under the project subject to satisfactory technical, economic and financial analyses (para 3.05). In all cases, the economic analysis took into account both dredging costs, to be financed under the project, and berth construction costs, to be financed directly by the industrial concern. If the waterfront for PMT were not constructed, then maritime traffic generated by the plant would have to be transported by truck to and from the TUM, where it would be transferred to ships. Quantified benefits from both berth construction and dredging therefore are: (a) avoidance of road transport and double-handling costs; and (b) avoid- ance of ship waiting time at the TUM. This component has an estimated ERR of 22%. The industrial development at Celasa could not take place without a  - 26 - waterfront, and, as such, this component was justified us'ng a producer surplus approach. The value-added of Celasa's production was compared with total investment costs (land, industrial plant and equipment, berth construction and dredging costs, and part of the flood control costs), yielding an estimated ERR of 18Z. 3.38 Tug (4% of project costs). The project would provide for acquieition of a 35-ton tractive power tug which would assist in vessel maneuvering, berthing and unberthing within the harbor. The tug, which would be capable of handling vessels of up to 100,000 dwt, is essentially required for safety reasons. The type of tug to be acquired was selected after an anAlysis of technical alternatives which took into account the type, number and size of vessels expected to visit the port. In addition to safety considerations, because the tug is more powerful than that currently in operation, vessels would benefit from faster turnaround times. Further, without the project, the port would have only one tug. If this were to break down, port operations would be shut down as well, which would result in costly increases in ship waiting costs. The tug was analyzed as part of the overall port since it is an essential element in port operations. Therefore, an overall estimated ERR was calculated for all transport-related project components (paras 3.35-3.37) whereby all costs (including that of the tug) and quantifiable benefits were compared. This yielded an overall ERR of 17X. 3.39 Small- and Medium-Scale Industrial Park (3% of project costs). The small- and medium-scale industrial park would provide infrastructure and related services to industrial concerns which would, in turn, provide inputs and services to the major industries located at the Lazaro Cardenas industrial port. It is also expected that companies which would use SICARTSA steel in manufacturing would locate there. The investment in the park for small- and medium-scale industries was analyzed by first projecting potential demand, based on a market analysis, for prepared industrial land and then comparing economic capital (including a share of flood control costs) and operating costs with projected park revenues net of transfer payments and taxes. This component has an estimated ERR of 23Z. 3.40 Environmental Components (14% of project costs). The project includes two components which address problems of environmental degradation caused by municipal and industrial wastes. The FONDEPORT industrial sewer is the first phase of an overall master plan at the industrial park to provide for appropriate disposal of waste as the industrial park develops. Within the overall plan, this first phase is the least cost solution; it provides for lagoon-based treatment and not for sophisticated and costly treatment plants; the lagoons would discharge into the Rio Balsas and not into the ocean, Which would be justified only when the industrial park is more intensively utilized. The FONDEPORT sewerage system to be supported under the project is therefore considered appropriate for projected industrial demand in the short to medium term. The cost of this component was included in the overall calculation of project .osts and benefits which yielded an economic rate of return of 23%. The solid waste management system is under study. The study will include financial and economic analyses to ensure that the least cost solution is selected.  - 27 - 3.41 Flood Protection (30% of project costs). The economic evaluation of the flood protection component analyzed a number of alternatives providing different levels of flood protection in order to determine the optimum design solution. Benefits were calculated by first determining levels of damages which would occur at various flood discharges and then applying these damages to probabilities of the flood's occurrence. The main quantified benefits were avoidance of damage to industrial and port infrastructure and prevention of production losses. With the project, the La Villita dam is also expected to produce an increased energy output. The alternative with the highest net present value of benefits provides protection for flows of up to 7,000 cms. This level of flood protection has an estimated economic rate of return of 40%. G. Project Risks and Sensitivity Analysis 3.42 The main risks which could be associated with the project would be shortfalls in the realization of forecast traffic and delays in completion of ongoing industrial plant construction. Those components related primarily to port traffic growth levels (e.g., road and rail access and cargo handling equipment) are moderately sensitive to changes in costs and benefits, but only major shortfalls in traffic growth levels would significantly affect these components' viabilities (Table 3.2). The container handling equipment is the most sensitive of the transport-related components to decreases in benefits. A 27% decrease in benefits (or traffic) would reduce the ERR of that component to 12%. Benefits from the road, rail and general cargo handling equipment would have to decrease by 38%, 33% and 27% respectively for these components' ERRs to be reduced to 12%. Since the traffic forecasts are considered conservative, the risk of such major shortfalls occurring is not great. Since part of Lazaro Cardenas' container traffic is expected to be diverted from Manzanillo, a sensitivity test was made to determine the impact on the container handling equipment component if this traffic did not materialize. If traffic were not diverted from Manzanillo, the equipment would have an estimated ERR of 15%. These components are moderately sensitive to increases in costs. The cost of cargo handling equipment would have to increase by 35% for this component to have an ERR of 12%. The costs of the road and rail components would have to increase by well over 50% to reduce their respective ERRs to 12%. 3.43 The small- and medium-scale industrial park is also only moderately sensitive to increases in costs or decreases in benefits. Benefits would have to decrease by 37%, or costs to increase by 57%, for this component's ERR to decline to 12%. The flood control's economic return is not sensitive to expected changes in costs and benefits. Costs would have to increase by 405%, or benefits to decrease by 80%, to lower this component's estimated ERR to 12%. 3.44 Among the project components, the greatest risks are related to the dredging to create industrial waterfronts since the benefits are intimately dependent upon the successful completion and operation of each industry. Sensitivity analysis of PMT indicates that, even if initiation of production were delayed by five years, the dredging works would still be economically viable. The greatest risk is that associated with the oil drilling platform manufacturer, considering the speculative nature of this type of enterprise. If the first order for an oil drilling platform were received three years  - 28 - behind schedule, this investment's ERR would decline to 12X. The risk is being borne by the company involved and is being minimized by the division of the dredging work into three stages. Stage one is needed for the construction phase and for delivery of inputs; subsequent stages are needed to launch the platforms. Stages two and three would not go forward if the company does not receive contracts for the platforms. The economic analysis was made for all three stages but only stage one is included in the first group of works being financed by the Bank. The economic analysis would have to be reevaluated for each tranche and before Bank approval is given. The risks of premature investment in the dredging to create waterfronts is being further minimized by the requirement that each company pay directly for the costs of such dredging. Before any tranche is approved, the Bank would receive written agreement between the company involved and the Government, indicating the relevant financial arrangements. 3.45 Because the execution and operation of the proposed project will require coordination among a large number of agencies falling under the jurisdiction of three secretariats, there is a risk of administrative complication and delay. The decision to create a monitoring and coordinating group within the Industrial Ports Program Commission and to name SCT as lead agency should minimize this risk. Nevertheless, a greater-than-average Bank supervision effort will be required over the life of the project. IV. PROJECT IMPLEMENTATION DETAILS A. Cost Estimates, Finance and Disbursements 4.01 A summary of the estimated costs for the proposed project components is given on the following page, and a detailed breakdown of the costs by component and year is given in Tables 4.1 and 4.2. Except as indicated in the notes on the tables, final engineering is substantially complete. The sources of funds for the local costs for each component are given in the financing plan shown in Table 4.3. 4.02 Disbursements on the loan would be made against: (a) 66% of total expenditures of civil works contracts; (b) 100% of cost, insurance and freight for equipment and rails procured from foreign sources and 100% of ex-factory cost for equipment and rails procured from domestic sources; and (c) 100% of the costs of professional services for technical assistance and training and for training other than recurrent operational training costs.  - 29 - mEXICo LAZARM CARDENAS INDUSTRIAL PORT PROJFCT SUMMARY ACCOUNTS COST SItIARY (USS Million) Z Total -- I Foreign Base Local Foreign Total Exchange Costs I. INVESTMENT CESTS A. Road Access 2.3 1.9 4.2 45 S D. Rail Access 0.2 0.9 1.0 aS 1 C. Maritime Akcess 8.9 20.9 29.8 70 35 O. Esuipsent 3.2 8.5 11.7 73 14 E. Collector Sewers 1.S 1.5 3.0 30 3 F. System for Solid Waste Mst. 1.2 1.8 3.0 60 3 S. Industrial Park 1.3 1.1 2.4 45 3 H. Flood Protection 8.1 18.9 27.0 70 31 I. Technical Assistance 0.2 0.4 0.5 70 1 J. Supervision of Constr. 0.8 1.6 2.5 70 3 K. Training 0.3 0.7 1.0 70 1 Total INVESTMENT COSTS 27.9 36.2 86.1 68 100 Phusical Contingencies 3.1 5.9 9.0 66 10 Price Contingencies 5.4 12.0 17.4 69 20 Total INCLUDINO C2NTIN6ENCIES 36.4 76.1 112.5 68 131 May 1984  - 30 - 4.03 Bank funds are expected to be disbursed over a six-year period (Table 4.4) which is generally in line with the standard disbursement profile for non-agricultural projects in Mexico which indicates that a seven-year period is required to obtain full disbursement. In preparing the disbursement estimate, the standard profile was modified to take into account the fact that most of the project components are essentially completion of ongoing projects and that substantial amounts of preparatory works have already been completed. Work on the FONDEPORT sewerage system was initiated in October 1983. In order to provide for disbursements on these works, retroactive financing of up to US$1.5 million would be provided for civil works under the loan. B. Execution and Procurement 4.04 The proposed project would be implemented by the various agencies responsible for design and physical maintenance of individual project components, with overall coordination by SCT. This procedure is, in principle, similar to that used in earlier stages of the industrial ports program, during 1979-1983; it has, as its rationale, the continuity of responsibility from the design stage --through bidding, contracting and supervision of construction- to final acceptance and maintenance (or operation), all under the jurisdiction of the same agency. The contract breakdown and budgetary allocations would be made accordingly. The project implementation schedule is given in Chart 26010. 4.05 The executing agencies responsible for specific project components are shown in Table 4.5. Within SCT, the Subsecretariat for Infrastructure has been designated as the official with primary responsibility for coordination of the proposed project throughout the implementation period. A general coordinator would be appointed by the Subsecretary for Infrastructure in SCT to oversee supervision of works being carried out by the different agencies. This coordinator would be located in Lazaro Cardenas to facilitate identification and resolution of problems which may arise during project execution. 4.06 Local competitive bidding procedures used by FONDEPORT (para 3.12) are similar to those used by SCT, which have been reviewed by the Bank and found to be generally acceptable. All contracts for civil works and procurement of goods with a value of more than US$200,000 would be subject to prior review and approval by the Bank. Contracts under US$200,000 would be reviewed after the award. Procurement arrangements for items to be financed under the proposed loan are summarized as follows.  - 31 - -- US$ millions Procurement Method Project Element ICB LCB Other N.A. Total Cost Civil Works 86.4 3.8 - - 90.2 (57.0) (1.9) (58.9) Equipment and rails 13.8 1.9 2.2 - 17.9 (10.6) (2.2) (12.8) Consultant Services, Training and Studies - - - 4.4 4.4 (4.4) (4.4) Total 100.2 5.7 2.2 4.4 112.5 (67.6) (1.9) (2.2) (4.4) (76.1) Note: Figures in parentheses are the respective amounts financed by the Bank loan, exclusive of front end fee. All figures include price and physical contingencies. 4.07 Supervision of construction would be the responsibility of the individual agencies listed in Table 4.5. For field supervision of major civil works, for inspection of major pieces of equipment during manufacture and for final acceptance tests upon delivery of equipment, the agencies concerned would, where appropriate, retain the services of consultants acceptable to the Bank. Further details with regard to the implementation of the environmental and flood protection components of the project are given in Annexes 1 and 4 respectively. 4.08 The financing plan for the project is given in Table 4.3 and smarized in the table below. US$ millions - Funds Required Local Foreign Total z Proposed Project 36.4 76.3 112.7 72 Debt Service during Period - 42.9 42.9 28 Total Required 36.4 119.2 155.6 100 Funds Available Funds Generated Internally 47.1 - 47.1 30 IBRD Loan for Project - 76.3 76.3 49 Government Financing (10.7) 42.9 32.2 21 Total Available 36.4 119.2 155.6 100 The project costs related to port operations and infrastructure, industrial infrastructure and flood control would be recovered by charges levied by ESP, FONDEPORT and the Government. Road and rail infrastructure costs would be  - 32 - recovered by road user charges and, in the case of rail, through N de N tariffs. C. Special Account 4.09 In order to reduce the interval during which the Government would finance the Bank's share of project costs with its own resources, the Bank would make advance payments from the loan account into a Special Account, to be opened in US$ in the Central Bank, and which would be available for reimbursing the Government, through BANPESCA, for the Bank's share of the project cost. The total amount in the Special Account would be that required for project execution, but would not exceed US$6 million. BANPESCA would be entitled to make withdrawals from the Special Account for payments incurred on Bank-approved contracts. The withdrawal applications would be on the basis of standard documentation. Supporting documentation would not be submitted to the Central Bank and the Bank, but would be retained by SCT, as coordinating agency; it would be made available for inspection during audits (para 4.10) and project supervision missions. The Bank would replenish the Special Account upon request of the Borrower on the basis of the withdrawals made. A condition of loan effectiveness would be the opening of the special account. D. Accounting and Auditing 4.10 Under the project, the Bank would require four types of annual audits: for (a) the Special Account in the Banco de Mexico; (b) ESP; (c) FONDEPORT; and (d) the project accounts on which the statements of expenditures are based. Procedures have been agreed to between the Government, BANPESCA and the Bank which would govern the auditing of all Special Accounts established for loans with BANPESCA. The external auditor for BANPESCA would carry out the required audit each year. These procedures were confirmed at negotiations. For the accounts of ESP and FONDEPORT, there is a satisfactory external audit carried out annually in addition to a system of internal auditing checks. Both ESP and FONDEPORT have highly competent accounting staff, and their accounts are well managed and up-to-date. It was confirmed at negotiations that an external audit of ESP and FONDEPORT would continue to be carried out annually in accordance with sound auditing principles by an independent auditor, and that, beginning with the fiscal year ending December 31, 1984, the Government would forward the audit report of these entities to the Bank not later than six months after the close of the fiscal year. In addition to these accounts, CNCP would maintain annual consolidated accounts for all entities operating in the industrial port, including the Government. 4.11 With regard to the auditing of Government project accounts, SPP will carry out the control and verification of accounts and will report on such verification annually. There are also General Directorates of Control in each Secretariat, independent from the operational departments, carrying out physical as well as financial audits of expenditures. The auditing procedures are satisfactory, and the SPP is considered to be an appropriate agency for carrying out such audits as it has under ongoing Bank loans for public sector investment. The auditing procedures to be applied to the related project accounts were confirmed at negotiations.  - 33 - E. Semi-Annual Consultations and Project Monitoring 4.12 With regard to project monitoring, the Government would prepare periodic reports providing information on progress in the execution of the project, listing the status of each contract related to Bank-financed components of the project; the status of disbursement requests and the schedule of estimated withdrawals of the loan proceeds. Furthermore, in order to monitor progress on the objectives of the project, the Government and the Bank would hold semi-annual meetings in March and September of each year. The Government would prepare reports on the items detailed in Annex 10. V. AGREEMENTS REACHED AND RECOMMENDATION 5.01 During negotiations, agreement was reached with the Government on the following: (a) the Government to take all appropriate measures to prevent contamination of the Lazaro Cardenas Industrial Port area's surface waters (para 2.28); (b) evaluation methodology, criteria and procedures for justification and Bank approval of investments under the dredging program (para 3.05); (c) submission, for Bank review, of studies and designs for the solid waste management system by December 15, 1984 (para 3.07); (d) the Government to enter into agreement with the municipality of Lazaro Cardenas regarding arrangements for construction, operation and cost recovery for the solid waste management system (para 3.08); (e) the Government to regulate the La Villita and Infiernillo Reservoirs so as to limit the water flow to 7,000 cms with a flood return frequency of about 200 years (para 3.10); (f) the scope and timing of professional services (para 3.11); (g) the Government to allow ESP, by June 30, 1985, to collect storage fees and retain an amount to cover cost of operating and maintaining storage facilities (para 3.21); (h) the Government to transfer equipment to ESP by December 31, 1984 (para 3.21); (i) the Government to take all appropriate measures to permit ESP to meet its financial targets (para 3.21);  - 34 - (j) the costs of dredging to provide maritime access and industrial waterfronts to be recovered from the beneficiaries of the works (para 3.27); (k) study of cost-related port dues to be completed by September 15, 1985; and preparation of an action plan for the progressive achievement of the study's recommendations at Lazaro Cardenas (para 3.30); (1) the Government to recover flood control costs from FONDEPORT (para 3.30); (m) accounts to be kept of Federal Government costs and revenues at Lazaro Cardenas port (para 3.30); (n) procedures for ICB, LCB prequalification, tendering and contracting (paras 4.04-4.06); and (o) annual external audit of Special Account and verification of project accounts (paras 4.10-4.11). 5.02 During negotiations, agreement was reached with ESP on the following: (a) ESP to produce, beginning in 1987, revenues sufficient to cover at least operating expenses and that amount by which debt service requirements exceed depreciation allowance. For 1985 and 1986, ESP to produce revenues sufficient to cover working costs (para 3.21); (b) preparation of a cost and tariff study by September 15, 1985 and an action plan for implementation of its recommendations (para 3.21); and (c) annual external audit (para 4.10). 5.03 During negotiations, agreement was reached with FONDEPORT on the following: (a) preparation, by December 15, 1984, of an action plan for Lazaro Cardenas industrial park based on administration, commercialization and promotion studies, and carrying out of the action plan (para 3.27); and (b) annual external audit (para 4.10); 5.04 The following would be conditions for disbursement: (a) on each dredging subproject, satisfactory evidence of technical, economic and financial feasibility (para 3.05);  - 35 - (b) on the solid waste management component, signed an;. effective agreements regarding construction, operation and cost recovery of the system (para 3.08); and (c) on the flood protection works, confirmation of the economic viability of the component (para 3.10). 5.05 The following would be conditions for loan effectiveness: (a) BANPESCA to enter into agreements with ESP, FONDEPORT and the Government for on-lending of project funds (para 3.16); (b) completion by PONDEPORT of the administration, commercialization and promotion studies (para 3.27); and (c) opening of the special account (para 4.09). 5.06 Subject to the above, the project provides a suitable basis for a Bank loan of US$76.3 million. The terms would be 15 years with a three-year grace period. May 29, 1984  - 36 - TABLE 2.1 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Population of Principal Urban Centers, 1960, 1970 and 1980 (thousands of inhabitantp) Average Amount Growth (Z) Urban Center 1960 1970 1980 I/ 1960-70 1970-80 Mexico City (Metropolitan Zone) 5,262 8,657 15,082 5.1 5.7 Guadalajara 851 1,486 2,490 5.7 5.3 Monterrey 708 1,236 2,052 5.7 5.2 Juarez 262 407 650 4.5 4.8 Tijuana 152 327 624 8.0 6.7 Puebla 289 413 613 3.6 4.0 Leon 210 365 605 6.1 5.2 Tampico 176 275 460 4.6 5.3 Torreon 259 325 449 2.3 3.3 Chihualua 150 257 447 5.5 5.6 Mexicali 175 263 414 4.2 4.6 Total Population 34,990 48,996 67,567 3.4 3.3 _/ Preliminary estimates Source: Censo General de Poblacion. March 1984  - 37 - TABLE 2.2 Regioa,l D1stribzdtic of EwumIgc Ativft3y STAOM~aEf l n g ns(175) lf Gm F Gcms Ar~Ri1ta (1980) VAleMd_________ z,c SFAE Anaea3ietm 5,471 507 0.8 499 0.3 112 0.5 1,601 0.3 Baja 0liforna 69,992L 1,227 1.8 3,139 1.7 334 1.4 7,881 1.6 BaJa sxla Sur 73,475 221 0.3 457 0.2 42 0.2 969 0.2 q~ede 50,812 371 0.6 276 0.2 22 0.1 820 0.2 awh4la 149,982 1,562 2.3 8,012 4.4 8% 3.9 24,027 5.1 Colinm 5,191 341 0.5 500 0.3 569 2.5 857 0.2 Ctiaps 74,211 2,099 3.1 243 0.1 60 0.3 1,235 0.2 Chdhbuma 244,938 1,937 2.9 4,68D 2.6 695 3.0 10,064 2.1 Distrio Fede=l 1,479 9,371 14.0 55,779 30.5 3,269 14.1 140,Z22 29.6 pA2gO 123,181 1,160 1.7 1,521 0.8 2% 1.3 4,096 0.9 G.auesato 30,491 3,048 4.5 2,918 1.6 275 1.2 8,316 1.8 Qurrexo 64,281 2,174 3.2 398 0.2 l13 0.8 939 0.2 lIIdelp 20,813 1,516 2.2 3,562 1.9 590 2.5 9,716 2.1 Jiaoo 80,836 4,297 6.4 11,590 6.3 1,296 5.6 29,854 6.3 Mexico 21,355 7,532 11.2 36;246 19.8 4,064 17.5 95,455 20.2 ilcan 59,928 3,050 4.5 1,347 0.7 235 1.0 3,775 0.8 1meim 4,950 933 1.4 1,815 1.0 230 1.0 5,264 1.1 Nayarit 26,979 729 1.1 764 0.4 50 0.2 2,282 0.5 IlAXv 1Ico 64,924 2,464 3.6 2o,0o4 no.0 3,515 15.2 50,472 10.7 owca 93,952 2,515 3.7 711 0.4 163 0.7 1,805 0.4 Pebla 33,902 3,285 4.9 6,403 3.5 8L7 3.5 18,360 3.9 eearo 11,449 731 1.1 2,573 1.4 700 3.0 6,591 1.4 4Ldnraz Ro 5D,212 210 0.3 56 - 14 - L54 - San lulas Po1 s 63,068 1,672 2.5 2,324 1.3 1,082 4.7 5,676 1.2 51mb.cs 58,328 1,882 2.8 1,778 1.0 220 0.9 4,539 1.0 scira 185,052 1,498 2.2 2,350 1.3 474 2.0 6,309 1.3 TA 25,267 1,149 1.7 165 - 56 0.2 579 0.1 luIi1ps 79,384 1,923 2.9 2,226 1.2 1,575 6.8 5,125 1.1 Tlsax 4,016 549 0.8 838 0.5 109 0.5 2,352 0.5 Veraczuz 71,699 5,264 7.8 7,456 4.1 951 4.1 19,266 4.1 Yucatan 38,402 1,033 1.5 1,342 0.7 198 0.9 3,529 0.7 7CacteC8S 73,252 1,146 1.7 522 0.3 71 0.3 1,024 0.2 ntSIL M1CD 1,958,201 - 67,396 100.0 182,831 100.0 23,160 100.0 473,148 100.0 1/ IndiJia ecctive ilmbtrlns bit adnie petrolem lIn&try. Scurce: Pbpulatiu, sp Agmila FatadlstI 198D y X mo Ge7ral de Poblacln y Vivemxb, 1980; Pesutados Prellmin, Mm, 19L. Foz, ae txngl 9PP, Oafl, X CeuIc TIstital 1975, edco, 1979. Dacember 1983  - 38 - ~cD FMH 2.3 UZAR) C- INSUEL PM 10 Indutrial Pbrts Prog InesUs. L979-1983 (millimso of current Ipan -s) 1979 1981 1981 1922a/ 1983 b/ SAEKP Land AcquEstion - 780.0 1,28&1 7,881.3 - Ifrascrmznue ad Yqpmeat - 31.0 220.7 278.4 - Rod Accs - 72.0 540.0 480.0 335.0 Urba Infrastructure and }Hws1 - 30.1 250.4 491.6 - Stumies aid hhfrstratioc 86.9 35.9 305.9 301.6 16.0 Sub-Total 86.9 949.0 2,578.3 2,332.9 scr Rs11 A-es - 90.0 107.8 53.0 250.0 Rl Mp - 4X45 7312 - Dredghr and fefloaters - 252.0 1,249.1 4,736.2 1,076.4 qpdpmemt - - - 154.6 2M0.0 Gain Terimfl - 188.0 380.5 100.0 1,118.9 IAtiple Use Terdnal - - 50. 75.0 285.2 -wit-e Sigu1lr - - - 71.0 6.0 Stuie aid AInistr oc 61.3 100.0 95.8 189.9 - ::! 42.0 106.0 200.0 228.0 384.5 Foideport c/ - - - - 675.0 Sub-Tatal 103.3 736.0 2567.7 5,680.9 4,347.0 e SAWH Water Suly '- 89.0 1,050.0 736.0 695.0 Tlhod Protectim - - 152.2 500.0 472.0 S-eU, and Projct A - 60.0 149.5 1.7 - Sub-Total - 869.0 1,350.7 1,237.7 1,167.0 - 54.8 61.9 250.0 100.0 SSA - - 108.0 33.1 25.0 SEIXE cl - - - - 494.5 Ostion Terminal - - 199.0 1,000.0 Naval Installations - - 118.4 - SaR1m Cmz T na1 - - 497.4 1,736.0 Snb-Total - - 814.8 2,726.0 6,462.0 TMrL DINlSTEIR tQ PCAI 190.2 2,608.8 7,484.6 12,271.0 12,610.5 US$ =Mlins euiva2ert 8.3 13.4 305.5 223.1 105.1 NDt available 0 a/ Cmdltted b/ Budee c/ ITzbi erierxit formrly under SADP scurce: oEP M iB84  - 39 - N__OD ThN.E 2.4 LU - lIMS Pr RV= invesnit at Imro Caxders IAus 1tal Port. 1979-1983 (Mllias of owxnt pesos) 1979 1980 1981 1982 al 1983 b/ AaFusitioc of Lm! - 258.7 1,067.2 575.6 - } efras~ucutr - - 93.2 174.3 - Roa Acce6s - 52.0 120.0 200.0 215.0 Urin InfrautKre and HEcsbg - - 167.5 227.6 - Studies and Afitnstrati 23.9 4.5 150.9 94.9 6.0 STota1 23.9 315.2 1,598.6 1J2724 scr RaflAccess - 50.0 57.1 18.0 200.0 Dredging and b&a1ters - 180.0 507.7 2,134.4 525.0 Grain Temnaml - 188.0 380.5 100.0 1,118.9 Sifg t - - - 11.0 - I tLkpl Use Terdl - -- 100.0 EFI4runt - - - - 200.0 StdiFes and Ad}inistrati[xn 11.8 11.2 14.4 47.5 - ClI 10.5 26.5 50.0 57.0 - Fbxxseport c/ - - - - 185.0 Sub-Total 22.3 455.7 1009J 2,367.9 2,550.0 c/ SAM -iater Supply - 125.0 174.0 400.0 16.0 FIod Protectioc - - 89.5 500.0 472.0 SmixIles and Projects - 20.0 29.2 1.7 - Sub-Total - 145.0 292.7 901.7 488.0 se - 13.5 15.5 50.5 18.8 SSiA - - 27.0 8.3 3.7 SIPS - - 0.8 2.4 4.0 9XEcI - - - - 170.0 CLvil Works - 31.0 - Stuixies ani Projects - - 87.4 - Sub-Total _ - 118.4 - 217.0 TlML LAZA3D CAMEU1AS 46.2 929.4 3,062.7 4,603.2 3,451.5 U3$ udlir-es equivlment 2.0 40.4 125.0 83.7 28.8 Not avalabLe b xbIReted of Imbies iture fozurly wder S&w soe QXP- mhri 198s4  MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Historic Transport Investment (rin mlllions of 1983 Mex$) 1/ Subsector 1977 1978 1979 1980 1981 1982 1983 1984 (Projected) Highways 56,600 59,500 65,100 72,700 110,400 79,200 71,700 54,500 Railways 27,000 23,600 38,300 52,300 64,400 55,500 54,100 50,500 Ports 2/ 3,400 3,200 6,700 15,300 33,200 29,200 11,900 11,700 Aviation 3 4,200 4.400 4.700 4J900 8,200 2,500 2,600 3,900 0 Total 91.200 90,700 114,800 145,200 216,200 166,400 140,300 120,600 US$ million equivalent 760 756 957 1,210 1,802 1,387 1,169 1,005 1/ US$1.00 - Mex$ 120 2/ Excludes dredging except in 1983 and 1984 and PEMEX port investments. 3/ Only infrastructure. For equipment in 1983 Mex$ 30,586 million was spent and Mex$ 9,900 million is budgeted for 1984. Sources SPP, SCT and Bank estimates May 1984 I.  - 41 - MEXICO TABLE 2.6 LAZARO CARDENAS INDUSTRIAL PORT PROJECT Total Traffic Through Mexican Ports by Major Commodity Groups, 1978-1982 (thousand tons) 1978 1979 1980 1981 1982 IMPORTS General Cargo 2,363 2,321 3,589 4,807 2,584 Agricultural Bulk 3,321 3,622 5,808 5,491 3,227 Mineral Bulk 2,868 3,407 3,233 3,637 2,855 Petroleum and Derivatives 1,172 1,427 547 607 3,041 Other Liquid 379 161 340 438 557 Other - 444 1 1 Total Imports 10,103 10,938 13,520 14,982 12,265 EXPORTS General Cargo 1,414 1,421 1,134 1,040 1,232 Agricultural Cargo 71 30 - - 14 Mineral Bulk 7,737 8,528 8,480 8,006 6,965 Petroleum and Derivatives 18,854 27,871 41,409 45,549 79,180 Other Liquid 1,904 1,924 1,490 1,187 1,151 Other 30 - 23 17 14 Total Exports 30,010 39,773 52,536 55,799 88,556 Cabotage (in plus out) General Cargo 1,508 1,723 1,854 2,066 2,123 Agricultural Cargo 160 39 232 273 627 Mineral Bulk 5,375 6,676 7,768 7,939 6,988 Petroleum and Derivatives 27,637 36,266 47,980 49,305 39,040 Other Liquid 545 622 465 409 563 Other 166 - 221 264 281 Total Cabotage 35,391 45,326 58,519 60,257 49,622 TOTAL PORT TRAFFIC 75,595 96,036 124,575 131,038 150,443 Total Traffic - exclusive of Petroleum and Derivatives 27,932 30,472 34,639 35,577 29,182 Source: SCT February 1984  MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Lazaro Cardenas: Actual and Forecast Traffic, 1979-1989 (thousand tons) ACTUAL TRAFFIC FORECAST TRAFFIC 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 MULTIPLE USE TERMINAL Containerized General Cargo 0 0 2 10 46 69 93 111 132 157 187 Other General Cargot/ 11 43 168 137 184 180 239 246 260 274 285 Grain 0 174 281 337 458 590 0 0 0 0 0 Minerals 0 28 41 29 12 65 69 76 84 92 99 Iron and Steel 185 46 4 162 346 330 272 307 350 401 408 Sub-Total 196 263 455 646 1,034 1,169 604 664 742 832 880 SPECIALIZED TERMINALS SICARTSA (Bulk Minerals) 715 707 707 521 173 395 500 500 500 500 500 CONASUPO (Grain) 0 0 0 0 0 0 600 630 670 710 750 FERTIMEX 0 0 23 0 0 0 320 673 1,204 1,266 1,330 PMT 0 0 0 0 0 0 0 144 261 261 261 Celasa 0 0 0 0 0 0 19 28 45 118 86 Pemex 102 110 147 140 94 150 260 320 386 396 406 Sub-Total 817 817 877 661 267 545 1,699 2,295 2,966 3,251 3,332 TOTAL LAZARO CARDENAS 1,013 1,080 1,332 1,307 1,301 1,714 2,303 2,959 3,1708 4,083 4,212 I/ includes bagged minerals handled as general cargo. Source: RPT; Annex 2, Tables I and 2. March 1984  MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Economic Evaluation and Sensitivity Analysis Economic Rate of Return Benefits Costs Base Case Decrease by Increase by Economic Rate Switching Values 20% 20Z of Return Benefits Costs (Z) (2) Project Component Road Access 20 -38 60 16 17 Rail Access 19 -33 50 15 16 General Cargo Equipment 23 -25 34 16 14 Container Handling Equipment 18 -27 36 14 15 Maritime Access: PMT 22 -46 84 18 19 Maritime Access: Celasa 18 -37 59 15 16 Flood Control 40 -80 405 43 44 Small and Medium Scale Industrial Park 23 -37 57 17 18 Sensitivity Test: Delays in Industrial Activity Component Assuption ERR Rail PMT and Celasa traffic does not materialize 17% Maritlme Access: PHT Initiation of PMT production delayed 5 years 13% Maritime Access: Celasa Initiation of Celasa Production delayed 3 years 12Z 4 years 10% Source: RPT; Consultores en Ingenieria, Planeacion y Sistemas; and Mission estimates. May 1984  - 44 - TABLE 4.1 LAM CARUCUAS INDIISTRIAL PORT P9.CT Detailed Cost Table (US Millilal Dreakdam ot Totals ncl. Cant 1USI NiDion) Paraeters Base Casts Totals Includinm Contingenries Local Phs. - - For. (Exc. btis I Cot. For. Gross SUmma:' 1995 1996 187 1998 1989 Total 15 1986 1987 19B 19B9 Total Exch. Taxesl Taxes Total Rate Exch. Tax Rate Account I. INUESTMENT COSTS A. Civil Horks Road Access a/ 2.1 2.1 - - - 4.2 2.5 2.7 - - - 3.2 2.4 2.1 0.8 5.2 0.15 0.45 0.15 RD Rail klcess b/ 1.0 - - - - 1.0 1.1 - - - - 1.1 1.0 - 0.2 1.1 0.1 0.85 0.15 PA Nalritie Access cl 2.4 7.4 *.B 13.2 - 29.8 2.7 9.2 9.2 19.5 - 40.6 28.4 9.9 3.2 40.6 0.1 0.7 0.08 MA Esuirsent d/ - 6.5 4.6 0.6 - - 11.7 6.3 5.2 0.7 - - 12.7 9.3 1.9 1.5 12.7 0 0.73 0.12 ED Collector Srens ei 1.2 1.3 0.5 - - 3.0 1.4 1.7 0.7 - - 3.0 1.9 0.9 1.0 3.9 0.15 0.5 0.27 CS System for Solid Maste lSt. fi 1.3 1.2 0.5 - - 3.0 1.6 1.6 0.7 - - 3.8 2.3 0.4 1.1 3.8 0.15 0.6 0.29 H Industrial Park I/ 1.6 0.9 - - - 2.4 11 1.0 - - - 3.0 1.3 1.2 0.4 3.0 0.15 0.45 0.15 I U Flood Protection h/ 4.9 7.7 6.9 5.0 2.7 27.0 5.7 10.0 9.6 7.7 4.5 37.6 26.3 7.S 3.9 37.6 0.15 0.7 0.1 FP Sut-Total Civil Marks 20.9 25.1 15.2 19.2 2.7 92.1 23.B 31.4 21.0 27.2 4.5 107. 72. 8 22.9 12.1 107.8 3. Engineering I Other Servicrs Technical Assistance 0.2 0.1 0.1 0.1 - 0.5 0.2 0.1 0.1 0.1 - 0.6 0.4 0.2 - 0.6 0 0.7 0 TA Supervision of Construction 0.7 0.9 0.5 0.2 0.2 2.5 0.7 1.0 0.6 0.3 0.3 2.9 2.0 0.9 - 2.9 0 0.7 0 SC TrainLrd 0.3 0.3 0.2 0.1 0.1 1.0 0.3 0.3 0.2 0.1 0.1 1.2 0.3 0.4 - 1.2 0 0.7 0 TIE Sub-Total Engineerird 1 Other Services 1.2 1.3 0.8 0.4 0.3 4.3 1.2 1.5 1.0 0.5 0.4 4.7 3.3 1.4 - 4.7 Total IIIUESTENT COSTS 2.1 26.4 16.0 18.6 3.0 86.1 S5. 32.3 22.0 77.7 4.9 112.5 76.1 24.3 12.1 112.5 Tota 22.1 26.4 16.0 18.6 3.0 96.1 25.1 32.9 22.0 27.7 4.9 112.5 76.1 24.3 12.1 112.5 Nay 16w 1994 16:25 aI Preliminary engineering, including soils investigations by means of test pits, has been completed. Detailed design substantially complete. Current cost estimates are based on unit costs from semilar earth uovirg and paving contracts currently under way at Lszaro Cardenas. b/ Construction is currently in progress. The loan will be used to replace rails taken from the stocks of DVF. The costs of the rails are current world uarket costs. Rails are exempt freo import duty and IVA. c/ Maritime Access - Dredging costs have been estimted on the basis of actual bathimetric and topographic surveys, probings. borings, and recently submitted hid prices for ongoing dredging contracts on the Pacific coast of Nexlco. EVA is Included only for estimated costs of fuel, housing and subsistence. dl hased on December 1983 world market or local costs, as aplicable, and Include lSZ EVA and, - applicable, Import dutles. el For the FONDEPORT sewerage based oan detailed engineering. fi EstImated costs are based on a preliminary plan for operation of a solid waste collection and disposal system In a sanitary landfill and through a toxic waste incinerator. The composition of the equipment and structures are based on current costs. i Engineering completed. The eatiuated costs are based on current construction costs In the Lazaro Cardenas area. hi Detailed design were completed for a such larger flood control project and advertised for bid in 1981. Borings and problnga have been completed along both sides of the proposed flood channel. The revised contract docments are substantially complete for the scaled-down project. Unit prices have been estimated from updating of the 1981 bid prices, recent channel rectification work at the Balsas River and recent earth-moving contracts in Lazaro Cardenas. Source: CNCP and misslon estlmates May 1984  MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Dredging Program (thousands of m3) TRANCHE 1985 1986 1987 1988 TOTAL BASE ODST (US$ millions) Tranche I (a) CELASA (Stage 1) 1900 5.4 (b) PMT 1000 2.9 Tranche II (a) PEMEX 1000 2.9 (b) CELASA (Stages 2 and 3) 2000 5.8 Tranche III2 180 5.2 Tranche IV 2000 7.6 29.8 Source: OGOM and FONDEPORT March 1984  - 46 - TABLE 4.3 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Project Financing Plan (US$ Million) Funds Required 1/ Local Foreign Total Z Project: FONDEPORT 4.6 3.2 7.8 5 ESP 3.4 9.3 12.7 8 Government 28.4 63.8 92.2 59 Project Total 36.4 76.3 112.7 72 Debt Service during Project 42.9 42.9 28 Total Funds Required 36.4 119.2 155.6 100 Funds Available Internally Generated: FONDEPORT 10.4 - 10.4 7 ESP 6.6 - 6.6 4 Government 2/ 30.1 - 30.1 19 Total Internally Generated 47.1 - 47.1 30 IBRD Loan for Project 76.3 76.3 49 Government Financing (10.7) 42.9 32.2 21 36.4 119.2 155.6 100 1/ Though it is derived from the consolidated Fund Flow Statemeut (Annex 6, Table 10), the above table relates only to the project components and does not include other investments planned by the SCT, FONDEPORT and the ESP. Such investments were, however, included in the financial evaluation. 2/ Does not include revenue from road and rail. Source: CNCP and Mission Estimates May 1984  - 47 - TABLE 4.4 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Estimated Schedule of Disbursements (US$ millions) Cumulative Disbursements Disbursements for the at end of Cumulative IBRD Fiscal Year Semester Semester Percentage 1985 December 31, 1984 1.7 1.7 2 June 30, 1985 4.1 5.8 8 1986 December 31, 1985 11.4 17.2 23 June 30, 1986 11.1 28.3 37 1987 December 31, 1986 11.1 39.4 52 June 30, 1987 7.3 46.7 61 1988 December 31, 1987 7.4 54.1 71 June 30, 1988 9.3 63.4 83 1989 December 31, 1988 9.4 72.8 96 June 30, 1989 1.1 73.9 97 1990 December 31, 1989 1.4 75.3 99 June 30, 1990 1.0 76.3 100 Source: Mission Estimates May 1984  - 48 - TABLE 4.5 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Executing Agencies Project Component Responsible Secretariat Executing Agency Road access SCT DGCF Rail access SCT DGVF Dredging SCT DGOM Equipment SCT ESP-LC Sewerage (in industrial park) SCT FONDEPORT Solid Waste Management SEDUE1/ Local Agency 2/ Park for Small and Medium Industries SCT FONDEPORT Flood Protection SARH DGGI _/ SEDUE responsible for feasibility studies. 2/ The identity *)f the local agency will be decided as part of the feasibility study exercise. Source: SCT and CNCP May 1984  - 49 - ANEX 1 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Environmental Conditions in Lazaro Cardenas A. Background 1. The Lazaro Cardenas region has experienced considerable industrial and urban growth over the last two decades. These developments have been accompanied by environmental degradation, and indications are that such degradation will increaue markedly unless major efforts are made to reverse the trend. This annex describes the existing environmental conditions in Lazaro Cardenas. Because statistics regarding emission levels are virtually non-existen., much of the following is based on the inspections made by the Bank staff and consultants to CNCP. B. SICARTSA 2. SICARTSA's pollution history is well known to the Bank. A review made by Bank staff in 1979 described pollution problems related to tar, oil, sulphur dioxide, hydrocyanic acid, benzene and dust emissions. Generally speaking, the situation has not changed since that review. 3. The dust situation at the pelletizing plant and the coke oven is poor. At the pelletizing plant, pollution control devices operate improperly and, at the coke oven, doors do not seal properly. For both, the result is dust pouring out of the facilities. The tar and gases emanating from the coke ovens are highly carcinogenic. Although data are not available, sulphur dioxide emissions must also be excessive; during a preparation mission, it was related by SICARTSA officials that the plant's Stretford sulphur recovery system was not operating. 4. A report prepared by consultants for the Government 1/ states that SICARTSA alone is capable, on occasion, of violating Mexican quality standards (which are relatively liberal in comparison with those of other developing countries) for the entire Lazaro Cardenas region. Other large industries, with records of pollution in other parts of Mexico, are currently installing facilities (FERTIMEX) or planning installations (PEMEX) at Lazaro Cardenas. It is likely that, without strict measures, pollution levels will get higher, and/or the frequency of air quality violations will increase. 5. SICARTSA, after repeated Bank requests, has not supplied any waste water analyses. On observation, however, wastewaters appeared black, with indications of oil and grease on the surface; they possessed a distinct sulphurous odor. Wastewater treatment facilities at SICARTSA operate improperly. In 1979, one of the two coke oven clarifiers was inoperative, and, during a preparation mission for this project, one of the two biological treatment tanks for coke oven wastewaters was not working. Sedimentation of suspended solids does not occur in designated settling tanks, but in the discharge channels, where it is scooped out and dumped outside SICARTSA I/ Informe Ambiental Puerto Industrial de Lazaro Cardenas, 1983  - 50 - ANNEX 1 property. Conflicting information was received on solid waste disposal at SICARTSA. The consultant's report offered an estimate of 235,000 tons/month. The appraisal team was given a current figure of 9,750 tons/month, which will increase to 16,150 tons/month with the initiation of SICARTSA Phase II. According to SICARTSA, all the solid waste is sold to cement manufacturers. Nevertheless, a tour of the SICARTSA facility revealed piles of slag extending over acres of property. C. Municipal Wastewater 6. The municipalities of Lazaro Cardenas and Guacamayas both have primary treatment capabilities for 450 and 200 liters/sec respectively, and a collector system which captures only about half of the wastewaters. Of this treatment capacity, only 210 liters/sec at Lazaro Cardenas operate (with only partial effectiveness). All other systems have been shut down for design changes and repairs. Raw sewage is discharged into the right branch of the Rio Balsas. Even theoretically, these systems nominally represent adequate treatment capacity only for the forecast discharge in 1987. A more immediate problem is the likelihood of continued shutdown of the treatment plant. D. Solid Waste 7. SICARTSA solid waste practices were discussed above; municipal solid waste disposal is, to a large measure, practiced in a random, uncontrolled fashion. The municipal disposal site was seen to be a disorderly, unhealthful operation. As may be expected, not all wastes are ultimately deposited even at this site; private collectors remove trash and dispose of it at unknown, unregulated locations. E. The Future 8. Industrial growth in Lazaro Cardenas is about to accelerate. The SICARTSA II expansion, which will double steel capacity, is under construction; a major FERT11EX facility is also under construction; and a PEMEX refinery is planned. Numerous other industries are under construction, planned or anticipated. Population growth accompanying this industrial development will increase municipal pollution from automobile emissions, wastewater and solid waste generation. Careful attention to erecting and operating both physical facilities and institutional inirastructure for municipal and industrial sources of contamination is necessary. F. The Project: Implementation and Administration 9. The proposed project includes components designed to address these problems, including sewerage systems for industrial waste and the implementation of a solid waste management system. 10. Effective implementation of environmental components of the proposed project will depend upon the organization, resources and personnel available for contracting, operation and maintenance of the individual components. Clearly the availability of trained staff, in appropriate numbers, will be a key factor in the success or failure of these project components; particular attention should therefore be given to the timely initiation of the training component of the proposed project in the field of environmental protection. No  - 51 - ANNEX 1 less important will be the organizational aspects of the solid waste management system, and efforts should be made to develop local agencies with the rhysical, financial and management resources needed for effective operation. 11. For the wastewater collection and treatment component in the industrial park area, for which FONDEPORT has responsibility, construction, contracting and related administration are being handled through the central office of FONDEPORT, while the existing local office of FONDEPORT in Lazaro Cerdenas will be responsible for construction supervision. Operation and maintenance of the sewerage system in the industrial park area will be under the jurisdiction of the new entity to be established by FONDEPORT in Lazaro Cardenas. 12. The solid waste management component, currently being planned and designed by SEDUE, will become the responsibility of a local agency. This component of the project, which is to serve all industries located in areas under the jurisdiction of FONDEPORT as well as industries and municipalities outside the industrial park, would be implemented by SEDUE, whose Directorate for Solid Waste Management would handle the contracting of construction for the sanitary landfill, maintenance shops and offices and the acquisition of equipment. The local agency which will take over operation, maintenance and administration of the collection and disposal system will be determined as part of the feasibility study exercise. May 1984  - 52 - AUEX 2 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Outline Methodology for Economic and Financial Analysis for Dredging Program I. Introduction 1. The dredging program, which has as its objective the provision of access at the Lazaro Cardenas industrial port, has been divided into tranches. The technical, economic and financial justification of each subproject in each tranche would be submitted to the Bank prior to its approval for financing under the proposed project. This annex outlines the methodology to be used in the preparation of this analysis. 2. To qualify for Bank financing, each subproject in the dredging program should bave a minimum economic rate of return of 12Z. The justification should include a financial analysis demonstrating that the cost of the investment would be recovered. 3. After initiation of the second tranche of the dredging works, there would be a mid-term review of the pace of utilization of project funds and of forecasts for future waterfront requirements to determine the appropriate timing and dimension of subsequent tranches. II. Technical Analysis 4. The technical analysis should include the following elements: (a) description of subproject; (b) for dredging to create waterfront for new industrial concerns, an analysis of alternative sites to ensure efficient use of resources; (c) analysis of utilization of dredged material; (d) cost estimate; and (e) implementation schedule. III. Economic Analysis 5. Three types of projects bave been defined under the overall Lazaro Cardenas dredging program: (a) deepening existing access channels, turning basins or berths; (b) dredging to create direct maritime access to an industry which is dependent upon direct access (e.g., a ship repair yard); and (c) dredging to create maritime access to an industry for which such access is optional.  - 53 - ANNEX 2 6. The following types of benefits and costs would be quantified for the three cases mentioned: (a) for dredging to provide deeper draft, benefits would be transport cost savings through the utilization of larLar vessels. The investment cost would be the economic cost of dredging; (b) for dredging to provide maritime access for an industry dependent upon such access, benefits would be the value added of the industry's production. The investment cost would include the economic cost of the industry's plant, equipment and other infrastructure, cost of dredging and berth; and (c) for dredging to create direct maritime access for an industry for which such access is optional, benefits would be transport cost savings, including (i) savings in the cost of transporting inputs and products to/from the industrial site and the Multiple Use Terminal (TUM); and (ii) ship waiting time savings. Investment costs would include the economic cost of dredging and berth construction. 7. An analysis should also be made justifying proposed basin and channel depths for the cases outlined in items 4(b) and (c) preceding. 8. In calculating benefits from use of a larger vessel or ship waiting time savings, 100% of savings attributed to Mexican flag vessels and to chartered vessels should be taken. For foreign-owned liner vessels, only 50% of projected benefits should be included in the analysis. 9. All costs and benefits should be exclusive of taxes and import duties. Production should be valued at the international market price. Fuel should be valued at its opportunity cost (e.g., international prices). 10. The economic rate of return, net present value capital and first year benefit/cost ratio should be calculated. Tests should be made to determine the sensitivity of the subproject's viability to changes in major variables such as cost increases, lower-than-expected traffic or production, and lags in benefits. IV. Financial Analysis 'A. The financial analysis will be made to ensure that the subcomponents' costs are being recovered adequately. The general principles to be followed are: (a) the dredging specifically related to new industrial waterfronts will be done by DGOM, together with dredging of access channels to such berths; (b) the industrial concerns will finance directly the cost of berth construction; and  - 54 - AN1EX 2 (c) whereas ships dues will be levied by SZT on vessels to cover the capital and maintenance costs of access channels, the costs of dredging of a specifically defined water area to the required depth alongside dedicated quays should be recovered from the industrial concern which benefits therefrom. 12. The mechanism for recovery of costs from the industrial concerns must be defined. Possible mechanisms include: (a) direct payment by the industrial concern to the Government, for the relevant part of the dredging, at the time that the work is contracted; or (b) through FONDEPORT, which will include, in its lease agreement with the enterprise concerned, an annual index-linked fee for recovery of capital and maintenance costs of the dredged berth. I3. The Bank will require a letter of intent between the industrial concern and either SCT or FONDEPORT regarding (a) the financial arrangements to be made to recover the dredging costs as require6; and (b) the industrial concern's program for berth construction as a condition for approval of each subproject. Nay 1984  - 55 - ANNEX 3 Table 1 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Details of Existing ESP Equipment Type of Number and Manufacturer Estimated Equipment Capacity and Year Remaining Life Forklift Trucks 12 x 15,500 lbs. Clark, 1981 4 2 x 8,000 lbs. - 1974/5 1 2 x 7,500 lbs. 1974 1 6 x 6,000 lbs. Yale, 1980 2 2 x 4,500 lbs. Clark, 1975 1 Tractors 1 x 5,000 lbs. Mercury, 1980 2 1 for containers Ottawa, 1981 5+ Trailers 41 x 3,000 lbs.a/ JEC/Serv. Hidro, 5 1979/80 6 for containers JEC, 1982 4 Cranes 5 x 20/23 tons P&H, 1983 6 Container 1 x 32 tons IHI, 1974 10+ Bulk Unloader 1 x 35 tons IMENASA, 1983 10+ Pneumatic Unloaders 5 NEVERO, 1981 4 a/ Serviceable but not utilized b/ Includes two owned by FIDEMAP Source: ESP May 1984  MEXICOI UUIO CM INTUSRIIL POT MOJECT EOUIPIINT etailed Cost Table (UH '000) Ireakdown of Totals Imcl. Cant (US '000) Quantity law Costs Totals Includi,i CaMiemncin Local Unit 95 1916 1967 Total Unit Cost 15 1966 1967 Total 195 196 17 Total Fort Exch. Total - -aam. m. a a.3.m.. u.aa. mi m .. .. .----_.,.. .... . _ ..m. an... m a 1. INIwSTM COSTS As RE-tU UM. C-MI Forklift Truck 3/5 ton dbch 4 a 8 20 36.225 144I9 269.9 269.9 724.5 150,7 327.1 35065 834.3 584.0 250,3 834,3 Mobile Crnes 7/10 ton each 2 2 - 4 170.465 340. 340.9 - 61, 354.6 384,8 - 739.3 517.5 22l,6 739.3 Trailer 20tt/20 ton each 5 5 5 15 14.263 71.4 71.4 71.4 214.2 74.3 90.6 97.9 242.7 169.9 72.9 242.7 Trailer 40t/20t each 2 2 - 4 19.044 38,1 36.1 - 76,2 396 43,0 - 82.6 57.9 24,6 92.6 Trackr 00 lbs, each 2 2 2 6 31,775 63.5 63,5 63,5 190,6 66.1 71,7 78.2 216.0 151,2 64.8 216.0 Tractor W0 lbs. eah 1 2 2 5 37,26 3743 74.5 74,5 136,3 38,8 U4 91,7 214,5 150,2 64,4 214.5 Pellets (th) each I - - 1 73.382 73,4 - - 73,4 76,3 - - 76.3 - 76,3 76,3 Suh-Totul A-KLK IIM. CAMG 76U.5 878.3 496,3 2,147,1 900.3 6J1H3 614,2 2,405.3 1,630.6 775.1 2,405.8 bber Tired Straddle Crew eah - 2 - 2 466,578 933,2 - 933,2 - 1,053.2 - 1,053.2 1.053,2 - 1,053,2 Toplifter 35t each I I - 2 485,415 45,4 485.4 - 970.8 504.8 547.8 - 14052,7 736.9 315.5 1,052,7 Forklift Trck 3/5 ten each 3 3 3 9 36.225 108.7 106.7 103.7 326.0 113,0 122.7 133.7 369.4 25Ss6 110,8 369,4 Forklift Truck /10 ton each 2 1 - 3 124.2 249.4 124.2 - 372.6 25W,3 140.2 - 399,5 319, 79,7 39005 Yard Tractor eah 4 - - 4 85,595 342,4 - - 342,4 356,1 - - 356.1 267,1 99.0 356.1 amsis eah 9 - - 8 19.044 152.4 - - 152,4 158,4 - - 151,4 109 47.5 158.4 hitchiir Erine each I - - I 197.375 197.4 - - 197.4 205,3 - - 205.3 205.3 - 205.J Mobile Tower Crow 250t each I - - 1 2,142,45 2,142.5 - - 2,142,5 2,22891 - - 2t229,1 222981 - 24226,1 9hTotal COITAIIOS 3,677.0 1,651,4 106.7 5,437,2 3,924,1 1,9639 133.7 51,21.6 5117.8 642,9 5,921.6 C. MAINTIWU P EOUIPIET Total Cost each * - - - 256,9 258,8 - 517,5 269.1 m2o - 56ll 420.8 140.3 561.1 Su-Total NAINTUWEE SHOP ESUIPENT 259.9 2519. - 517.5 269.1 m.o - 561.1 420.9 1403 561.1 s TU95OAT Total Cost each - - - - 1,769,9 .1769,9 - 3,539,7 1540.61,997.5 - 3J.6361 1,919.0 1.919,0 3,936.1 Sub-Total TUUGAT 1,76.9S 19769.9 - 36539,7 1,540.6 1.W6765 - 3.;33,1 1i919.0 1.919,0 3,8;1 Total IIAMII1T1T WITS 6,47512 4W556.3 606,0 11,641.5 6,734.2 5144,6 747.9 124626,6 99149.3 3,477.3 12,626.6 --zaaaaIaa:,_--.aaia.aamaa.. mama.......... _a.a Ma.aa.a MaM.... . a....,. Total 6,475.2 4,558.3 606.0 11,6415 6,734.2 5,144.6 747.9 12,626.6 9149,3 30477.3 12,626.6 * .am... .. m........ aa.ga3 aa: l: g.. Nay 16, 1"4 10136 Source: RPT, ESP and mission estimates. May 1984  - 57 - ANNEX 3 Table 3 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Ship Forecast and Maximum Ship Size Service Maximum Size of Ship 1985 1990 1995 Containers 1,200 TEU 48 102 166 Iron and Steel Products 16,000 DWT 34 52 60 Break-bulk general cargo 22,000 DWT 75 114 125 Special bulk carriers 60,000 DWT 15 62 79 Bulk carriers 90,000 DWT 35 40 45 Products Tankers 22,000 DWT 21 30 149 Crude Tankers 60,000 DWT 0 166 320 Total 228 560 994 Source: ESP and RPT Associates May 1984  - 58 - ANNEX 4 MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Flood Protection A. General 1. The industrial port at Lazaro Cardenas is being developed in the triangular delta of the Rio Balsas. Flooding occurred in the delta in 1976 in association with Hurricane Madelaine, demonstrating that a potential existed for flood damage to industries locating at Lazaro Cardenas. Subsequent planning for the industrial port has included provisions for flood control works to reduce or eliminate the flood risk. This annex summarizes the hydrologic and hydraulic characteristics of the delta, the alternative plans considered for flood protection, the economic justification for flood control, and the ongoing study needed to verify the economic justification. B. Hydrology 2. The 110,920 km2 of the Rio Balsas drainage basin comprise the major river system in south-central Mexico. The climatic characteristics range from semi-arid to semi-tropical. Average annual rainfall over the basin is 978 mm, most of which is concentrated during the months of August, September and October. The remaining months are very dry. 3. Two dam and reservoir projects for generating hydroelectric power are located just upstream from the project area. La Villita, the smaller and most downstream of the two, is located about 15 km from the sea. Discharges from the La Villita powerhouse and spillway enter directly into the upper reaches of the delta. The second dam, Infiernillo, is located about 70 river km from the sea. The Infiernillo Reservoir has a dramatic effect upon the hydrology of the basin downstream from the dam, spreading runoff formerly concentrated within a few months over the entire year. The operating policy is to fill the reservoir at Infiernillo by the end of the rainy season and to generate power so that the reservoir is nearly empty at the beginning of the normal rainy season. Rainfall events that exceed the regulating capacity of Infiernillo usually occur only in association with hurricanes such as Beulah in 1967 and Madelaine in 1976. 4. The operating policy of the two reservoirs calls for simultaneous operation of the gated spillways at each dam. The result is that discharges at Infiernillo are immediately reproduced at the spillw&y at La Villita and enter directly into the delta. Because of the geometry of the basin, storm inflows from the intervening area between the two dams will already have passed through La Villita before peak discharges occur at Infiernillo, and the Infiernillo discharge can correctly be taken as the flow entering the delta. 5. The Rio Balsas divides into two branches about 1.5 km below La Villita. The depth of the triangular-shaped delta is roughly 15 km measured from La Villita to the coast, and the base is about 7 km, measured along the coast. The two branches of  - 59 - ANNEX 4 the Rio Balsas have been named using a downstream-facing convertion; the Brazo Derecho forms the western border. The flood control project is located along the left branch, a braided, broadly meandering stream. The right branch is a smaller single chanuel. There is one active cross-connecting channel below the dividing point. SARH has recently completed construction of a diversion control structure on the right branch of the river. The structure is designed to limit flood flows entering the right branch to 300 cubic meters per second (cms). Prior to construction of the diversion structure, an estimated 30% of delta flood flows passed down the right branch. The structure is also designed to pass a minimum flow of 50 cms to the right branch for water supply and flushing. C. Flood Potential 6. The potential for flooding in any area is expressed by two parameters, the flowrate and the probability of occurrence of that flow. The Comision Federal de Electricidad (CFE) is the owner and operator of Infiernillo Dam and, as such, has done all existing analyses of flood flows and return frequencies for the Rio Balsas Basin. Records of stream flows have been kept since the mid-1950s, and a 28-year period of record is now available. An update of statistical analyses, completed in August of 1983, shows the return frequency for the Infiernillo Reservoir inflows to be as presented in the following table, which gives the flood-frequency relationship for the river basin above Infiernillo. I-nflow-Frequency Relationship Infiernillo Reservoir Return Period Peak Inflow Volume (years) (cms) (1 cu.m) 10,000 38,800 10,200 1,000 29,500 8,100 100 22,500 5,900 50 19,400 5,300 15 16,300 4,100 7. The corresponding relationship below Infiernillo is dependent upon the operating policy of the dam. With the objective of optimizing utilization of the dam, taking into account both electrical generating capacity and flood protection, CFE studied a series of alternative operating policies. CFE selected an operating policy for Infiernillo that provides some flood protection to the delta by lowering hydropower storage level by 4 meters and gradually increasing spillway gate openings as the pool level rises to its design operating level. The table following shows the flood frequency relationship produced in the delta by this operating policy. The policy was reviewed by both consultants to CNCP and Bank staff who concluded that it represented a reasonable balance between, on the one hand, maximizing energy, and, on the other, minimizing the risk of flooding in the Rio Balsas delta.  - 60 - ANNEX 4 Flood Frequency in Rio Balsas Delta Under the Selected Infiernillo Operating Policy Return Period Peak Flowrate (Years) (cms) 10,0O0 10,000 1,000 9,000 467 8,000 216 7,000 103 6,000 50 5,500 15 5,000 The operating policy for Infiernillo is critical to flood conditions in the delta. Alternate flood-routing scenarios indicate that, without the flood protection measures provided in the selected operating policy, the peak discharge in the delta would be increased by nearly 50%. 8. The results of mathematical modeling performed in 1976 by the University of Mexico's Institute of Engineering indicate that flood flows in the 10,000 cms range would flood most of the delta, with depths of inundation ranging up to almost 2 meters above the natural delta terrain. Material dredged from the harbor basin has been used to raise elevations in the industrial area to 4 meters above sea level. This will reduce the depth of flooding in some areas and increase it in others. New mathematical modeling studies by the Insitute of Engineering are under way to determine, with more precision, the current patterns of flooding. D. Proposed Plan 9. The currently proposed flood protection plan on the left branch of the Rio Balsas consists of channel rectification and levees which will provide protection against flood flows up to 7,000 ems. The improvements are indicated on Map IBRD 17795. The channel rectification would consist of deepening and widening the existing river channel from La Villita to a point near the village of San Francisco, a distance of about 10 km. The flood control channel would stop at a distance of about 4 km from the sea. The new channel width would be 250 meters, and the elevation of the channel bottom would vary from +2 meters at La Villita to -2 meters at the ocean outlet. Total channel excavation would be about 8.7 million cubic meters. The levee on the left bank of the channel would begin at the high bank at Zacatula and extend to the ocean outlet, providing protection at Zacatula, Naranjito, San Francisco, and agricultural lands. The right-bank levee would begin at the Dique Alcantarilla and extend to the ocean outlet, providing protection to the port and industrial area. 10. The levees would be built with material excavated from the new flood channel. An impervious-core plug dike would be incorporated in the right-bank levee where it crosses existing waterways, and riprap armor would be provided on both levees, at changes in alignment, to protect against high-velocity scouring. Riprap-protected overflow sections would be provided to protect against sudden overtopping and levee failure.  - 61 - ANNEX 4 E. Alternatives Considered and Economic Analysis 11. Development of the flood control project through August 1983 focused on a plan that would provide protection against a 1,000-year flood, and a complete, final engineering design for a project that would provide protection against flows up to 13,000 cms was prepared. After an economic analysis of alternatives, the design was reduced; the plan which would be supported by this project would protect against flows up to 7,000 cms, providing a 200-year level of protection. 12. In analyzing alternative plans, SARH tested various alternatives for levies and channel rectification to protect against several flow rates. This work served as a basis for a comparison by consultants RPT of the economic costs and benefits for alternatives for flood flows of 3,000, 5,000, 7,000, 10,000, and 13,000 cms. 13. The economic evaluation was based on the following quantified benefits: (a) prevention of damages to industrial development; (b) prevention of losses in industrial production; (c) prevention of damages to populated areas; (d) prevention of losses in agricultural production; {e) prevention of damages to infrastructure; (f) reduction of maintenance dredging; (g) avoidance of damages to projects of smaller design; (h) avoidance of delays in port operations; and {i) increased power generation at La Villita. 14. The benefits were determined by: (a) determining the level of damage which would occur at each level of flooding. For industrial damages to infrastructure and production, investigations were made for each of the industrial plants which exist or are under construction at the port; (b) applying these benefits to probabilities (derived from the table in paragraph 7) of flooding for different discharge rates; and (c) comparing the net present value of these benefits (assuming a 30-year period of analysis and an opportunity cost of capital of 12%) to the costs of flood protection projects designed to avoid damages from floods of varying discharges. 15. Because of uncertainties over the pace of industrial development at Lazaro Cardenas, only benefits from industries already constructed or under construction were included in the analysis (e.g., FERTIMEX, NKS first stage, SICARTSA first and second stage, CONASUPO grain terminal, Pemex tank farm, the ESP and PMT). Because of uncertainties regarding the pace of completion of SICARTSA II, only that percent of work already completed or committed (80%) was included in the analysis and only production losses from the first stage operation were included. In this analysis, RPT's estimates for benefits from industrial damage and increased power generation were reduced by the mission by one third. 16. A summry of the benefits for each plan which was investigated is provided in the table following:  - 62 - ANNEX 4 Summry of Present Value of Benefits (1983 Mex$ billions) Design Discharge (cms)l/ Benefit Category 5,000 5,500 6,000 7,000 8,000 9,000 10,000 Industrial Damages 3.4 6.2 7.1 7.5 7.7 7.8 7.9 Lost Production 1.4 2.6 2.8 3.0 3.1 3.1 3.1 Urban Damages 0.0 0.0 0.0 0.0 0.1 0.1 0.1 Agricultural Production .. .. .. .. .. Infrastructure Damages 0.2 0.5 0.5 0.5 0.6 0.6 0.6 Maintenance Dredging 0.1 0.2 0.2 0.2 0.2 0.2 0.2 Damages to Lesser Plans 0.0 0.4 0.4 0.4 0.4 0.5 0.5 Shipping Losses 0.0 0.0 0.0 0.0 0.1 0.1 0.1 Increased Energy Output 4.2 4.2 4.2 4.2 4.2 4.2 4.2 TOTAL 9.3 14.1 15.2 15.8 16.4 16.6 16.7 1/ Levels up to which no flood damage would occur. .. Indicates less than 0.05 17. The estimated costs for the 7,000 cms and 13,000 cms plans have been developed in detail. Final design drawings were used by SARH in making quantity estimates, a.ud unit costs have been updated from October 1981 bid prices using factors reflecting local wage increases and national price trends for each type of work. A separate cost estimate, based on SARH quantities but using independently derived unit costs, was prepared by SOROS Associates for CNCP. That estimate corroborates the SARH work. Costs for the other alternative plans were prepared from SARH preliminary design work done during the design of the 13,000 cms project. The SARH unit costs were applied to the preliminary quantity estimates by RPT, and the resulting figures were fit to a smooth curve. 18. The net present values of the alternatives (discounted at 12%) are shown in the table following. Net Present Value of Benefits (1983 Mex$ billions) Design flow (cms) 5,000 5,500 6,000 7,000 8,000 8,000 10,000 Benefits 9.3 14.1 15.2 15.8 16.4 16.6 16.7 Cost 2.6 2.7 2.9 3.2 3.8 4.5 5.1 Net Benefits 6.7 11.4 12.3 12.6 12.6 12.1 11.6  - 63 - ANNEX 4 19. The maximum net present value benefits occur for a plan protecting against a flow of 7,000 cms. This alternative has an estimated economic rate of return of 40%. The benefit analysis is based on the assumption that flooding patterns are identical to those occurring in 1976. Mathematical modeling of current conditions is expected to show reduced levels of flooding. Because of the uncertainties regarding the nature of flood patterns which might emerge from this exercise, a series of sensitivity tests was made to determine whether the optimum plan would change under various likely flooding scenarios. The table below indicates that the selected design and its viability would not change even given extreme assumptions regarding the likely outcome of the mathematical model. Sensitivity Test: Net Present Values of Benefits (1983 Mex$ billions) Design Flow (cms) 5,000 5,500 6,000 7,000 8,000 9,000 10,000 Flood levels reduced by 0.50 m 6.1 9.4 10.3 10.5 9.8 8.9 8.0 Flood levels reduced by 0.50 m and NKS, FERTIMEX and Pemex not flooded 4.9 7.0 7.52 7.51 6.7 5.8 4.8 20. Responsibility for implementing the flood control component of the project will be with SARH. Within this organization, the Subsecretaria de Infraestructura Hidraulica, Direccion General de Grande Irrigacion (DGGI) is the responsible office. The DGGI is subdivided into six Subdirectorates. The Subdireccion de Proyectos Especificos is responsible for the design of the proposed flood control component. 21. Upon completion of design work, project responsibility is shifted to the Subdireccion de Construccion, where cost estimating, bidding, contracting, and construction supervision are carried out. Construction supervision will be done by Lazaro Cardenas field office of the Departamento de Supervision de Obras de Control de Rios. That office is now supervising construction of flood control works on the right branch of the Balsas River including the diversion dam Dique Alcantarilla, channel rectification on the right branch, and channel improvements on the Arroyo El Barco, a tributary to the right branch. May 1984  - 64 - ANNEX 5 MCO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Details of Training Coponent I. Training for ESP Operating and Administrative Staff 1. The rapid growth of container traffic foreseen at Lazaro Cardenas over the next few years will require the development of new skills in the operation and maintenance of new specialized equipment, and in the administration of a modern container terminal. Consultants to CNCP financed by Loan 1964-ME prepared a Master Plan for the training of operating and administrative staff of the industrial ports. A series of outline lesson plans for various port functions was also prepared, but has neither been translated into Spanish nor adapted to local use as yet. 2. SCT has already constructed a building in Lazaro Cardenas to house a National Training Center for Maritime and Port workers, which, when properly equipped and staffed, will serve the whole of the country. Meanvhile, considering the immediate needs of ESP and the contracting union, the project would include procurement of equipment and development of instructors who would be able to give courses at the training center. 3. The objectives of the training program for ESP would be to: (a) improve cargo handling procedures; (b) increase cargo handling productivity; (c) reduce cargo losses and damages; (d) improve maintenance capability for new and existing equipment; (e) develop or improve machine handling skills; and (f) strengthen and expand the existing CNCP training division. II. Wastewater Plant Training 4. The need for adequately trained staff to operate and maintain the environmental components of the project is discussed in Annex 1. A training program for FONDEPORT personnel will be required for the operation of the waste water plants. Specific training programs for the municipal sewerage systems would be developed after the feasibility studies are completed. These programs are expected, however, to follow that proposed for FONDEPORT personnel. III. Budgets and Implementation Schedules 5. The training budget which would be supportee by the project is given in Table 1 of this annex. May 1984  - 65 - ANNEX 5 Table 1 EXCO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Training Program Cost Estimates I. ESP Port Training US$ A. Maintenance 1. Training Workshop 120 m @ $350/m2 42,000 2. Workshop Equipment 150,000 3. Instructor (Local - 1 year) 20,000 4. Expatriate Technical Assistance - 6 months @ 8,000 48,000 SUB TOTAL 260,000 B. Administration of Cargo and Containers 1. Classroom Furniture 15,000 2. Audio Visual Equipment 25,000 3. Adaptation and Translation of Learning 15,000 material (Oakland) 4. Models of handling gear and other equipment 150,000 5. Instructor (1 year) 18,000 6. Expatriate Technical Assistance - 6 months 48,000 SUB TOTAL 271,000 C. Cargo-Handling Oerator Training 1. Equipment n/c 2. Fuel and Materials 15,000 3. 2 Trainers x 6 months 18,000 4. Expatriate T.A. - 4 months 32,000 SUB TOTAL 65,000 D. Preparatory TraininR of Trainers Training Director (ESP) + 2 Chief Instructors 3 months abroad 50,000 Expatriate Assistance - 12 months 120,000 SUB TOTAL 170,000 II. FONDEPORT Training Water Treatment Plants Training 12 operators @ 6 weeks course (in US) Salaries 18,000 Allowance 50,000 Fares 6,000 Cost of Course @ 3250 per person 39,000 113,000 113,000 TOTAL BASE COST 991,000  - 66 - AME 6 MEXICO LAZARO CABDENAS INDUSTRIAL PORT PROJECT Financial Analysis I. The Empresa de Servicios Portuarios (ESP) A. Structure and Performance to Date 1. ESP, the port operating company, has been in existence since 1972. Its principal shareholder is the Federal Government, which today holds 752 of the shares, although its holding may be reduced to 51% according to the company's charter. Its organization is shown in Chart 26028. SICARTSA holds 24% of the shares, and a symbolic 1% is held by the ESPs of Mazatlan, Manzanillo and Acapulco. ESP has no long-term liabilities. Its assets consist principally of a tug and cargo-handling equipment. Summary balance sheets for recent years are as follows: Summary Balance Sheets, 1979-1983 (millions of current Mex$) 1979 1980 1981 1982 1983 I/ Net Fixed Assets 16.24 =3Oo ITEM 310.47 7b. Other Assets 8.73 42.87 76.52 63.85 128.00 Total Assets 24.97 68.27 186.93 374.32 435.00 Total Liabilities 8.73 17.91 23.20 208.74 167.00 Net Worth 16.24 50.56 163.73 165.58 268.00 Total Liability and Net Worth 24.97 68.27 186.93 374.32 435.00 Despite the humble picture thus presented, ESP has, since 1975, been handling over 1 million tons of cargo annually. From 1979 through 1982, this cargo included some 700,000 tons of coal for S-IARTSA, handled with the latter's own gantry crane. 2. Its work force today consists of some 710 employees, about 600 of whom are contracted through the Stevedoring Union's organization on a "per-ton handled" basis. On Its own staff, which deals with the administration, finance, operational planning, and supervision and equipment maintenance of the port's public facilities, it bad some 109 employees at the end of 1983. Summary operational statements for recent years are as follows: 1/ Provisional Figures  - 67 - ANNEX 6 Summary Revenue Statements 1979-1983 (millions of current Nex$) 1979 1980 1981 1982 1983 1/ Operating Revenue 41.65 67.05 122.07 205.57 387.00 Working Expense 32.96 53.81 122.34 190.72 369.00 Depreciation 2.25 5.25 11.39 9.22 3.00 Total Expense 35.21 59.06 133.73 199.94 372.00 Surplus (loss) 6.4 7.99 (11.66) 5.63 15.00 Working Ratio 79 80 100 93 95 Operating Ratio 85 88 110 97 96 B. Tariffs and Costs 3. The Empresa has made efforts to keep its tariffs above its fully absorbed costs for each specific service and, apart from 1981, has managed to do so -as may be seen from the preceding operating ratios. The figures must, however, be viewed with care since they contain hardly any capital costs. The reason is that few of the capital assets used in port operations belong to ESP (nor does ESP pay for their use), and those which do, appear in its books at their depreciated cost. C. Financial Projections 4. The assumptions on which the financial projections are based are presented in Appendix A of this annex, and projected revenue accounts, flow of funds statements and balance sheets are presented in Tables 1 to 3 of this annex. The target revenue accounts for the next five years and the relevant ratios are summarized in the following tabulation: ESP's Projected Revenue Statements, 1985-1989 (in millions of 1983 Mex$) 1985 1986 1987 1988 1989 Operating Revenue 515 659 876 990 1,037 Working Expenses 515 585 633 637 661 Depreciation 219 254 256 212 214 Surplus (loss) (219) (T80) (13) 141 162 Working Ratio 97 87 71 63 62 Operating Ratio 142 127 102 86 84 The principal assumption with regard to revenues is that tariffs will be increased by 352 in real terms in 1985 and will be maintained at that real level to achieve 1/ Provisional Figures  - 68 - ANNEX 6 the target cash generation agreed to until 1987, when tariffs will be raised by another 7.5% in real terms. This should be sufficient to cover all working and maintenance costs, generating a surplus cash flow from 1987 onward to cover debt service and leave something toward investments. Although this goal may seem fairly modest, the transition from present revenue levels to the projected ones during a period of high inflation will require great financial discipline and may well encounter some political opposition, let alone user resistance to the tariff increases required. Additional Government financing will be required through 1986 at any rate, even with the projected tariff increases (see Table 2 of this annex, note 1). II. Fondo Nacional para los Desarrollos Portuarios (FONDEPORT) A. Present Financial Situation 5. FONDEPORT is an independent Federal agency created in 1975 by the Ministry of Finance and the Banco Nacional de Obras, with the object of developing port lands and selling or leasing them. It has, to date, been instrumental in the development and sale of lands in the country's fishing ports. At the end of 1982, the Government transferred to FONDEPORT ownership of the lands for industrial development adjacent to the ports of Lazaro Cardenas and Altamira. FONDEPORT has since set up a special department for industrial ports at its head offices and branch offices in Lazaro Cardenas and Altamira (Chart 26069). 6. The audited balance sheets for 1981 and 1982 are summarized below: FONDEPORT Summary Balance Sheet (millions of current Mex$) Assets 1981 1982 Cash and Receivables 1,192 550 Fixed Assets 1,310 2,979 1/ Other Assets 37 10 i,539 3,539 Liabilities Short Term Liabilities 248 399 Own Funds 2,292 3,140 2,539 3,539 I/ Based on valuation by the National Commission for Valuation of State Property. 7. Operations have consisted largely of the development and sale of lands transferred by the Government to FONDEPORT. Although FONDEPORT paid nothing for the land, it was sold at prices determined by the Committee for National Property Valuation, plus prorated development costs. Its most recent revenue statements are sunmarized below: FONDEPORT Sumary of Revenue Statements 1981-1982 (millions of Mex$) 1981 1982 Net Revenue from Sales and Interest 196 282 General Expenses 66 97 Surplus -i  - 69 - ANNEX 6 B. Projections for the Lazaro Cardenas' FONDEPORT Subsidiary 8. In order to manage the industrial park of Lazaro Cardenes, FONDEPORT intends to create a special, semi-autonomous entity. To this end, it has commissioned studies on the administration, commercial development and promotion of the Lazaro Cardenas Industrial Port, consulting with Bank staff with regard to the terms of reference for these studies. These studies will not, however, be completed before June 1984; decisions with regard to setting up the required administrative body should be taken by the end of the year. Nevertheless, the assumptions on which the financial projections for the FONDEPORT entity are based (presented in Appendix A of this annex) were agreed upon with FONDEPORT's Director of Industrial Ports. The following is a summary table of projected financial results for the years 1984-1989, based on assumptions in Appendix A. More details are presented in Tables 4-7 of this annex. Summary of FONDEPORT Lazaro Cardenas Office Revenue Statement Projections 1984-1989 (millions of 1983 Mex$) 1984 1985 1986 1987 1988 1989 Revenues 172 266 409 424 445 447 Working Expenses 93 105 116 204 258 285 Depreciation 86 108 125 134 145 147 Total Expenses 179 213 241 338 403 432 Operating Surplus -7 53 168 86 42 15 Working Ratio 54 40 28 48 58 64 Operating Ratio 104 80 59 80 91 97 9. The two basic principal assumptions implicit in the projected revenues above are (a) that rental fees for land will be collected as of this year on the basis of leasing agreements to be signed with the relevant industries, beginning at no less than 35 pesos/sq m per yearl/ and to be increased annually to keep pace with inflation and (b) that such agreements will include provisions for full recovery of dredging costs for specialized wharves. The working costs above include annual transfers to the Government of dredging and flood protection costs collected from industrial tenants. 10. In addition to the lands assigned to heavy industry on or close to the waterfront, FONDEPORT intends to develop an area of 120 hectares for smaller industries and workshops which either have some functional relationship to the heavier industries in the port area or serve the municipal area of Lazaro Cardenas. The first stage of this development (40 ha) would be included under the project. Development of this park for small and medium industries is based on the results of a market and economic and financial feasibility study. The market study and financial analysis recommended a monthly rental value of Mex$ 48.15 per sq m2 which would be appropriate to meet demand for land, filling the initial 40 ha area over the first three years. Leasing contracts would have an escalation clause to maintain the lease at its 1983 value in real terms. The financial projections show that, in order to maintain a return of 102, the rental value would have to be about Mex$ 44 sq m. The administrative framework through which the park is to be managed will be determined as a part of the larger ongoing study with regard to the administration of the whole of the industrial port area. 1/ The present charge for the only existing contract in Lazaro Cardenas, that with PMT, is Mex$ 30.24/sq m but is subject to review every three years, being recognized as only symbolic payment.  - 70 - ANNEX 6 III. The Federal Government 11. Two principal agencies of SCT have been involved to date in the development of the industrial port: DGOM, which has constructed the breakwaters and quays and dredged the channels; and DGODP, which has overall responsibility for port operations, ship movements and the collection of port dues. Revenues arising out of port dues in recent years have been as follows: Federal Government Revenues (millions of current Mex$) 1980 1981 1982 1983 Ships Dues 0.9 2.4 1.8 35.5 Mooring Dues 1.6 2.7 1.8 8.7 Wharfage 6.1 6.8 10.9 10.6 Concessions, etc. 0.6 0.9 1.2 1.2 Total 9.2 12.8 15.7 56.0 US$ million 0.24 0.26 0.21 0.45 It is clear that the Government, in 1983, made drastic increases in ship's dues. Coastal vessels today pay one-half of the international dues. The revenues to date are inadequate to cover depreciation and interest on the sums invested by SCT in port infrastructure. According to consultant estimates, the revenue in 1983 covered about 22% of annual depreciation, which amounts to Mex$ 250 million per year at 1983 prices. The revenue thus collected goes to the Ministry of Finance (SHCP) as part of the Federal Treasury receipts. There is no direct relationship between what is collected and investments in ports, which are made through SCT's annual budget allocations. 12. Not included in the preceding table of revenues are storage fees, whicb are for storage of cargo in excess of 15 days and are collected by the customs authorities. Revenues for 1981 and 1982 were Mex$ 933,000 and Mex$ 1 million, respectively. 13. The administrative costs of running the DGODP office in Lazaro Cardenas were about 16.8 million pesos in 1983. The accounts kept are of a single entry budgetary nature and include only nominal depreciation of some of the port assets. 14. In order to make financial projections (presented in Tables 8 and 9 of this annex) to 1989, all the costs related to the Government's investments in the industrial port have been taken into account. This includes depreciation (in accordance with the useful lives of the assets) as presented in the 'Assumptions used in Financial Projections" (Appendix A) and based on the revalued cost of the assets concerned. Costs of investment in dredging for specific industries will be recovered through FONDEPORT for its waterfront tenants as well as from SICARTSA, ESP and FERTIM. The latter already pays an annual concession fee, but it has not been adjusted for inflation. Costs of flood protection investments will possibly be recovered similarly from FONDEPORT and others by inclusion into an annual port concession fee. The relative level of fees was calculated by  - 71 - ANNEX 6 the annual maintenance costs of these works. The cost of dredging access channels is to be recovered through ships' dues. Construction of wharves is recovered through mooring charges and wharfage, although these dues are today inadequate to cover the revalued depreciation costs of past investments. The analysis given in Tables 8 and 9 indicates that revenue from port dues would have to be raised by 120X just to cover full operating costs (including revalued depreciation). A summary of proforma projected revenue statements follows: (in million 1983 Mexican Pesos) 1984 1985 1986 1987 1988 1989 General Revenue 397 433 519 721 1153 1228 Working Costs 103 107 110 154 283 283 Depreciation 249 256 282 314 406 442 Total Costs 352 363 392 468 689 72Z5 Surplus 45 70 127 253 464 503 Operating Ratios 89 84 76 65 6W May 1984  - 72 - ANNEX 6 Appendix A MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Assumptions Used in Financial Projections A. ESP 1. Cargo and ship traffic projections are presented in Annex 7. Products have been regrouped to fit in with identifiable unit costs and revenues of ESP. Unit costs and revenues were calculated on the basis of end of 1983 figures. 2. Cargo handling and services to vessels will both be performed by ESP. It will continue to handle cargo at the SICARTSA wharf and will handle the grain at the CONASUPO terminal. At other specialized terminals, ESP will also handle cargo unless concessionary agreements are arrived at with waterfront industries. 3. All financial projections presented in this report have been made in constant 1983 pesos or dollars because of the difficulty of obtaining agreed forecasts of rates of inflation. Forecasts have also been made in current terms based on best estimates and are available in the project file. 4. ESP's computed cargo handling unit costs for labor have been reduced by the following percentages during the project period to reflect the growing efficiency resulting from more capital-intensive operations, cargo unitization and real wage erosion: 1984 1985 1986 1987 1988 1989 5 7 9 10 10 10 5. ESP's salary costs reflect the growth in the number of its employees from 109 in 1983 to 232 by 1988. 6. The operation of an additional tug which would be financed under the project is assumed as from 1986. 7. Depreciation costs have been adjusted as of 1984 to reflect the revalued worth of existing fixed assets and the fact that aU equipment and superstructure on the public wharves become ESP's property. Cost of new imported equipment includes import taxes. 8. To attain the target results, ESP revenues will be increased, in real terms, by 35% for 1985 through 1986 and by another 7.5% for 1987. B. FONDEPORT 9. With regard to FONDEPORT, the following areas will be leased to industries, in cumulative totals, in each of the years:  - 73 - ANNEX 6 Appendix A Hectares Actual Projected 1983 1984 1985 19086 1987 1988 1989 475 567.2 720.4 1099.7 1134.1 1148.1 1150 10. To bring historic investments to 1983 values, the following factors were used: 1979 - 4.249 1980 - 3.276 1981 - 2.252 1982 - 1.680 1983 - 1.00 11. Depreciation of Useful Lives Buildings 30 years Storage Sheds 25 years Infrastructure on Land 50 years Water Supply and Drainage 50 years Quays and Aprons 40 years Roads 40 years Electricity Network 30 years Dredging Works 90 years 12. Maintenance and Administration Costs Infrastructure 1% of investment Water Supply Network 3.22 of investment Roads 3.2n of investment Electricity Network 2.42 of investment 13. FONDEPORT land-leasing charges will be 35 pesos per sq. m. per year at 1983 prices (or about US$3,000 equivalent per hectare) and will be pegged to inflationary price increases. This estimate is very conservative in view of periodic revaluations called for in FONDEPORT's proposed contracts. C. Federal Government 14. Storage revenues have been estimated on the basis of average revenue of Mex$ 30/ton x 15 days x 5% of total TUM cargo; 50% of this revenue is retained by ESP to cover costs of operating and maintaining storage facilities. 15. To assure reasonable cost recovery, dues are assumed to be increased by 120% for 1985 and onward and retained at that level in real terms. May 1984  MEXICO LAZARO CARDENAS INDUSTRIAL PORT PROJECT Projected Revenues for E.S.P.. 1983 - 1989 (in million 1983 pesos) 1983 1984 1985 1986 1987 1988 1989 REVENUES Cargo Handling 353 386 318 407 502 563 577 Related Services 23 25 21 27 33 37 38 Storage 0 19 23 31 41 53 61 Pilotage 0 3 4 5 6 6 7 Towage 11 13 14 18 22 24 25 -----------------------------------------------------------------------__----__----------- Total Revenue 367 446 380 48B 604 683 715 Adjustment Factor 1 1 1.36 1.35 1.45 1.45 1.45 Adjusted__________Revenues_________367 __-_-446 ______15____659______7_____ 990_____ 1037___ Adjusted Revenues 387 446 515 659 676 990 1037 ------------------------------------------__------------------___----__-------__---------- Operating Revenues I/ 387 446 51S 659 876 990 1037