Honduras - Third Port Project

Docomw.tMo The World Bank FOR OFFICIAL USE ONLY Repot No. 5765 PROJECT PERFORMANCE AUDIT REPORT HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO and 1369-HO and CREDIT 696-HO) June 28, 1985 Operations Evaluation Department Thi douma sms restridd ma d my bed by ripits elylthe pferomce their el&ia dulles IIs clEM ma getwelbew be 0dloed Whoug World Bank autherafion FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO AND 1396-HO AND CREDIT 6?6-HO) TABLE OF CONTENTS Page No. Preface.... ....... . .............................................. i Basic Data Sheet... ....... ........ ...... .. .... . -... ... . ..... i Highlights ... ...............-o... o..................... iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. INTRODUCTION AND BACKGROUND ........ o ......... ........ 1 II. IMPLEMENTATION AND RESULTS ... ........ o............ 3 III. POINTS OF PARTICULAR INTEREST.. ............. 6 APPENDIX Comments from Empresa Nacional Portuaria (ENP) and from the Ministry :1 Finance and Public Credit ... 11 PROJECT COMPLETION REPORT I. Introductio..... .................. ... - .... 17 II. Project Preparation and Appraisal ..-...........o...... 17 III. Project Implementation and Cost .. ........... 19 IV. Traffic and Operations ............ ........ .......... 24 V. Financial Performance of ENP . ............... 26 VI. Economic Reevaluation ................................ 27 VII. Institutional Development................ ............ 29 VIII. Role of the Bank ................ .. .... 29 IX. Conclusions. ............ ......... . 30 TABLES I Major Loan Covenants ... . ................... 33 2 Actual and Appraisal Cost Estimates ................... 34 3 Approved and Actual Financing of the Project ........... 35 4 Actual Use of Bank Loans and Credit Funds .............. 36 5 Revision of Allocation of Loan Funds ........... ..... 37 6 Puerto Castilla - Appraisal Traffic Projections ........ 38 7 Puerto Castilla - Revised Traffic Projections ...... 39 8 San Lorenzo - Appraisal Projected and Actual Traffic 40 9 Summary of ENP Projected and Actual Income Statements 41 10 Puerto Castilla - Economic Benefits -................ 42 11 Puerto Castilla - Streams of Cost and Benefits ... 43 Th docUment has a rncted distbutin and any be used by recipients only in the perfomance of their official duties. Its conients may not otherwise be disclosed without World Bank authorization. Table of Contents (cont'd.) Page No. 12 San Lorenzo - Summary of Peak Period Port Capacity Analysis ....................... 44 13 San Lorenzo - Wharf Extension and Channel Dredging Streams of Cost and Benefits (US$1977) ............. 45 ANNEX Puerto Castilla - Revised Subproject ................... 46 MAP IBRD 12463R(PCR) - May 1984 IBRD 12464R(PCR) - May 1984 PROJECT PERFORMANCE AUDIT REPORT HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO AND 1396-HO AND CREDIT 696-Ho) PREFACE This report presents a performance audit of the Third Port Project in Honduras, for which Bank loans of US$12 million and an IDA Credit of US$5 million were made in April 1977. The closing date of the Loans and the Credit was June 30, 1984. About US$16.55 million of the loan and credit amounts was disbursed, and the remainder was cancelled. The project has been co-financed by the Venezuela Investment Fund and the OPEC Fund. The report consists of a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the Latin America and Caribbean Regional Office of the Bank. The PCR is based on a review of Bank files including appraisal, supervision and progress reports and other available documents. The OED memorandum is based upon a review of the Appraisal and President 's Reports, the Loan and Credit Agreement, Bank records and files, the PCR, Minutes of the Executive Directors' meeting at which the project was approved and interviews with people concerned with the project. The audit concurs with the conclusions of the PCR regarding the difficulty in forecasting forestry and agricultural production and the advisability of designing projects flexibly so they can be implemented on a phased basis. The audit goes on to draw other conclusions and enlarges on certain aspects of the project experience, in particular, forecasting, debt burden, and construction contract problems. The draft PPAR was sent to the Borrower for comments. Identical responses received from Empresa Nacional Portuaria (ENP) and the Ministry of Finance and Public Credit have been combined by OED into one letter which is attached as an Appendix to the PPAM. The text of the draft PPAR was amended to reflect these comments. PROJECT PERFORMANCE AUDIT REPORT HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO AND 1396-HO AND CREDIT 696-HO) BASIC DATA SHEET KEY PROJECT DATA Actual or Appraisal Current Item Expectation Estimate Total Project Cost (US$ million) 29.9 47.7 /a Overrun () - 59 Loans and Credit Amount (USS million) 17.0 17.0 Disbursed 17.0 16.9 /b Date Physical Components Completed 09/79 08/84 /c Proportion of Time Overrun (Z) - 138 Estimated Economic Rate of Return (%) Puerto Castilla 15.5 /d 12.2 /d San Lorenzo Wharf Extension 14 2 Channel Dredging 19 ) CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ million) FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 Appraisal Estimate 0.5 6.9 11.1 17.0 17.0 17.0 17.0 17.0 Actual - 3.0 8.3 14.6 15.3 15.4 16.0 17.0 Actual/Estimated (%) 0.0 44 75 86 90 91 94 100 OTHER PROJECT DATA Actual or Item Original Plan Est. Actual First Mention in Files or Timetable 09/06/74 Appraisal 07/76 Negotiations - 02/28/77 Board Approval Date 03/29/77 04/05/77 Loan Agreement Date - 04/25/77 Effectiveness Date 03/21/77 12/22/77 Reappraisal - 10/81 Closing Date /e 12/31/80 06/30/84 Borrower Republic of Honduras Executing Agency Empresa Nacional Portuaria Fiscal Year of Borrower January 1 - December 31 /a Actual and projected costs cannot be readily compared because the appraisal project differed from the implemented one. /b US$17,559.52 of Loan 1395-T-HO and US$33,700.73 of Loan 1396-HO were cancelled. /c As of March 1985, equipment for Puerto Castilla costing about US$1.9 million under OPEC Fund co-financing is still being reviewed for procurement through the OPEC Fund loan. /d Revised project. Te- Revised closing of OPEC Fund co-financing loan is now August 31, 1985. MISSION DATA Month/ No. of No. of Man- Date of Item Year Weeks Persons Weeks Report Preappraisal 02/76 1 3 3 03/19/76 Preappraisal 05/76 1 2 2 06/23/76 Appraisal 06/76 2 4 8 11/05/76 Post-Appraisal 09/76 1/2 1 1/2 10/01/76 Post-Appraisal 12/76 1/2 2 1 Subtotal - - 14-1/2 Supervision I 05/77 1 3 3 06/28/77 Supervision II 10/77 1/2 1 1/2 11/23/77 Supervision III 03/78 1 1 1 04/05/78 Supervision IV 05/78 1 3 3 05/19/78 Supervision V 11/78 1 1 1 11/29/78 Supervision VI 01/79 1/2 1 1/2 02/26/79 Supervision VII 03/79 1 1 1 03/30/79 Supervision VIII 08/79 1 2 2 09/25/79 Supervision IX 03/80 1 1 1 03/24/80 Supervision X 03/81 1/2 1 1/2 11/25/81 Reappraisal 10/81 1 3 3 11/25/81 Supervision XI 07/82 1/2 1 1/2 09/03/82 Supervision XII 03/83 1 2 2 04/07/83 Supervision XIII 07/83 1 3 3 07/18/83 Supervision XIV 12/83 1/2 2 1 01/13/84 Subtotal 23 Total 37-1/2 COUNTRY EXCHANGE RATES 1976-84 Name of Currency (Abbreviation) Lempira Exchange Rate: US$1.00 - Lempira 2(L) US$0.50 - L.1. 1982 US$500 - L.1000 - iv - PROJECT PERFORMANCE AUDIT REPORT HONDURAS THIRD PORT PROJECT (IBRD LOANS 1395---HO AND 1396-HO AND CREDIT 696-HO) HIGHLIGHTS The objectives of the project were (i) to provide capacity at a new port on the Atlantic coast in northeast Honduras to handle the exp-rt of timber and agricultural products from the Olancho forest region and the Aguan Valley, and (ii) to provide capacity for increased sugar exports from south- ern Honduras by extending an existing port on the Pacific coast. The project also included technical assistance for the construction works and for train- ing staff of Empresa Nacional Portuaria (ENP), the Port Authority, in con- tainer operations. The project was appraised in 1976 and completed eight years later in 1984, compared with three years estimated at appraisal. Port development in Honduras over the ten years preceding the start of this project had been progressive and generally effective in meeting the needs of the nation. An efficient Port Authority, ENP (PPAM para. 4), had developed and its activities at Cortes, the principal port of Honduras situ- ated on the Atlantic seaboard, were satisfactory. However, in 1975, ENP embarked on a program to develop a new port on the Pacific coast which did not prove to be a prudent development. This port, San Lorenzo, replacing lighterage, was assisted in both stages of its development with finance from the Bank under the Second Ports Project (Loan 767-H0) and this, the Third Ports Project. San Lorenzo does not yet have the traffic it was designed and built for, neither has it been economic in either its first or its second phases (PPAM para. 11). The traffic forecasts for San Lorenzo were unduly optimistic and costs have been greatly in excess of what was estimated. The trends begun at San Lorenzo under the Second Ports Project continued and became more pronounced under the Third Project. By the time the Third Project started, plann'ng in Honduras appears to have become a tool for target setting to meet variou3 goals and bearing little relationship to the practical circumstances zurrounding development. As a result, the traf- fic originally forecast for San Lorenzo and Puerto Castilla under the Third Project has fallen far short of appraisal expectations. Costs have also been much higher and ex-post economic rates of return (ERR) of 3% for San Lorenzo and 12% for Puerto Castilla have been estimated in the PCR. The Puerto Castilla return is based entirely on forecast traffic (port opening was in mid 1984) and therefore subject to greater uncertainty than forecasts in projects for operating ports. If there is even a one year delay in traffic development, the already marginal rate of return would be seriously reduced (PPAM paras. 12, 23 and 25). Initially, finance was provided for the Third Port Project by the Bank and by IDA (together US$17 million) and the Venezuela Investment Fund (US$9.1 million equivalent), with the ENP and the Government providing the balance. The scope of the project was increased in May 1979 to include channel dredging at San Lorenzo at an extra cost of US$4.4 million, and then, - v - following a supplementary appraisal of the project in 1982 (PPAM para. 6), the Bank approved a reduction in the scope of the harbor works at Puerto Castilla from three berths to one berth, at the same time as it initiated further financing on behalf of ENP from the OPEC Fund of US$9.0 million. The ENP and the Government financed US$12.6 million equivalent of the revised project, bringing the total project cost to US$47.7 million equivalent. Very serious contractual difficulties arose at Puerto Castilla. The contractor (a US firm) suspended work, because of alleged frustration and late payments; the case was arbitrated in favor of the contractor for US$1.7 million. ENP did not immediately pay the award, the contractor claimed from his insurer and eventually ENP paid out US$3.5 million in settlement. Mean- time, ENP claimed on the 100% (US$19.4 million) US style performance bond. ENP eventually settled for US$7 million from the underwritqr, far less than what was required to complete the project, even though it had been ach re- duced in scope from the original contract. Points of interest highlighted in the audit are: i) there was excessive reliance on optimistic, target oriented plan- ning forecasts for ports traffic, and this has led to premature and inappropriate investments (PPAM paras. 19-25); ii) as a result of (i) above, the third ports project created a pre- mature debt burden on the ENP (PPAM paras. 26-28); and iii) the construction contract problems at Puerto Castilla, bring to light difficulties in qualifying contractors for bidding, and show the grave risks involved in proceeding with arbitration and litiga- tion rather than negotiation and settlement (PPAM paras. 29-34). In conclusion both the PCR and the audit concur that the project investments at San Lorenzo were completely unjustified. The audit considers this could have been seen at appraisal. The audit also considers that the revised port investment at Puerto Castilla was barely worthwhile, and not for the reasons originally used in its justification at appraisal. Delays in reaching port operating capacity at Castilla because of insufficient traffic in the future, could become the most significant factor in reducing still further the ERR estimate made in the PCR. Whether the overall forestry, roads and port infrastructure required for the development of the Olancho region is economically justified at the moment, is another matter, which is not addressed by this audit. Traffic growth at Castilla is still uncertain and any further development there should be phased to meet demand in as small increments as possible. The most likely growth potential there is for con- tainer operations. Looking at the project overall and at worldwide trends in shipping, the audit envisions that the most wocthwhile direction for the future deve- lopment of harbor operations in Honduras is in containerization. Based on this point of view, the audit concludes that perhaps the most worthwhile com- ponent of the third ports project was the technical assistance costing $77,000 for training ENP staff in container operations at the existing port of Puerto Cortes. PROJECT PERFORMANCE AUDIT MEMORANDUM HONDURAS THIRD PORT PROJECT (IBRD LOANS 1395-T-HO AND 1396-HO AND CREDIT 696-HO) I. INTRODUCTION AND BACKGROUND 1. Over the last thirty years, transport infrastructure in Honduras has developed from a rudimentary system to one which covers most of the basic transport needs of this small and mountainous country. Growth had been vigorous until the worldwide slow down in demand which started during the late '70s. Forecasting procedures in the early period of rapid growth were similar to those used subsequently after the worldwide shortage. These pro- cedures emphasized the establishment of targets rather than accuracy in prediction. Demand in the early period generally rose in accordance with these targets to meet the capacity of the highway and port infrastructures. 2. The Bank and the Association (referred to collectively in this audit as "the Bank") have supported the development of transport infrastruc- ture in Honduras with 8 highway projects, commencing in 1958 and with 3 port projects commencing in 1966. The Bank had no rationalized country program policy until about 1979 when it decided to place more emphasis on agricultur- al and industrial credit projects as part of a policy to focus effort on direct production and social sectors, rather than increasing the infrastruc- ture in the power and transport sectors. This policy was not formally enunciated until the Bank's Country Program Paper of 1982. All of this was, of course, far too late to be brought to bear on the design of the third port project. 3. The Honduras ports comprise Puerto Cortes on the Atlantic coast catering for 80% of all traffic, three much smaller ports on the Atlantic coast, Tela, La Ceiba and Puerto Castilla, and a fifth small port, San Lorenzo on the Pacific Coast. Tela and La Ceiba are old ports built for the banana industry and not very suitable for modern cargo requirements. Puerto Castilla is the new port built under this project, and construction on San Lorenzo commenced in 1975, under the second Bank port project and continued under the third project. 4. All these ports are administered by Empresa Nacional Portuaria (ENP), which is an autonomous undertaking with an Executive Board and an appropriate organization. Administration is the responsibility of the General Manager and ENP is under the general direction of the Secretary of Economy and Finance. Set up in 1965 in association with the Bank's first port lending operation, ENP has grown to be an effective and appropriate organization to operate and control the ports of Honduras. 5. When the third port project was about to commence in 1977, ENP was beginning to experience increasing debt (para. 27), the initial phase of con- struction at San Lorenzo had not yet been completed, and there had been a - 2 - general slackening in demand for export products in line with the worldwide trend. In the context of all these circumstances it seems imprudent (paras. 26-28) to have gone ahead with the third port project, at least on the scale proposed. 6. The third port project was appraised in June 1976 and was comprised of: Puerto Castilla i) A 450 m quay, with 10.5 m depth alongside, transit and lumber sheds, a warehouse, office and maintenance buildings, palm oil and petroleum storage tanks, roadworks, utilities and other ancillary works; ii) the procurement of marine and mechanical equipment; San Lorenzo iii) a 145 m quay, a sugar storage shed and molasses tanks; iv) the procurement of mechanical equipment; Technical Assistance v) a study to determine the optimal depth of the San Lorenzo channel, and vi) training ENP staff in container operations at Puerto Cortez. Revisions to the project were made at various times, culminating in the proj- ect amendment of November 1982. The project as finally completed was modi- fied from that appraised as follows: Puerto Castilla i) the quay length was reduced to 150 m; ii) the mechanical and marine equipment was considerably reduced; and San Lorenzo iii) the long approach channel was dredged to 28 feet. The revisions at Puerto Castilla made the project more realistic for the mixed lumber and containerized banana operations that are developing there (paras. 23-25), but the revision at San Lorenzo only worsened the premature development of this port (paras. 21 and 22). 7. At the time of appraisal, the total cost of the project was esti- mated at US$29.9 million equivalent and actual total project costl/ upon I/ Revised as indicated in para. 6 of this memorandum. - 3 - completion is expected to be US$47.7 million. The Bank assisted with loans of US$12 million, the Association with a credit of US$5 million, the Venezuela Investment Fund with US$9.1 million equivalent and the OPEC Fund (para. 29) with US$9.0 million equivalent. The Government and ENP provided the balance of the finance. The Bank and Association financing of the proj- ect has been fully expended while the OPEC Fund financing, for which the Bank is loan administrator, has yet to be fully drawn down on account of some equipment items. II. IMPLEMENTATION AND RESULTS 8. Contracts for all the works were entered into after detail engi- neering had been completed by consultants (USA). Procurement for the civil works was through prequalified international competitive bidding at Puerto Castilla, and by negotiated extension c%f the second ports project contract at San Lorenzo (with the prior agreement of the Bank). The Puerto Castilla con- tract, let for an amount 40% above the engineer's estimate, ran into severe problems ending in arbitration about which further details and conclusions are described in paras. 29-34 of this memorandum, and also in the PCR paras. 3.02 through 3.05. The San Lorenzo contract was executed smoothly (PCR paras. 3.10-3.12) though the cost was more than twice the appraisal esti- mate. This audit concurs with the PCR that the appraisal estimates at both ports were gross, unexplained underestimations. The estimates were said (SAR para. 3.12) to be based on the consultants' figures derived from recent bid prices for comparable work and, therefore, should have given reasonable costs particularly at San Lorenzo, where an existing contract whose rates were known, was being extended. Moreover, when the negotiated contract prices at San Lorenzo indicated such a large cost increase, the audit does not under- stood why the Bank did not insist that ENP go out to (international) competi- tive bidding. At Puerto Castilla, some of the extra cost may have been attributed to the remoteness of the works site compared with normal contract works. In the absence of other evidence, the audit can only conclude that the cost estimating showed a lapse of judgement, both by the consultants and the Bank. 9. In addition to the unduly low original cost estimates, the 59% cost overrun of the project overall was caused by (i) increasing the scope of the project at San Lorenzo, and (ii) at Puerto Castilla, inflation and delay costs arising out of a two and a half year break in construction. The cost overrun depleted the available funds to such an extent that additional fi- nancing had to be found. Unfortunately, additional financing was only sought after the works were committed, in particular the additional works at San Lorenzo. The audit concurs with the PCR (para. 9.04 of PCR) that, even if the additional dredging works at San Lorenzo had been justified (which they were not, see para. 11), they should not have been undertaken until additional finance was assured. Instead funds were reallocated from elsewhere in the project, and subsequently extra financing was obtained from the OPEC Fund for Puerto Castilla, the last component of the project to reach completion. 10. Traffic forecasts at both San Lorenzo and Puerto Castilla were grossly overestimated at appraisal. This raised serious problems for project design and places doubt on the planning procedures used. A more detailed description of traffic estimates for this project and an elaboration on the problems these estimates caused, are described in more detail in paras. 19-25 of the PPAM. ENP ;nd Government officials note that unfavorable internation- al trade relations under the worldwide economic recession, which were not foreseen at appraisal, were responsible for the overoptimistic projections. 11. The economic results of the third port project are, in general, poor because of the original overestimation of traffic and high costs as com- pared with appraisal estimates. The ex-post economic rate of return (ERR) at San Lorenzo was only 3% compared with 12% at appraisal, while at Puerto Castilla it was 12% compared with 27% at appraisal. Details of the ex-post economic evaluation are shown in the PCR paras. 6.01 through 6.09 and in the related tables of the PCR. San Lorenzo is clearly uneconomic. Doubts were raised on this point by the Bank's Loan Committee before the project was pre- sented to the Board. The Central American Transport Study (ECAT) of November 1976 had estimated that traffic would be much less than the forecast in the draft appraisal report. A special Bank mission visited Honduras to review the forecasts before the loan was approved by the Bank's Board. Despite lowering the forecasts as a result, the San Lorenzo component appears to have been agreed to by the Bank more on the basis of the impact it would have on developing the southern region of Honduras rather than on its rate of re- turn. However, the development impact of San Lorenzo port appears to be limited and the Bank would have been wise to have exclu'ed the San Lorenzo component from the project. ENP and Government officials, taking exception to the Bank's assessment of San Lorenzo's economic merits, consider the port to be one of the country's great economic assets. 12. Since Puerto Castilla is an entirely new port which began operation in mid 1984, the traffic forecasts used in the reestimated ERR could make no reference to extrapolation of existing trends and therefore are subject to greater uncertainty than forecasts in projects for operating ports. In par- ticular the time needed to build up traffic may not be correctly predicted. If there is even a one year delay in the traffic developing as forecasted, then this would seriously reduce the already marginal rate of return. 13. Even if the port development at Puerto Castilla proves economic, there is the broader question, not within the scope of this audit, as to whether the whole of the Olancho regional project including forestry, roads and a share of port development, is economically justified. The extra costs and restrictions on the development of the lumber industry together with cur- rent stagnant world market prices for lumber products may significantly affect the viability of this regional project. If the regional project were deemed as a whole to be uneconomic and the Puerto Castilla project had to rely primarily on containerized banana trade for its viability, then the alternatives of improving La Ceiba as compared with Puerto Castilla would have to be considered to know whether the best use had been made of financial resources. 14. The financial performance of ENP has for the most part conformed with sound financial principles but, since the late 1970's ENP's debt burden - 5 - has been increasing heavily. This was made worse by the implementation of the third port project, which increased the net fixed assets of ENP by about US$50 million equivalent when its pre-project assets were US$25 million. Details of the circumstances surrounding the commitment of this debt and its implications are elaborated on in paras. 26-28 of this PPAM. 15. Since ENP is an efficiently operating organization, most of the emphasis in this project was placed on matters other than institutional deve- lopment. However, a training program for ENP staff in container operations at Puerto Cortes was provided through a consultancy under this project. This training was successfully carried out and, with containerization fast becom- ing a most important part of marine transport worldwide, it can be expected that ENP will have the need to service containers and the chance to put this training to good use. In the opinion of this audit, the training in contain- er operations was therefore, one of the most important and successful compo- nents of the whole project. Containerization lends itself to marginal investments for very significant increases in traffic throughputs, and there- fore, future initiatives for growth in ENP are likely to be most rewarding in this direction. 16. In view of all the circumstances described in paras. 11 through 15 above, this audit is of the opinion that the Bank overemphasized in this project the need to provide costly port infrastructure rather than concen- trating on less costly consolidation and improvement of existing port operations, and encouragement of container operations. This was an unfortu- nate position for the Bank to have taken, especially since the project chosen was so large as to involve co-financing from two other agencies, and when a more appropriate and less costly project would not have needed co-financing. 17. Bank intervention during supervision of the project dealt well with a series of crises when they arose, but the supervision itself failed in anticipating problems and taking early preventative action. Thus when a supervisice mission in October 1977 found out that the Bank's forestry proj- ect would be reduced and delayed the Bank made no effort to ensure that cor- rective action was taken in ENP's development program. This was some four months before the contract was signed for the construction of the three berths at Puerto Castilla. The reason given in the Bank's supervision report for not reducing the scope of the Castilla works before they even started was that despite a 200,000 ton/annum reduction in timber exports, the long term traffic would not be affected. Once construction started, supervision missions did not visit the Puerto Castilla site often enough in the initial implementation period to investigate the early warning signs of real contract problems. These warning signs were evident as early as November 1978 when the contractor began a series of letters to the Bank's project officer. Finally, the Bank appeared to take no action to counter ENP's debt burden problem which was brought to the Bank's attention by the March 1978 supervi- sion missions. -6- III. POINTS OF PARTICULAR INTEREST 18. Three points of particular interest arise in this project. They are commented on in some detail as follows: 19. Excessive reliance on optimistic planning forecasts and the conse- quent damage this causes to national economies through premature or inappro- priate investments. This project is an example where demand projections were based more on optimistic target assumptions of exportable production than on already proven demand realistically adapted for future circumstances. In this project, where new enterprises and new marketing are involved, demand projections cannot be easily checked against past demand. In such cases, this audit consider a more cautious step-wise approach using smaller invest- ment units (with flexible implementation arrangements) and periodic reviews to check whether infrastrucutre is appropriate for the demand is a better system to use than target based planning. 20. The Government and ENP submitted unrealistic plans to support this project, and the Bank, though modifying the demand projections downward to make them more realistic, still agreed to go ahead and support the financing of a project which was premature in nearly all its components. Although some of this error was corrected by the reduction of one project component, some of it remained through completion, and some was compounded by increasing the scope of another project component. 21. The project, being based on unduly optimistic forecasts of demand, suffered from overdesign of its components. While the appraisal projected that the opening year traffic at Puerto Castilla would be about one quarter million tons and would quadruple in four years, the revised traffic projec- tions showed roughly the same opening year tonnage but an increase of only 1OC! in six years. In the case of San Lorenzo the actual 1983 traffic was about one half the amount forecast at appraisal. Four significant demand forecasts were involved at the two ports, as follows. Firstly, the export- able surplus of sugar products that could advantageously be shipped through a Pacific port, were grossly overestimated at appraisal (by more than 250% for 1983). This overestimation was based on the assumption that, with excess world sugar supplies and low prices before 1980, Honduras as a low cost pro- ducer could capture a permanently larger share of the market if it had the capacity to do so. It appears as if planning in the sugar industry as a whole was geared around the threefold increase in capacity by 1980 that was needed to capture this market. Certainly the expansion of San Lorenzo port was based on the assumption that Honduras would capture this larger share of the sugar market. Unfortunately, by 1983 the total sugar/molasses exports of Honduras reached only 85% of the 1980 planned exports because local consump- tion had increased, and the market westwards across the Pacific did not materialize. Consequently, and because more sugar was marketed eastwards, the increase in production went to the Azlantic port of Puerto Cortes instead of San Lorenzo where sugar products traffic dropped by 40% between 1978 and 1983. The extra berth provided under this project at San Lorenzo is there- fore grossly underused even now, five years after its completion. - 7 - 22. Secondly, since it was said that the marketing of sugar products from San Lorenzo would be more attractive if larger vessels could use the harbor, a study to determine the feasibility of deepening the channel was carried out under the project. When the study was completed, the project was amended (two years after loan signature) to include the deepening of the San Lorenzo channel to 28 feet on the assumption that large draft vessels would use the harbor. In the event, there was no change to larger vessels, thus negating the US$4.4 willion investment in dredging. 23. Thirdly, for Puerto Castilla, the timber product exports forecast at appraisal for 1985, the first full year of operation of this new port, were 220% more than the latest estimate of 168,000 tons made in 1984. At appraisal, Puerto Castilla was scheduled to be opened to traffic during 1980, by which time no timber would have been available for export. The reasons for the overestimation are understood to be (i) a revised national policy on forest conservation reduced the rate of felling; and (ii) the sawmill at Corocito was delayed in its construction, and because of mill testing activi- ties, was still working below full capacity when the port opened in mid 1984. There also might have been an overestimation of timber in the forests. 24. The main risk foreseen at appraisal, that forest and access roads would not be completed on time, appears to have been well guarded against and no trouble was experienced on this score. The audit notes that the original plan for developing the timber industry in the olancho region (the port hinterland) was overly ambitious, and this led to the overdesign of Puerto Castilla. Three berths were contracted for, but because of the suspension of the works on contractual grounds, the opportunity was taken to modify the port project to one berth (at a cost of about 180% of the appraisal estimate of the cost of three berths). The audit considers that, for a new port on a virgin coast and opening up a virgin hinterland, it was imprudent to have gone ahead with a three berth harbor as a first stage of construction. A more cautious and slower approach to investing in infrastructure would have been more appropriate, and in the opinion of this audit, this could have been foreseen and should have been allowed for in the appraisal. 25. Fourthly, the agriculturai development of the Aguan valley, served by Puerto Castilla, was over optimistic, largely because the flooding prob- lems of the Aguan river were not properly recognized. As a result, export forecasts of citrus, palm oil, corn and beans are not expected to be anywhere near the expectation for the first full year (1985) of port operation. How- ever this has been considerably balanced out by the rerouting of banana ex- ports from La Ceiba to Puerto Castilla. This has come about because Puerto Castilla can be used for container traffic while La Ceiba cannot. At Puerto Castilla, overall forecasts of agricultural and timber exports and of im- ports, may prove reasonable for one berth given a degree of containeriza- tion. However, this outcome will be fortuitous rather than well planned. 26. The Bank's financing of this ports project was not supportive of a basic need in Honduras, and for the most part it has created a premature debt burden. The Bank's emphasis prior to 1979 in lending to Honduras had been for transport and power infrastructure. Originally these had been much need- - 8 - ed developments; but over the last thirty years, Honduras has improved its transport infrastructure to a degree that justifiable major new developments in the transport sector are not so readily found, and probably would not con- stitute a worthwhile use of scarce resources. The audit considers this could have been foreseen at appraisal for the ports sub-sector. 27. In fact, at appraisal, ENP's debts were forecasted would rise 270% in the three years up to the originally scheduled completion date for this project, and that debt service would rise correspondingly. The covenant in the Second and Third Port Projects that ENP's cash generation should be at least 1.75 times its maximum debt service in any year, was in default as a result of the Third Ports Project. Both these points were made in the ap- praisal report (SAR para. 5.16), but nothing was done about it. As if to drive the point home, ENP had to enter into a debt rescheduling agreement in 1983 with the Central Bank of Honduras, and is expected also to reschedule its debt with foreign commercial banks (PCR para. 5.02). 28. The burden of this debt, coupled with relatively poor economic per- formance overall of this project, means that financial viability is only retained by ENP through matching tariff increases. These increases are an unnecessary burden on the Honduran economy, and if improved inter-regional relations develop over time, then ENP may find itself in a difficult position competing with nearby ports in other countries. 29. The construction contract problems of the works at Puerto Castilla are of considerable interest, not only because they are rather unusual, but also because (i) they highlight an inherent difficulty in qualifying contrac- tors for bidding, and because (ii) they show the risks involved in proceding with arbitration and litigation rather than negotiation and settlement. 30. The contractor was a joint venture of two firms from the USA, one of which in effect undertook the contract. This firm was prequalified and the contract value was US$19.4 million. At the prequalification review the consulting engineers relied entirely upon the data submitted by the construc- tion firms in their applications. As is normal, no detailed investigations were carried out to determine the accuracy oF the data in the applications. Subsequent investigations made during the litigation process brought to light prior performance problems of the contractor that might have excluded him from qualifying had they been known earlier. 31. A brief history of the principal events of this contract are as follows. Contract award was in early 1978, and by November 1979 the contrac- tor had claimed US$6 million on various grounds. Then, with precipitation at the end of January 1980, against their consultant's advice and without giving adequate warning to the surety, ENP invoked the bond and indicated the con- tractor to be in default. In a hurried effort at mediation, there followed in early February 1980 a meeting, under Bank auspices, of ENP, the contractor and their surety, to clarify and try to reconcile the problems so that the contract could continue. Some degree of agreement was reached, but this proved abortive, when on March 6, 1980, the contractor without prior notice, suspended work at the site claiming many frustrations of the contract, prin- cip.,l of which was that interim payments were not being made within the time limit stated in the contract documents. At the time of suspension, 30% of the works were completed, and 56% of the total contract cost had been paid. The time limit given for payments was 30 days and this is considered by the audit to be rather less than normal for this type of contract; 60 days would have been more appropriate. It was learnt by ENP after the contractor left the site that the prequalified firm had bought out the other firm acting with power of attorney on their behalf. 32. After the suspension, there followed an arbitration case for over a year and a half, with the Inter-American Convention on International Commer- cial Arbitration ruling in favor of a US$1.7 million award to the contractor in November 1981. The ENP did not meet the award immediately and the con- tractor claimed from his insurers, the Overseas Private Investment Corporation (OPIC) which is a U.S. Government agency established to insure US investors outside the United States. Finally, the contractor and ENP reached an agreement which resulted in a payment by ENP of US$3.5 million (including the arbitrated amount of US$1.7 million) to the contractor for an ,verall settlement of the ENP/contractor dispute. 33. Concurrently, ENP started negotiations with the surety who had pro- vided the contractors with a 100% US style (US$19.4 million) performance bond. The surety made an offer of US$10.25 million contingent upon the outcome of the arbitration proceeding, which ENP felt unable to accept. Instead, ENP took out a law suit against the surety for US$12 million (the outstanding value of the contract not completed), but eventually settled for US$7 million. ENP then let the contract for the remainder of the revised civil works (except piling works) to a local joint venture contractor in June 1982, and the whole of the works were eventually completed in June 1984. ENP and Government officials explained that the US$7 million settlement did not satisfy the demands of ENP. 34. Conclusions to be drawn from this whole unfortunate and long drawn out experience are (i) that the submission of well substantiated performance reports on previous contracts should be mandatory for prequalification appli- cants; and (ii) the risks of litigation and its grave consequence should be made clear to the Bank's Borrowers, especially when operating amongst inter- national contractors with whose practices they may be unfamiliar. Though litigation may not frequently arise, the experience of it has invariably proved that "negotiation and reconciliation are preferable to arbitration and litigation." The experience here reinforces the wisdom of this statement. 35. In its review of the draft PPAR, ENP and the Ministry of Finance and Public Credit made comments on the use and selection of consultants for design, execution and supervision of projects, on Government-Bank inter- actions and on civil works and institutional development of ENP under this project. Among other points, ENP and the Ministry emphasized that the Bank should consider national and regional firms for consultancy assignments and pay close attention to opinions of the governments in the context of con- struction and supervision contract awards. Further, they drew attention to the importance of ENP's institutional development, through technical assist- ance and training, under the project. The full text of these comments is given in paras. 18-20 of Appendix 1. Óñr6/<< k APPENDIX Page 1 of-b Ministry of Finance and Public Credit E-1191/85 May 29, 1985 Office of the Undersecretary for Public Spanish (Honduras) Credit and Administration OED PS:pa Rev.:JCB and Empresa Nacional Portuaria (ENP) Office of the General Manager May 13, 1985 and May 9, 1985 Mr. Yukinori Watanabe Acting Director-General Region's and Operations Evaluation Department OED's The World Bank comments a/ Washington, D.C. Sir: We are in receipt of the preliminary draft of the Project Performance Audit Report on the Honduras Third Port Project which you sent to us on March 13, 1985. ENP would like to make the following comments on this draft: English 1. On page (i) of the Project Performance Audit Report (PPAR) the closing versign date of the loan needs to be corrected to read "June 30, 1984." correct. 2. On page (ii), "Basic Data Sheet for the Project Performance Audit Highlights Report," the effective or current estimate shows a total project cost of of PPAR US$47.7 million, with which we are in agreement. On pages (vi), 4 and and para.7 elsewhere in the report, however, the figure is given as US$46.2 of PPAK million. We assume that the difference between the two totals amended. (US$1.5 million) is accounted for by the cost of the 35-ton mobile crane, the purchase of which was mutually agreed on with the World Bank, which played an active role in all the bidding procedures for procurement of the equipment, but which has yet to give its approval for the purchase of the crane, on the grounds that it is not appropriate for Puerto Castilla operations. Para. 4 of 3. Paragraph 4 on page 2 of the PPAR needs to be corrected to read: PPAM amended. "Administration is the responsibility of the General Manager and ENP is under the general direction of the Secretary of Economy and Commerce." Para. 28 4. In paragraph 28 on page 17 of the PPAR we find it inappropriate to say of PPA "raising tariffs beyond normal levels," because the tariff changes that modified. were introduced in October 1982 were decided in keeping with Bank requirements in effect since 1978, and the Bank also reviewed and approved our plans to revise our tariffs. Moreover, these changes were made following a review of our costs and on the basis of a comparative analysis of our tariffs with those in effect in other ports of the region. a/ The Mnistry of Finance and Public Credit and the Empresa Nacional Portuaria (ENP) wrote identical comments on the draft Project Performance Audit Report. OED has combined these comments into one letter. APPENDIX -12 - Page 2 of 6 We agree that the tariff increase had a direct impact on our incipient economy, but this increase was encouraged by IBRD because ENP's operations were running at a deficit, which prevented it from meeting the financial indicators established in the loan agreements. It should also be mentioned that ENP did not follow IBRD's recommendations to introduce tariff increases at regular yearly intervals, starting in 1982, because this would have Aggravated our country's already critical situation and would have put us out of competition with other ports in the Caribbean region. We should also point out that in order to guard against Honduran ports losing their competitiveness, ENP's management has decided not to introduce any further tariff adjustments for its user services other than in exceptional cases where such action is found to be warranted on the grounds of appropriate analyses. Correct- 5. On page 4 of the PPAR a correction is needed to reflect the fact that the miansin palm oil storage tank was indeed built in Puerto Castilla. para. 6 of PPAM. 6. In paragraph 9, on page 7 of the PPAR, the cost overrun figure for the Para. 9 of project overall needs to be corrected to 59% to tie in with Table No. 2 PPAM cor- on page 19 of the Project Completion Report (PCR). rected. Para. 3.03 7. The statement made in paragraph 3.09, page 7, of the PCR, that from of PCR January 1982 the USA consultants continued working alone, is incorrect, amended. because counterpart supervisory support was provided by ENP staff up until completion of the works. 8. Paragraph 5.01 on page 12 of the PCR states that only eight of the Para 5.01 existing 14 buildings in the free trade zone at Puerto Cortes are uPt occupied, which is incorrect, because all 14 industrial buildings have updated. been leased since the end of 1984. It should also be kept in mind that this is a project whose returns are more social and economic than financial, in that it has successfully generated more than 2,200 jobs and the payment of annual wages of over US$4.5 million, not to mention the demand for other Honduran goods and services on the part of the industries established. Para. 31 9. Paragraph 31 on page 18 of the PPAR needs to be corrected to read, "At of PPAH the time of suspension, 30% of the works were completed, with negligible amended. progress in the 23 months from co-mencement of the project." 10. The last part of paragraph 32 on page 19 of the PPAR needs correction, Para. 32 n.f PPAM because the payment of US$3.5 million was made to the contractor (CAC) amended. and not to OPIC (see paragraph 3.05(a) on page 5 of the PCR). 11. In paragraph 3.08 on page 6 of the PCR the list of equipment for Puerto Para. 3.08 Castilla, financed by OPEC, should include one 35-ton mobile crane, one of PCR dump truck and two mobile fire pumps, since this equipment is part of the amended. set that it was agreed with IBRD should be purchased for Puerto Castilla. APPENDIX --13 - Page 3 of 6 Para. 32 12. The inconsistency between what is said on pages (vi) and 19 of the PPAR of PPAM and in paragraph 3.05(a) on page 5 of the PCR, concerning the result of amended. the arbitration, needs to be corrected. The fact is that the case was arbitrated in favor of the contractor for US$1.7 million and not US$3.5 million. It should be explained that the sum of US$3.5 million was the result of an overall settlement between the contractor and ENP, which included the arbitration award plus other amounts payable to CAC. 13. We feel that most of what is said in paragraph 33, page 19, of the PPAR Para. 33 is irrelevant, considering the fact that the negotiations were difficult of PPAM for ENP, and that the set of figures given in that paragraph might give amended. rise to misinterpretations regarding the procedures followed in this case, which involved the participation of US government agencies in reaching the final agreements. It is important to stress that the final agreement did not satisfy the demands of ENP, the institution that suffered the greatest loss in the execution of the project. The arbitration award also left ENP virtually unprotected in the event of subsequent claims, because the insurance company proposed negotiating figures that were subject to the outcome of the arbitration. 14. We find irrelevant -- and therefore inappropriate for inclusion in the Para. 23 report -- the statement made in paragraph 23 on page 14 of the PPAR that of PPAM the quantity of timber in the Honduran forests turned out to be not as amended. much as originally estimated. This claim cannot be made without first conducting a complete reassessment of the CORFINO project. Page (viii) of the PPAR also states that, "whether the overall forestry, roads and port infrastructure required for the development of the Olancho region is economically justified at the moment is another matter which is not addressed by this audit." 15. It is mentioned more than once in the report that negotiation and reconciliation are preferable to arbitration and litigation. We feel that this is the right approach for IBRD to adopt vis-A-vis its borrowers, because this experience has been extremely damaging to Honduras. We feel, however, that exhaustive negotiations are appropriate provided the circumstances are favorable and all parties act in good faith, and that steps must be taken to guard against interference and pressure from agencies not directly involved in the agreements and contracts signed. IBRD must help by providing real and effective technical assistance in negotiations, with a view to affording the borrowers' interests some measure of protection and to ensuring that the technical supervisors of projects are not influenced*, so that their reports are impartial and consistent in all respects. *T.N.: Literally, "imposed." APPENDIX -14 - Page 4 of 6 Implementation of the Puerto Castilla subproject, in particular, was plagued by contradictory supervisory reports, and it was clear that in various areas the technical supervisors gave ENP little or no support in organizing the arbitration and subsequent legal proceedings. The biggest loser in the end was Honduras, which will have to bear the obligations, damages and losses of the case. We think it is unfair that a poor country should have to assume full responsibility for the errors and omissions of all the parties involved in the execution of the Third Port Project. 16. With regard to the report's description of the San Lorenzo subproject as Para. 11 a premature, unjustified and uneconomic investment. we are of the opinion of PPAM that the basic facilities of this port represent one of the country's enlarged. greatest economic advantages, because, besides the technical, economic and financial factors, the political implications for the Central American region must be considered. A decision not to build the facilities would have brought about a deterioration in Hondurans' foreign trade in products that it has to export to the south because of the economic advantages. Other very significant benefits have also been derived from the replacement of a system of operation that was a drain on the Honduran economy. Although the PPAR report refers, in paragraph 28, page 17, to some hope of improvement in inter-regional relations, this is not foreseeable in the short or medium term because of the current political situation in Central America. 17. The report dwells on the overestimation of :he traffic to be handled by Para. 10 the Honduran ports, although IBRD is aware of the serious situation and of PPAM uncertain prospects of the developing countries in terms of their enlarged. international trade relations, the result of the worldwide economic recession and the development situation of those countries. Our exports of timber, sugar and byproducts, the projections of which provided the justification for the Third Port Project, have been affected by the following circumstances: (a) Because of the economic recession in the US and Canada, those countries have been exporting timber at lower prices to markets traditionally served by Latin American countries. (b) The US was the leading market for Honduran sugar but, besides adopting protectionist measures, that country has stepped up its use of sugar substitutes. The US has reduced the Honduran quota from last year's 59,500 short tons to 50,000 for 1984-85, with plans to eliminate the quota system altogether in the medium term. We have thus been affected not only by the steady and steep decline in the price of the product but also by the reduction in the volume allowed free entry into the US. APPENDIX - 15 - Page 5 of 6 When IBRD appraised the project in 1976 freight traffic showed a growing trend on the whole and it was impossible to foresee the consequences of the worldwide economic recession, which began in 1979 and which affected ENP's volume of freight traffic in such a way that 1984 levels were down to those recorded in 1979 and 1980. In light of the foregoing, we do not feel that it was a case of over-optimistic projections but that the gap between forecasts and actual and expected figures is attributable to the worsening of the worldwide economic crisis. 18. It is important to note that the plans designed by consultants* for Puerto New Castilla and also the specifications for the works were copied from those para. 35 for the facilities built at Puerto Cortis. The design criteria could added to have been improved for the development of this infrastructure. In this P connection, IBRD should keep three things in mind: (a) That the job of consultants is not merely to transplant technology to the borrowing countries without considering their special characteristics. (b) Efforts must be made to make maximum use of the resources of the borrowing countries by tailoring technical specifications to their individual circumstances and available resources. (c) The Bank should consider national and regional firms for the design, execution and supervision of projects, since such firms would be familiar with our environment and situation and this would give them the opportunity to deepen their experience and to utilize the human resources available in the developing countries, i.e. people who, thanks to the efforts of both the public and the private sector, have been trained in developed countries, but who are obliged to emigrate for want of employment opportunities, since they are not given access to the specialized fields where they might develop their professional skills. 19. In light of experience in executing the Puerto Castilla subproject and in New confirmation of the viewpoint we expressed on page 25 of our "Final pda. 35 added to Report on the Third Port Project," we feel that IBRD must take into PPAM. account the opinions of the governments and executing agencies of the borrowing countries when awarding construction and supervision contracts. It must also respect national legislation in order to avoid situations that might harm the sovereignty and dignity of the borrowing countries. It is also important to devise mechanisms with surety companies, in the form of "no fault" clauses guaranteeing contract performance, in order to minimize the risks that can jeopardize project implementation. 20. The report concludes that the most worthwhile component of the Third Port New Project was the technical assistance and the training in container dded added to handling provided for ENP personnel. This is an aspect which we see as PPAM. extremely important for our institutional development, because the * Name of consulting firm deleted by OED. APPENDIX -16 - Page 6 of 6 infrastructure improvements must be accompanied by technical, operational and administrative training activities so as to ensure efficient management of the available resources and attainment of the socioeconomic goals of the Honduran government. We believe IBRD can play an important role in this respect, supporting the management and organization of training projects requested by developing countries. IBRD would not be expected to become directly responsible for this function but to use its influence, position and available resources to get the appropriate institutions and agencies to allocate resources and to include our countries in their training programs. Despite the opinion of IBRD's Operations Evaluation Department, we think that the most worthwhile aspect of the Third Port Project lies in the joint decision of ENP and IBRD to complete the works and in their success in overcoming all the problems encountered during execution. Finally, we want once more to express our sincere gratitude to IBRD for its technical and financial support of the projects carried out in Honduras and we look forward to benefiting from its continued assistance and to the further strengthening of the good relations we have enjoyed since ENP came into being. Very truly yours, /s/ Rodolfo Matamoros H. Undersecretary for Public Credit and Administration /s/ Enrique Vitanza F. General Manager of ENP - 17 - HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO AND 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 Development of the ports in Honduras has taken place largely during the last two decades. Modernization of Puerto Cortes, the main port located on the Atlantic coast, was begun with Bank financing in the late 1960s (Loan 463-HO, US$4.8 million, 1966). A second expansion of Puerto Cortes was completed in 1976/77 and, at the same time, construction of the port of San Lorenzo (Pacific coast) was begun (Loan 767-HO, US$6.0 million, 1971)1/. The ports of Tela and La Ceiba, both on the Atlantic coast, are mainly banana handling facilities. Puerto Castilla, constructed under the subject project, serves the agricultural and timber areas of Eastern Honduras - the Aguan Valley and the Olancho forestry and reserve. 1.02 The ports of Honduras are administered by Empresa Nacional Portuaria (ENP) established with Bank assistance in 1965. ENP is an autonomous Government entity with an Executive Board and a General Manager responsible for day-to-day operations. ENP is competent and efficient in its operations and has had considerable experience in working with the Bank. 1.03 Up to June 1984, Bank Group assistance to the transport sector in Honduras, in addition to the two port projects mentioned in paragraph 1.01 and the project under review, has consisted of eight highway projects for which loans and credits totaling US$88.0 million have been approved. The first seven highway projects concentrated'on the completion of the primary road network. Under the ongoing Eighth Highway Project, the focus has shifted toward expansion and improvement of the secondary and feeder roads and maintenance of the system. 1.04 This Completion Report deals with the Bank's Third Port Project financed by Loans 1395-T-HO (US$5.0 a), 1396-HO (US$7.0 m) and Credit 696-HO (US$5.0 m), all approved on April 22, 1977. The report is based on information obtained from the Minutes of the Board Meeting, LAC Information Center, the Appraisal and Reappraisal Reports, staff supervision reports, consultants' final reports and a Project Completion Report prepared by ENP. II. PROJECT PREPARATION AND APPRAISAL 2.01 By 1977, development of the first stage of the agricultural potential of the Aguan Valley had been completed with financial assistance from the Inter-American Development Bank (IDB), and the second stage had been commenced. Also, the development of the forestry industry in the Olancho 1/ Project Completion Report issued on December 30, 1982. - 18 - region had started to take place with financial assistance from IDB and the Venezuelan Investment Fund (VIF). Timber and wood chips for export from saw mills located at Corocito, Pueblo Viejo and La Union would be produced during the first stage; subsequently, wood chips would be used to produce pulp and paper. There was a need to provide additional port facilities for this new traffic and ENP selected Puerto Castilla as the site. 2.02 At the same time, expansion of sugar manufacturing capacity in the Choluteca region in the South was under way, with two new sugar factories being built and an existing one being expanded, to provide cane sugar and molasses for export. Since these developments took place after award of the contract for port works at San Lorenzo, financed by Loan 767-Ho, ENP proposed a new project for a suitable expansion at San Lorenzo, as well as a study of the feasibility of deepening the access channel thereto. 2.03 The scope of the resulting project works at Puerto Castilla and San Lorenzo was based upon feasibility studies carried out by ENP, with the help of a joint venture of USA and Honduran consulting firms at Puerto Castilla, and consultants from the Netherlands at San Lorenzo. 2.04 A Bank appraisal mission visited Honduras in July 1976 and recommended construction of a 450 a long wharf at Puerto Castilla, with 10.5 m water depth alongside at low water and provision of an additional 145 m berth at San Lorenzo, with 7.5 m water alongside, both with appropriate backup facilities and equipment (para 2.06). Total estimated project cost was US$29.9 million, with a foreign exchange component of US$17.0 million. The Bank loans (1395-T-HO and 1396-HO) and the Association Credit (696-HO), totaling US$17.0 million, were approved on April 5, 1977 and signed on April 25, 1977. Effectiveness was delayed until December 22, 1977 because of difficulties over the subsidiary Loan Agreement for onlending arrangements between ENP and the Government. 2.05 Apart from provision and improvements of physical infrastructure, the project entailed the implementation of numerous measures to improve ENP's financial position. Major covenants (Table 1) covered costing procedures, tariff revisions, and debt service and cost recovery ratios. 2.06 The project as originally appraised consisted of: (a) Puerto Castilla 1. Construction of: (i) 450 a wharf with 10.5 m depth alongside; (ii) one 3,000 m2 transit shed; (iii) one 3,000 m2 warehouse; (iv) two open side lumber sheds totaling 6,000 m2; (v) one 800 m2 office building; (vi) one 560 m2 maintenance building; (vii) one palm oil storage tank of 2,500 tons and one petroleum storage tank of 2,000 tons, and (viii) fences and ancillary works. 2. Provision of surfaced open storage areas, roadways and utilities. - 19 - 3. Procurement of: (i) 14 forklifts and 500 pallets for general cargo; (ii) four forklifts, three tractors and five trailers for lumber; (iii) three front-end loaders, five dump trucks and one portable ship loader (250 ton/hour) for wood chips, (iv) one used 1,200 HP tug; and (v) one harbor launch. (b) San Lorenzo 1. Extension of the existing berths by 145 m and necessary dredging alongside. 2. Construction of one sugar storage shed (76 m x 31 a) and two molasses tanks of 3,800 ton capacity each. 3. Procurement of: (i) one 15--ton mobile crane, five 5-ton forklifts, four tractors, ten trailers and 500 pallets; (ii) two front-end loaders, two tractors, five trailers and 20 steel buckets for sugar handling; (iii) 150 ton/hour molasses pumps; and (iv) six navigation buoys. (c) Technical Assistance and Consulting Services 1. A study to determine the optimal depth of the San Lorenzo access channel. 2. Preparation of a manual detailing container operation procedures and documentation for Puerto Cortes. 3. Training ENP staff in container operations at Puerto Cortes. 4. Consulting services for design and construction supervision. 2.07 ENP was the executing agent for the project assisted by the joint venture of USA-Honduran consulting engineers at Fuerto Castilla and the consultants from the Netherlands at San Lorenzo. III. PROJECT IMPLEMENTATION AND COST A. Execution of the Project (i) Puerto Castilla 3.01 Following completion of the final engineering, contractors were selected for the works, on the basis of international competitive bidding, in accordance with Bank guidelines. The contract between a joint venture of two USA contractors and ENP was signed on February 14, 1978 for US$19.4 million, equivalent, 40% above the appraisal esti-ated base cost of US$13.9 million. This higher-than-expected base cost required ENP to -eek additional financing for US$9.1 million equivalent which was provided by the IF. - 20 - 3.02 Work commenced in March 1978 with contract completion time of 25 months, i.e., by April 1980. Following award of the contract, one partner of the joint venture withdrew from active participation, leaving the other firm as sole operator on site. In September 1978, the area was hit by a hurricane which flooded the site and destroyed the access road. The contractor was sorely taxed to make good the only road available for bringing materials, equipment, and supplies to the site. Since access road maintenance was not his responsibility, visiting Bank supervision missions brought the matter to the attention of the Government. 3.03 Because of the combination of the contractor's inadequate management and the frequent breakdown of the old equipment brought to the site, works progressed "ery slowly. Bank supervision missions urged ENP to request the contractor to rectify the deficiencies atfecting his performance but, by early 1979, the contractor was several months behind schedule. Also, delays by ENP in making prompt payments due to the contractor and in reimbursing him for local taxes and duties as required by the contract may have affected his cash flow. 3.04 Between 1978 and 1979, six Bank supervision missions addressed these problems, which finally appeared to be resolved by the end of 1979, when new personnel of the contractor, the supervising consultants and ENP took over. At that time, the works were four months behind schedule, with completion anticipated for August 1980. ENP, in January 1980, accepted this delay, but deferred granting the contractor any extension of time. The contractor, without prior warning, suspended -York at the site on March 6, 1980, when only about 30% of the original civil works were completed and 56% of the cost had been paid, and filed an arbitration claim against ENP to terminate the contract and obtain compensation for work completed, totaling about US$7.0 million. ENP filed a counterclaim for abandoning the works without cause, and sought compensation from the contract performance bond. 3.05 Works on Puerto Castilla were resumed in a substantial manner only in early 1982. During the intervening two-year period, ENP's efforts were geared toward solving the three main issues affecting continuation of the project: (a) Arbitration proceedings: The arbitration procedures involving the contractor and ENP were finalized in January 1982, when the arbitration panel under the Inter-American Convention on International Commercial Arbitration issued its decision to award US$3.5 million to the contractor. Meanwhile, ENP started negotiations with the insurance company providing the contractor's performance bond. Nego'.iations were protracted, and ENP took out a lawsuit against the insurance company. ENP finally accepted US$7.0 million in settlement, quite below the amount estimated necessary to complete the civil works. (b) Reassessment of Puerto Castilla: Although the original objective of the subproject to support the development of the forest industry in the Olancho region and agricultural output in the Aguan Valley had not changed, it became evident that the appraisal-estimated productive capacity of the region was - 21 - overoptimistic and, therefore, that the port facilities could be scaled down. Based on this premise, ENP, with Bank assistance,developed a new investment plan more in line with updated traffic projections. (c) Subproject Financing: Because of the higher-than-expected original contract price for Puerto Castilla, and the inclusion in the project of the dredging of the entrance channel to Port San Lorenzo (para 3.13), Loan funds were almost depleted when works were suspended in Puerto Castilla. Only about US$1.7 million of Bank loans and US$5.2 million from VIF were available to finance the estimated US$18.8 million necessary to complete the works. ENP, with Bank assistance, arranged additional financing for the new works by the OPEC Fund. 3.06 A reappraisal mission visited Honduras in October 1981 to evaluate the reformulated Puerto Castilla subproject. Details of the elements constituting the revised subproject are presented in Annex 1. The modified facilities to be provided in the revised subproject were designed to handle traffic until 1990 and were capable of being expanded later, if required, since the new facilites were part of the same overall master plan outlined in the earlier feasibility and engineering design studies. The revisions were approved by the Board in November 1982, and funds from the OPEC Fund were secured by the Borrower (US$7.3 million) in early 1983. The Loan Agreement was accordingly amended in February 1983. 3.07 The revised civil works at Puerto Castilla were executed by ENP, assisted by the original USA consulting engineers, and were scheduled to be completed by April 1984, which would be consistent with the revised forestry production deadline. Contracts were let by ENP, with Bank approval, to a USA contractor, for necessary pile driving, and to a local joint venture, for the remainder of the civil works. Woks were completed by August 1984. Delays were basically caused by additional work needed to replace eight piles broken by the premature operation of a ship when the deck had not yet been finished. 3.08 The list of equipment for Puerto Castilla included in the revised subproject was reassessed by both ENP and the Bank, immediately prior to bid invitations, on tbe basis of an analysis of the type and volume of traffic that the main port users would generate. This reassessment resulted in the recommendation to procure equipment for general cargo and container handling, maintenance and security. The list specifies the following items: five tractors; one 40-ton, two 7-ton and,four 4-ton forklifts; one 35-ton mobile crane;2/ one dump truck; one compresor; one welding machine and two mobile fire-fTghting pumps. Equipment fof loading wood chips, originally included under the project, is to be provided by the forestry industry, since exportation of wood chips is expected to last only for a limited period. The process of equipment procurement, except for the 35-ton crane, has already been carried out, and the OPEC Fund's approval of both the revised list of equipment and the amendment of the Loan Agreement that the revision requires., 2/ OPEC's decision regarding the financing of the 35-ton crane is await'ag the Bank's assessment of information requested to ENP and not yet submitted. - 22 - has been made, including an extension of the OPEC Fund Loan closing date of August 30, 1985. The Bank is acting as Administrator for the OPEC Fund Loan. The estimated total cost of civil works and equipment for Puerto Castilla is US$28.5 million. 3.09 The partnership of USA and Honduran consultants retained by ENP for the supervision of works at Puerto Castilla was discontinued on March 31, 1979 because of disagreements between participating staff from the local and foreign consulting partners; for a year thereafter, the supervision was carried out by the USA consultants and ENP engineers. From May 1980 to January 1982, the USA consultants were joined by another local firm, and thereafter the USA consultants continued, once more, only with the support of ENP engineers. ENP has indicated dissatisfaction with the consulting services at Puerto Castilla for recommending to award the contract to the joint venture of two US firms without prior investigation of their background, for exercising a weak supervision and for authorizing non-contractual payments. (ii) Puerto San Lorenzo 3.10 A contract for the pier extension at the port of San Lorenzo, as well as for the supply and installation of molasses tanks and the fire fighting system, was let on December 17, 1977 to the same Italian contractor who was executing the ongoing works under Loan 767-HO. The pier extension was satisfactorily completed in November 1978 and the tanks and fire fighting system were in place in July 1979. The alongside dredging was done by a local contractor in December 1978, and the completed facility became operational in January 1979. 3.11 The contract for the sugar storage shed, two weighing scales, the potable water system and the molasses tanks plus a 300 m2 Government building, the latter not included in the original project for San Lorenzo, was awarded in May 1978 to a Honduran contractor; works were completed in May 1979. 3.12 The appraisal estimated a total cost of US$4.06 million (including contingencies) for works at San Lorenzo comprising: (a) wharf extension; (b) dredging alongside the wharf extension; and (c) sugar shed and molasses tanks. Actual costs amounted to US$9.45 million, of which US$4.12 million were financed by the Bank. The substantial difference between appraisal estimated and actual costs was mostly the result of a gross underestimation of costs at the time of appraisal, coupled with price escalation and increases in the basic costs of the molasses tanks, pumps and piping. 3.13 On completion of the channel study in August 1978 3/, ENP requested, and the Bank agreed, that the project should finance the dredging of the San Lorenzo access channel and turning basin to a depth of 28 feet at low water, to allow the operation of larger, more efficient sugar/molasses vessels. The Credit and Loan Agreements were ame-ded accordingly in May 3/ The study, carried out by ENP with the assi.tance of USA consultants, was paid for by ENP before the loan was effective. - 23 - 1979. US$2.72 million were allocated to the purpose, estimated to represent 85% of the estimated cost of dredging the access channel. Works wcre to be partially financed from funds released by the deletion of equipment procurement from Loan 1395-T-HO and 1396-RO4/. The Netherlands consultants were appointed to undertake the design and 1;agineering of this subproject. However, on completion of the engineering and contract letting procedures, ENP decided to entrust the supervision of this work to their USA consultants. 3.14 The contract for dredging the San Lorenzo channel (US$4.4 million, including US$3.8 million of foreign exchange) was awarded to a Netherlands contractor on March 8, 1979, at a cost that was 38% above the estimate at the time the Loan Agreement was amended. Work commenced in April 1979 and was satisfactorily completed by December 1979 at a total cost of US$4.0 million. Bank financing of the channel dredging averaged 76% of total cost. 3.15 No equipment was, in fact, purchased at San Lorenzo for sugar handling since the sugar exporters.employed a cargo handling company for loading, eliminating the need for the port to provide equipment. 3.16 Navigational aids were purchased and installed in the access channel of San Lorenzo to facilitate entrance to the port. However, with time, and particularly as a result of pilferage, it has been necessary to replace and strengthen the navigational aids system for this and other ports in Honduras. ENP is currently purchasing new navigational aids with financing provided by Dutch sources. 3.17 Total expenditures under the project for the port of San Lorenzo, including equipment and the dredging of the access channel, were US$22.75 vis-a-vis the US$5.51 million estimated at appraisal (including contingencies). 3.18 ENP has indicated that the Netherlands consulting services at San Lorenzo, which prepared, let and supervised all the civil works contracts, and prepared and let the contract for channel dredging, were satisfactory. B. Project Cost and Financing 3.19 A comparison between appraisal and actual cost estimates are presented in Table 2. Total cost of the project is estimated at US$47.7 million, about 59% above appraisal estimate. The reasons for the substantial cost overrun are the already mentioned cost increases experienced by works both in Puerto Castilla and the port of San Lorenzo and the inclusion in the project of the dredging of the access channel to San Lorenzo. Since loans/credit funds were almost depleted when the project was far from completion, ENP secured additional funds from OPEC. The estimated appraisal and actual financing of the project is presented in Table 3, while Table 4 shows the actual use of the Bank loans and credit funds and Table 5 presents its allocation revisions. 4/ Equipment procurement was limited tc US$1.14 million from Credit 696-HO. - '24 - IV. TRAFFIC AND OPERATIONS A. Traffic at Puerto Castilla 4.01 The 1977 appraisal report for the original project, estimated that Puerto Castilla traffic would consist of forestry exports (sawn timber, wood chips and eventually paper), palm oil, citrus fruit, maize and beans from the Aguan Valley agricultural development, and imported inputs for these development projects (chemicals, fertilizers, machinery and petroleum). Table 6 gives the appraisal traffic projection for selected commodities. 4.02 Forestry exports were scheduled to produce 124,000 tons of wood chips and 43,000 tons of sawn timber in 1980, expanding to 643,000 tons and 221,000 tons respectively by 1983. The pulp and paper mill was to begin operation in 1984, and export of wood chips would cease in 1985. Liner board exports were expected to commence in 1984. 4.03 The Institute of National Agrarian Reform (INA) estimated, on the basis of acreage already planted plus expansion to be undertaken, 51,000 tons of corn and beans annually from 1980; palm oil, commencing in 1981 at 7,000 tons and increasing to 31,000 tons in 1986; and citrus fruits, commencing in 1982 with 14,500 tons and expanding to 222,000 tons by 1986. 4.04 Regarding imports, chemicals and fertilizers were estimated to increase from 10,000 tons in 1980 to 46,000 tons in 1986, and machinery and equipment from 22,000 tons to 39,000 tons over the same period. Petroleum products would increase from 8,000 tons in 1980 to 24,000 tons in 1986. 4.05 Thus the total traffic for 1986 was forecast to be 794,800 tons, of which only some 122,000 tons or 15%, would be imports. 4.06 During the redefinition of the Puerto Castilla project, traffic projections were reassessed and expected total traffic in 1986 reduced to 430,000 tons. Current projections (Table 7) are less optimistic than both the appraisal and reappraisal forecast traffic, mainly because of the deterioration of the Honduran economic performance in the last few years. Projected forestry products to be handled through the port includes sawn timber, with 64,000 tons/1984, 116,000 tons/1986, and 188,000 tons/1988; and wood chips, with 27,000 tons/1984 rising to 72,000 tons/1988. Export of liner board is expected to start in 1990. Agricultural exports are expected to change to meat, banana, citrus fruit and basic grains (corn, beans and rice). Banana and citrus alone would comprise over 90% of agricultural products for each year to 1990, when the two export products would amount to 170,000 tons of the forecast 186,000 tons of total agricultural traffic. Imports were reduced accordingly, being revised to 22,000 tons/1984, 33,000 tons/1986 and 66,000 tons/1990. - 25 - 4.07 The traffic projections for the revised project were reduced essentially because of: (a) the delays in establishing the saw mills in the forestry development; and (b) the realization that the control of yearly flooding in the Aguan valley would be economically unfeasible. The first sawmill, Bonito Oriental, was expected to be in production in 1982 (with full capacity by 1984) and, in fact, will start production only in 1984. The second mill, at La Union, was scheduled to commence operations in 1987, but now is expected to do so at a later date. B. Traffic at Puerto San Lorenzo 4.08 Appraisal expectations for future traffic at Puerto San Lorenzo were based on: (a) past traffic levels; (b) the considerable improvements in the service characteristics of the port in 1977, when the first deep water berth became available; and (c) plans for development of the sugar and molasses export industry in the region south of Tegucigalpa. Sawn lumber exports (130,000 tons in 1977) were expected to stabilize at about 100,000 tons in 1983. Export of molasses was scheduled to commence at about 27,000 tons in 1978, increase to a level of 45,000 tons by 1980 and remain constant thereafter. Sugar exports were also scheduled to commence in 1978 at 41,000 tons, increasing to 69,000 tons in 1980 and continue at the same level thereafter (Table 8). 4.09 Total traffic in 1982 was expected to reach about 277,000 tons of which imports would represent about 40,000 tons, remaining sensibly constant thereafter. Actual traffic at San Lorenzo in 1982 was about 150,000 tons (12,000 tons imports); exports included 19,500 tons of sugar and 81,000 tons of lumber. ENP estimates that traffic will grow at an annual rate of 3% for the next five years. C. Operations 4.10 Operations at both Puerto Cortes (the major port) and San Lorenzo are carried out efficiently, although San Lorenzo is handling less traffic than was foreseen. In particular, molasses and sugar handled in 1982 amounted to only 60,000 tons (combined), compared to the forecast 115,000 tons. An agreement that the sugar estates were to pay ENP for any export shortfall below 60,000 tons at the standard tariff was never finalized. The rate of occupation of the wharves has been low: 17% in 1979, 36% in 1980, 30% in 1981, 24% in 1982 and 20% in 1983. 4.11 Container traffic at Puerto Cortes is increasing and the operation of discharging, loading and stocking containers is efficient in spite of the obsolescence of most of the equipment. It appears that ENP has benefited considerably from the technical assistance provided under the project. The number of containers hndled in 1983 was 53,000. Containerized fruit is expected to be the main export traffic through Castilla and ENP is now capable of handling well such operations. - 26 - V. FINANCIAL PERFORMANCE OF ENP 5.01 ENP's consolidated income statements for the period 1977-1983 are given in Table 9. ENP was consistently able to generate a yearly operating profit during this period, with a 13% rate of return on net fixed assets (book value) in 1977, declining to a 6% return in 1981. The main reason for the decline was the fact that operating costs increased at a higher rate than increases in tariffs. A tariff adjustment in October 1982 improved the return on fixed assets, which reached 23% in 1983. Operating profits are mainly generated by Puerto Cortes; the port of La Ceiba breaks about even. The other ports, e.g., Tela and San Lorenzo, operate at a deficit, especially the latter. La Ceiba, operated mainly for a foreign fruit company, will be phased out when Castilla starts servicing containers. In addition, the free trade zone at Puerto Cortes generated a yearly operating loss of about US$500,000, the main reason being that until late 1984, only eight of the existing 14 buildings were under leasing agreements; the rest were vacant. by 1985, however, all the buildings were leased. 5.02 Excluding 1980 and 1981, ENP was able to generate operating profits, and, since 1982, its Internal cash generation has been sufficient to cover interest expenses and principal payments on long term loans. ENP nevertheless signed, in November 1983, a debt rescheduling agreement with the Central Bank of Honduras for US$13.0 million, to be paid over 10 years, and expects to reschedule its debt with foreign commercial banks, in the context of the overall country negotiations. 5.03 In 1982, ENP generated o-erating net profits of about Lampiras 19.0 million and an operating ratio of 49, as compared to 1981, when the operating net revenues were Leapiras 6.6 million and the ratio was 80. This improved performance resulted from a slight increase in traffic, tariffs increases of about 35%, and a containement of operating costs. 5.04 EMP's financial performance, as measured by the targets defined at appraisal, has been mixed. EMP was able, during 1982 and -1983 to surpass the appraisal targets regarding operating ratios. With respect to the most important financial covenants, Section 5.06 of the Loan Agreement required that ENP should establish and maintain port charges as necessary to yield a rate of return on net fixed port assets of not less than 8% per annum, and Section 5.10 required that ENP should not incur any debt unless its net cash generation was not less than 1.75 times the debt service requirements. In 1981, ENP generated a rate of return on net fixed port assets of 6%, and its debt service coverage ratio was only 0.3. Because of the already mentioned tariff increases in late 1982, the rate of return on fixed assets and the debt service coverage ratio reached 23% and 1.5 respectively, in 1983. Since the Bank had agreed that the cash generation requirement of 1.75 times the debt requirement seemed too high, and it was revised to 1.5 times the debt service in early 1983, ENP was able to meet this less stringent requirement. - 27 - VI. ECONOMIC REEVALUATION A. Puerto Castilla 6.01 The economic reevaluation of Puerto Castilla is based on the - methodology used in 1982 for the reappraisal of the reduced subproject. The analysis considers a "without project" case in which Castilla's port facilites would not be in place and traffic would be handled through the existing - facilities in Cortes and La Ceiba. All export traffic, except bananas, and all imports, except chemicals and fertilizers, would be handled through Puerto Cortes. Banana exports and chemicals and fertilizers would, under this alternative, continue to be served by La Ceiba. Traffic to/from Puerto Cortes would be carried by road while that to/from La Ceiba would be carried predominantly by the existing railroad. 6.02 The benefits that the investment will produce for the Honduran economy, and that were quantified, are basically land transport cost savings (vehicle operating cost savings and road maintenance cost savings) and port operating cost savings at Cortes and La Ceiba. These benefits are shown in Table 10 and also, in aggregated form, in Table 11. Equipment necessary to operate Puerto Castilla would have to be replaced in 1995; consequently, the estimated value of the equipment is shown in the investment stream. 6.03 The expected rate of return of the Puerto Castilla investment is estimated at 12.2%, vis-a-vis the 15.3% calculated during the reappraisal of the reduced project component (the 1977 appraisal report showed a 27% economic rate of return). The lower-than-expected rate of return is attributable to the downward revision of projected traffic (Table 7), a consequence of the fall in economic activity in Honduras. The timing of the investment appears to be adequate, as shown by a first-year benefit of about 13%. B. Puerto San Lorenzo 6.04 Construction of the port of San Lorenzo started under the Second Port Project (Loan 767-HO). Before the port facility began to operate, it was decided to expand its berthing capacity by changing the "L" shaped wharf to a "T" shape. The decision was based on the needs of the sugar industry to have adequate handling facilities on the Pacific for exports to Asian markets. In addition, dredging of the channel to permit larger vessels in the export traffic of sugar and molasses and to avoid lighterage of lumber cargo was also included in the project. 6.05 Because of the quasi-simultaneity of works under the Second and Third Port Projects in San Lorenzo, the Project Completion Report for Loan 767-HO (December 30, 1982) carried out an economic reevaluation, considering the project as consisting of both the construction of a port with a "T" shaped wharf and the dredging of the channel to a depth of 28 feet. The analysis yielded an estimated rate of return of 8%. For the purpose of this report, an ex-post evaluation of only the subprojects included in the subject project was performed. The construction of the Port of San Lorenzo with an "L" shaped wharf was considered a sunk cost. - 28 - 6.06 To quantify the benefits of the subprojects elements carried out in Puerto San Lorenzo, the "without project" case was considered to be the port with an "L" shaped wharf and no channel dredging. Sugar and molasses would be handled at the port of Corinto in Nicaragua. Based on 1983 data, about 6% of the lumber cargo would be lightered at the nearby port of Amapala. The benefits considered were: (a) Savings in lighterage costs - consisting of reduced handling and operating costs and faster turnaround of ships that unload/load directly at dockside; (b) Savings in ship delay costs - because of reduced waiting for the high tide to enter the port; (c) Savings in ship operating costs - (for sugar and molasses) because to the use of larger vessels; (d) Savings in ship time - because of increased berthing capacity and reduced queing; (e) Avoided cost of land transport to Corinto; and (f) Avoided charges at Corinto. 6.07 The 1977 appra±sal estimated a rate of return of 14% for the expansion of the wharf, and the feasibility study for the dredging of the channel mentions a rate of return of 19% on that investment5/. The ex-post economic evaluation resulted in an expected ERR of 3.2% for both components of the subproject taken together (Tables 12 and 13). 6.08 The substantially lower-than-expected returns from the subproject are due to the very low traffic using the port (Table 8), project cost increases of 100% in real terms and the apparent lack of change to larger vessels. In 1983, only three ships calling on San Lorenzo could not have done so with the former channel depth. Lighterage has been completely discontinued, but lumber seems to be transported mostly in smaller vessels that could have been able to enter the port without its dredged channel. 6.09 The preceding analysis confirms the conclusion of the Project Completion Report for the Second Port Project regarding the premature nature of the investments in San Lorenzo. Given that actual traffic shows that even the forecast of the PCR for Loan 767-Ho was optimistic, its conclusion that the optimal timing for the investments would have been in the early 1990s should be revised to a later date. 5/ As mentioned, the channel dredging was not included in the original project and was not evaluated at appraisal. Its feasibility was based on an incremental cost-benefit analysis to determine the optimal dredging. Increasing the depth of the channel to 26 feet yielded an ERR of 115%, and from 26 to 28 feet, an ERR of 19%. The overall ERR of the solution finally adopted (28 feet depth) had an expected ERR of 65%. - 29 - VII. INSTITUTIONAL DEVELOPMENT 7.01 ENP existed, and was operating satisfactorily, prior to the commencement of the project. The main institutional aspect addressed under the project was the development of procedures for handling container traffic at Puerto Cortes and the related training of local staff. The preparation of a manual documenting procedures, the development of appropriate documentation, and the training of operating staff were undertaken successfully by consultants in 1979. Some 53,000 containers per annum are now satisfactorily being handled at Puerto Cortes. 7.02 ENP's financial procedures have also been improved by the following measures introduced under the project: (a) establishment of separate accounts for ENP headquarters; (b) establishment of separate accounts for major development projects; (c) segregation, within all accounts, as appropriate, of port and non-port expenses and investments; and (d) implementation of a complete costing system for all port operations and procedures, and restructuring of tariffs to reasonably reflect the costs of services and facilities. VIII. THE ROLE OF THE BANK 8.01 The Bank's involvement in this project was motivated by the need to assist ENP in providing adequate port facilities at Puerto Castilla and San Lorenzo for the exportation of the products of agricultural and forestry development in areas adjacent to both the Atlantic and the Pacific coasts. The fact that it was necessary to reduce the project scope at Puerto Castilla before works restarted, after the original contractor had suspended work, reflects the problems inherent in forecasting agricultural and forestry developments. The need to provide appropriate facilities to handle exports had not changed in Puerto Castilla although the original project was overdesigned because of the optimistic traffic forecast. 8.02 Regarding the execution of the original project, the selection of the contractor for works in Puerto Castilla was strictly in accordance with Bank guidelines; but during implementation problems arose, and when the contractor suspended working at the site, the Bank was of assistance to ENP in dealing with arbitration and legal matters. Although the Bank supervision was adequate, specifically in its efforts to expedite progress and ensure availability of adequate local funds for prompt payments to the contractors, - 30 - supervision missions, in part because seldom visited the project site at Puerto Castilla and placed heavy reliance on consultants' information, did not anticipate problems that later hindered the project physical implementation and financing. 8.03 Following the suspension of work by the original contractor, the Bank assisted ENP and the Government in arranging additional finance to complete the project and in defining the scope of the revised project. Bank staff also made considerable efforts to ensure that ENP understood the problems inherent in the arbitration and surety proceedings. 8.04 The Bank's approval of the late inclusion under the project of the dredging of the access channel to San Lorenzo left the other project components underfinanced, unduly complicating the problems encountered during project iaplementation. When the decision was made, both ENP and the Bank were not concerned about safeguarding loans/credit funds for other project components, as ENP possessed cash reserves and a solid credit rating. Moreover, it appeared reasonable to expect that any subsequent cost overrun would be minor. This, as it turned out, proved overoptimistic and unwise. IX. CONCLUSIONS 9.01 The project has been successful in providing necessary port facilities for exportation of forestry and agricultural products, albeit on a smaller scale than originally foreseen, and at a cost considerably in excess of the original estimates. The project was completed some four years later than forecast. Most of the delay was caused by the suspension of works at Puerto Castilla by the original contractor. While the selection of the contracting firms was in accordance with Bank guidelines, their failure to perform as a joint venture, prevented the timely completion of the project. 9.02 This project shows the difficulties inherent in the forecast of agricultural and forestry production. Traffic forecasts prepared for the original project proved to be over-optimistic and needed to be revised in the light of the slower than expected progress in the forestry and agricultural projects on which they were based. This was the reason for the project at Puerto Castilla being smaller than originally foreseen. The work at San Lorenzo was carried out according to the original plan, and the dredging of the access channel thereto was added to the project with the Bank's agreement. However, the ex-post economic evaluation shows that, due to lower than expected traffic, investments in San Lorenzo were unjustified. Furthermore, inclusion of the channel dredging left the main project component, Puerto Castilla, with a large financing gap. 9.03 The revision of the size and scope of the Puerto Castilla subproject was a fortuitous event. The scaling down of the subproject resulted from the interruption of works and was not a consequence of revisions in the demand forecasts. This suggests the following lesson to be learned: in projects with long gestation periods, the adequacy of its size and scope should be monitored to adapt to changing circumstances. Contracts could be phased, when possible, to allow for such revisions. - 31 - 9.04 Another lesson to be learned is that changes in the scope of a project which substantially impact project costs and financing, should only be considered, when possible, after the original physical objectives are near completion and firm costs for those components underway can be assessed. Furthermore, the Bank should ensure that a comprehensive financial plan exists to successfully complete the original project when such changes reduce Bank financing of the original project components. 2%Zr #9--3- - 33 - TABLE 1 HONDURAS THIRD PORT PROJECT (LOANS 1395-T-RO. 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Major Loan Covenants Loan Agreement: Section 5.04 - Revaluation of assets. (1396-HO) Section 5.05 - Installation of a costing system. Section 5.06 - Rate of return on fixed assets in operation to be not less than 8%. Section 5.07 - Income from non-port operations to be at least adequate to cover costs. Section 5.08 - Capital expenditure on non-project items to be less than $500,000 each fiscal year. Section 5.09 - Adjustment of tariffs. Section 5.10 - ENP not to incur new debt without prior approval of Bank If debt service ratio falls below 1.75. Loan Agreement: (1395-T-H0) Section 3.01(b) - Government to relead the amount of Credit Agreement loan/credit to ENP for a term of 20 (696-HO) years, including 41/2 years grace period and at the interest rate of 8.5%. HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Actual and Appraisal Cost Estimates US$ 000 Z Difference Between Actual and Project Component Actual Costs Contract Appraisal Cost etimates Appraisal Contract Local Foreign Total Amount Local Foreign Total Estimate Amount 1. Civil Works (1) San Lorenso 5,336.6 4,129.4 9,466.0 3,599.5 1,198.0 1,938.0 3,136.0 +202 +163 (i) Puerto Castilla _5,1702 20,243.8 25,414.0 19,390.6 7,472.0 6,393.0 13,865.0 +83 +31 Sub-Total 10,506.8 24,373.2 34,880.0 22,990.1 8,670.0 8,331.0 17,001.0 +105 +52 Dredging San Lorenso Access Channel 1/ 1,192.3 3 132.0 4 324.3 4 443.9 - - - - -5 Sub-Total Category 1 11,699.1 27 J f 39,204.3 274300. _867 8 17,001.0 +130 +43 2. Equipment (i) San Lorenso - 67n.0 670s0 670.0 55.0 1,061.0 1,116.0 -40 0 (ii) Puerto Castilla 2/ - 3,111,0 3,100.0 3,100.0 149.0 2,848.0 2,997.0 +3 0 Sub-Total Category 2 3,770.0 3,770.0 3,770.0 204.0 3,909.0 4,113.0 -8 0 3. Consultant Services and Technical Assistance (i) Engineering and Supervision (a) San Lorenzo 933.0 1,130.9 2,063.9 - 130.0 195.0 325.0 +535 - (b) Puerto Castilla 1,670.3 939.2 2,609.5 - 526.0 789.0 1,315.0 +103 - Sub-Total 2,603.3 2,070.1 4,673.4 - 656.0 984.0 1,640.0 +189 - (ii) Technical Assistance (a) Dredging Study - - - - 100.0 150,0 250.0 - - (b) Training - 77.0 77.0 130.0 40.0 60.0 100.0 -23 59 Sub-Total - 77,0 77.0 130.0 140.0 210.0 350.0 -78 59 Sub-Total Category 3 2,603.3 2,147.1 4,750.4 - 796.0 1,194.0 1,990.0 +142 - 4. Contingencies - - - 1,254*0 3,566o0 6,820.0 TOTALS 14,302.4 33,422,3 47,724.1 12,924.0 17,000.0 29,924.0 I/ Not included in the project as appraised. T/ Estimated final cost. 33- TABLE 3 ONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Appraisal and Actual Financing of the Project (USS*OOo) Source Appraisal 2 Actual % IBRD 17.0 57 17.0 36 ENP 12.9 43 12.6 26 VIP - - 9.1 19 OPEC Fund - - 9.0 19 TOTAL 29.9 100 47.7 100 - 36 - TABLE 4 HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Actual Use of Bank Loans and Credit Funds (US$'000) Loans 1395-T-HO I/ Project Component Loan 696-HO and 1396-HO Total 1. Civil Works 1.A Civil Works (i) San Lorenzo 1,166.6 2,962.8 4,129.4 (ii) Puerto Castilla 2,242.8 4,152.0 6,594.8 Sub-Total 3,409.4 7,114.8 10,524.2 1.B Dredging San Lorenzo Access Channel - 3,132.0 3,132.0 Sub-Total Category 1 3,409.4 10,246.8 13,656.2 2. Equipment - (i) San Lorenzo 670.0 - 670.0 (ii) Puerto Castilla 475.5 475.5 Sub-Total Category 2 1,145.5 1,145.5 3. Consulting Services and Technical Assistance (i) Engineering and Supervision (a) San Lorenzo 172.4 958.5 1,130.9 (b) Puerto Castilla 272.7 666.5 939.2 Sub-Total 445.1 1,625.0 2,070.1 (ii) Technical Assistance (a) Dredging Study (b) Training - 77.0 77.0 Sub-Total - 77.0 77.0 Sub-Total Category 3 445.1 1,702.0 2,147.1 4. Contingencies TOTALS 5,000.0 11,948.8 16,948.8 1/ Undisbursed balances of US$17,559.52 for Loan 1395-T-HO and US$33,700.73 for Loan 1396-HO were cance-ed. HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Revision of Allocation of Loan Funds US$'000 Position at Commencement Loan of revised Agreement Amendment Subproject Amendment April 1977 May 1979 Dec.1982 Civil Work. Puerto Castilla and San Lorenzo 8,330 8,330 9,177 10,518 Dredging of San Lorenzo Channel - 2,721 3,022 3,132 Equipment 3,900 1,569 1,145 1,145 Consulting Services and Technical Assistance 1,200 1,050 1,939 2,205 Unallocated 3,570 330 Total 17,000 17,000 17,000 17,000 - 38 - TABLE 6 HONDURAS PROJECT COMPLETION REPORT (LOANS 1395-T-90, 1396-10 AND CREDIT 696-HO) PROJECT CCHPLETION REPORT Puerto Castilla - Appraisal Traffic Projections (000 tons) 1980 1981 1982 1983 Exports Pals Oil - 7.0 13.1 19.8 Citrus Fruits - - 14.5 32.9 Corn 40.5 40.5 40.5 40.5 Beaus 11.0 11.0 11.0 11.0 Sawn Timber 43.0 106.0 183.0 221.0 Wood Chips 124.0 306.0 531.0 643.0 Imports Chemicals and Fertilizers 10.0 14.0 22.0 28.0 Machinery and Equipmetit 22.0 25.0 27.0 30.0 Petroleum 8.0 10.0 12.0 14.0 Other 6.0 7.0 8.0 9.0 Total 264.5 526.5 862.1 1049.2 HONDURAS PROJECT COMPLETION REPORT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Puerto Castilla - Revised Traffic Projections (000 tons) 1984 1985 1986 1987 1988 1989 1990 Exports Meat 0 0 3 3 4 6 8 Banana and Citrus 120 160 164 167 167 169 170 Sawn Timber 64 116 116 116 132 188 188 Wood Chips 27 52 52 52 72 0 0 Liner Board 0 0 0 0 0 0 16 Basic Grains and Others 2 3 4 6 6 6 8 Imports Chemical Products 3 3 4 4 5 6 7 Fertilizers 12 16 18 19 20 22 24 Petroleum Products 3 6 8 12 16 24 24 Machinery and Equipment 2 3 4 5 4 3 3 Others 2 3 3 3 5 6 8 Total 235 362 376 387 431 430 456 HONDURAS PROJECT COMPLETION REPORT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT San Lorenzo - Appraisal Projected and Actual Traffic (000 tons) Commodity 1977 1978 1979 1980 1981 1982 1983 Proj. Actual Proj. Actual'/ Proj. Actual Proi. Actual Prol. Actual Prol. Actual Prol. Actual Exports Molasses - - 26.7 - 35.6 3.7 44.5 19.7 44.5 25.0 44.5 25.0 44.5 19.8 Sugar - - 41.1 - 55.1 16.0 68.9 42.9 68.9 30.8 68.9 19.5 68.9 19.2 Lumber 130.4 103.3 130.0 - 130.0 80.4 130.0 77.9 120.0 60.3 110.0 81.1 100.0 66.2 o Other 10.0 8.4 11.4 - 12.0 12.0 12.4 12.4 13.0 11.9 13.4 11.1 14.0 3.4 Imports Fertilizers and Chemicals 12.0 12.9 12.4 - 12.8 9.9 13.4 19.6 14.0 6.6 14.b 4.8 15.2 13.4 Machinery and Equipment 5.7 9.8 6.0 - 6.2 11.2 6.4 11.4 6.6 6.2 6.8 4.0 7.2 4.6 Other 15.0 14.7 15.6 - 16.2 24.2 16.8 20.2 17.6 7.9 18.4 2.7 19.2 1.4 Total 173.1 149.1 243.2 - 267.9 159.2 292.4 204.1 284.6 148.7 276.6 148.2 269.0 128.0 I/ ENP did not produce information for 1978. HONDURAS PROJECT COMPLETION REPORT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Summary of ENP Projected and Actual Income Statements (Leapiras Millions) 1977 1978 1979 1980 1981 1982 1983 Proj. Act. Proj. Act. Proj. Act. Prol. Act. Proi. Act. Proj. Act. Proj. Act. Operating Revenues 18.6 18.5 22.3 21.4 24.7 29.0 29.2 31.0 30.8 32.4 32.3 37.4 33.1 51.0 Operating Expenses 9.4 13.3 11.0 14.1 12.8 21.0 15.7 23.7 16.8 25.8 17.8 18.4 19.1 26.2 Net Revenues 9.2 5.2 11.3 7.3 11.9 8.0 13.5 7.3 14.0 6.6 14.5 19.0 14.0 24.8 Interest Cost 3.3 2.0 5.0 2.0 6.0 6.3 6.9 10.4 6.8 9.4 6.5 9.8 6.2 7.4 Not Income (loss) 5.9 3.2 6.3 5.3 5.9 1.7 7.2 (3.1) 7.2 (2.8) 8.0 9.2 7.8 17.4 Operating Ratio 51 72 49 66 52 72 34 77 55 80 55 49 58 51 Return on Fixed Assets 19 13 17 5.2 9 8 10 6.0 10 6 10 11.7 10 23 Debt Coverage Ratio 2.5 1.4 2.3 1.7 2.1 0.5 2.3 1.0 2.4 0.3 2.1 1.0 2.2 1.5 HONDURAS PROJECT COMPLETION REPORT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Puerto Castilla - Economic Benefits ('000 Lempiras, Dec. 1981 prices) Concept 1984 1985 1986 1987 1988 1989 1990-2003 Truck Operating Cost Savings 4280.1 11361.3 11613.1 11823.2 13544.8 12635.2 15816.8 La Ceiba Port Operation Savings 79.5 164 166.7 169.6 168.6 169.6 170.0 Cortes Port, Operations Savings 72.4 267.8 281.9 293.8 401.9 377.8 456 Road Maintenance Savings 167.3 332.0 332.0 332.0 332.0 332.0 332.0 * Six months. - 43 - TABLE 11 HONDURAS PROJECT COMPLETION REPORT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT Puerto Castilla - Streams of Cost and Benefits ('000 1981 Lempiras) Total Year Investments Operations Costs Benefits 1978 13,394.0 - 13,394.0 1979 12,632.0 - 12,632.0 1980 - - 1981 - - 1982 15,799.0 - 15,799.0 1983 19,274.0 - 19,274.0 - 1984 1,665.0 332.9 1,997.9 4,599.3 1985 - 719.8 719.8 12,125.1 1986 - 742.8 742.8 12,393.7 1987 - 763.7 763.7 12,618.6 1988 - 812.6 812.6 14,447.3 1989 - 817.4 817.4 13,514.6 1990 - 851.5 851.5 13,514.6 1991 - 902.9 902.9 13,514.6 1992 - 902.9 902.9 13,514.6 1993 - 902.9 902.9 13,514.6 1994 - 902.9 902.9 13,514.6 1995 2,625.0 902.9 3,527.9 13,514.6 1996-2003 - 902.9 902.9 13,514.6 HONDURAS PROJECT COMPLETION REPORT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT San Lorenzo - Summary of Peak Period Port Capacity Analysis 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989-2000 Total Tonnage at Front Face (10OOmt) 139 103 100 87 94 95 98 102 106 111 Number of Ships 53 39 38 34 36 36 37 39 40 42 Berth Occupancy (2) Singla Berth 51 38 36 32 35 35 36 38 38 40 Berth Occupancy (%) Two Berths 26 19 18 16 18 18 18 19 19 20 Average Waiting Time (days/ship) Single Berth 0.7 0.3 0.3 0.2 0.2 0.2 0.3 0.4 0.4 0.5 Average Waiting Time (days/ship) Double Berth 0.1 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.07 Cost of Waiting Time 2, - Single Berth 185,500 58,500 57,000 34,000 36,000 36,000 55,000 78,000 80,000 105,000 Cost of Waiting Time-Two Berths 26,500 7,800 7,600 6,800 7,200 7,200 7,400 7,800 8,000 14,700 2/ Value of Ship Waiting Time in 1977 prices is US$5,000 per day. HONDURAS PROJECT COMPLETION REPORT (LOANS 1395-T-HO, 1396-HO AND CREDIT 696-HO) PROJECT COMPLETION REPORT San Lorenzo - Wharf Extension and Channel Dredging Streams of Cost and Benefits (US$ 1977) Savings Savings in Ships3/ Savings in Ships4/ Avoided 6f Avoided Year Investments Operating in Light- Operating Costs Delays Costs Ship time Land Cost Charges Net Costs I/ erage 2/ Sugar Molasses Imports Exports Savings 5/ Corinto Corinto Benefits 1978 9,923,810 -9,923,810 1979 - 27,594 2,396 27,600 8,103 23,000 40,205 159,000 37,988 23,646 294,344 1980 - 106,266 3,412 118,404 43,143 62,976 84,095 159,000 180,237 112,070 657,071 1981 - 38,450 2,562 90,816 54,750 27,306 71,830 50,700 173,327 107,779 543,620 1982 - 36,650 3,552 50,310 54,750 14,145 75,185 49,400 128,124 79,645 418,461 & 1983 - 34,950 2,900 49,536 43,362 23,862 59,730 27,200 112,289 69,791 353,720 1984 - 35,000 2,987 51,084 44,457 24,600 61,490 28,800 115,456 71,784 365,658 1985 - 35,000 3,075 61,404 45,990 25,338 63,360 28,800 119,199 74,112 386,278 1986 - 36,000 3,167 90,300 78,840 26,076 65,230 47,600 123,362 76,693 475,266 1987 - 37,000 3,294 93,740 82,125 27,060 67,870 70,200 126,262 78,496 512,047 1988 - 37,000 3,425 97,610 85,410 28,167 70,565 78,000 130,660 81,138 537,975 1989/2000 - 38,000 3,596 102,340 89,790 29,520 74,085 90,300 135,240 84,091 570,962 2001 -4,000,000 4,000,000 ERR - 3.2% 1/ Until 1983 based on 10% of actual operating costs of Puerto San Lorenzo. 2/ Applies only to 6% of exports of lumber. Based on 1983 actual data. S/ For Sugar and Molasses only. Applies to 60% of cargo in 1983 and increases to 1002 in 1986, when signalization of the channel is expected to be completed. 4/ Refers to delays caused by ships waiting high tides to enter the port. 5/ Refers to savings generated by decongestion from wharf extension. 6/ For sugar and molasses only. Based on appraisal report, adjusted for reduced traffic projection. Annex HONDURAS THIRD PORT PROJECT (LOANS 1395-T-HO AND 1396-HO AND CREDIT 969-HO) PROJECT COMPLETION REPORT Puerto Castilla - Revised Subproject Civil Works (a) Construction of new concrete wharf 150 m long on precast concrete piling; (b) Dredging, placing and grading landfill, placing rip-rap and filter blankets; (c) Asphaltic and reinforced concrete pavement to provide 11.35 Ha including a container yard, back-up areas and open storage areas, with circulation and access roads; (d) Two open sided lumber storage sheds (6,000 m2), a Government office, a maintenance shed (560 =2), a vehicle service station and a guard house; (e) Water supply, sewerage, and fire (salt water) mains; (f) Petroleum product storage tanks with loading and dispensing facilities; and (g) Ancillary works including electrical distribution system, communication and security fencing. Equipment (a) Seven forklifts (4 x 3.6 ton, 2 x 7 ton, and 1 x 40 ton) and (b) five tractors, one compressor and one welding machine. IBRD 12463R(PCR) CUBIA -' A U Co1bbean Sea Cfribbeilm Sto HONDURAS THIRD PORT PROJECT ELSALV R METERS? 9PORT FACILITIES PA*c C iFf. AT PUERTO CASTILLA OC EANCA J, All< 93.c PROJECT AREA AND PORT p ACIUTIES EXISTING RESIDENTIAL AREA. m ~@§ mr u EXISTING SRooEs ~ l . a ro STORAGE TANI0 FOR PALM CIL AND PETROLEUM 90 DEPTH IN METERS (IlWu MLWS) OPEN STORAGE AREA TIMBER SHEDS TRANSIT SNED Nrv~ ~ MA4NTENANCS BUILDING m ~00Cr ADMINISTRAION BUILDING W ArIEHOVSE rmig MAP 4 BASED ON 1aD R. MARCH 191. CONTAINER VARD PROJECr INFORMAVl0N HAS SEEN (M0AYED. AN laga VAP 013CLAIMER HAS SEEN A00ED GRAIN 8l L a,Cari bean*S aala PORT aPERATION C~MLEX ToCAILLA ib uaTr v /, //o é ay r~ r u p- IBRD 12464R(PCR HONDURAS .i• yE / s SO, THIRD PORT PROJECT PORT FACILITIES AT SAN LORENZO - er.,ea a .HONDURAS weglim rOANACour SAN LORENZO Puerto Nusvo EVSA IA A ~31 r i GENERAL LAY UT - t -_gro SEE f IFOAA7! -Dem--,DP rb in Merers 13'cA<, PORT FACåLITIES ME a tt €œ:66ea Thir Prt P"90 HONDURAS saSewp0pjc r Orgn N ar ^m /s ND ON ORD 000 mo tE - ..emao ik~ 6e 25' METERS pfl .c WFI5 MN~ #li