Mexico - Ports Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6743-ME STAFF APPRAISAL REPORT MIEXICO PORTS RETIABILITATION PROJECT April 25, 1988 Countty Department II Latin America and Caribbean Region ds document has a retcted disributin and may be used by teal. only In the PeifolaMne of their offidat dutdes. Its contents may aot ot&ise be disc! Wodd Bank autho&saion.  ~9 * CURRENCY EQUIVALENTS Currency Unit Mexican Peso (Mex$) US$1 - Mex$2,270 Mrbx$1 million = US$440 (March 15, 1988) Fiscal Year January I-December 31 WEIGHTS AND MEASURES Metric: British/US EquNvalent 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi) 1 kilogram (kg) & 2.20 pounds (lb) 1 metric ton (m ton) - 2,205 pounds I liter (1) - 0.26 gallon (gal) ABBREVIATIONS BANOBRAS National Bank for Public Works and Services BANPESCA National Bank for Fishing and Ports CDP Port Development Committee CIFSA Industrial Development Consultant CNCP National Commission for Port Coordination DGPP Directorate General for Ports DGP Directorate General for Planning DGT Directorate General for Tariffs DGOM Directorate General for Maritime Works DGVF Directorate-General for Rail Lines DRAGADO Directorate General for Dredging ESP Port Services Company FIDEMAP Trust Fund for Port Machinery FONDEPORT National Fund for Ports Development GUA Stevedoring Union for Tampico NdeM National Railways of Mexico SAHOP Secretariat for Human Settlements and Public Works SCT Secretariat for Communications and Transport SEDRA Dredging Service SEPOG ESP of Guaymas SEPOM ESP of Manzanillo SERPOVER ESP of Veracruz SHCP Secretariat for Finance and Public Credit SPP Secretariat for Programming and Budgeting SPTA Decentralized Entity of Port System in Tampico- Altamira TEU Twenty-foot Equivalent Unit (Container) TUM Common User Berth  t FOR OmFCI USE ONLY MEXICO STAFF APPRAISAL REPORT PORTS REHABILITATION 7ROJECT TABLE OF CONTENTS Page No. I. SUMMARY ..I.oee,eeeeee......... e , 1 II. THE TRANSPORT SECTOR .................................. 3 A, The Transport System 3 (1) Transport and the Economy...............,............. 3 (ii) Institutional Framework .............................. 4 B. Bank Involvement in the Sector and Current Lending Strategy.................ra t e gy....... 5 C. The Ports Subsector .6....... ..... ..... , e 6 (i) Port Administration and Planning 00....."............ 6 (ii) Maritime Traffic ... 8 (iii) Infrastructure, Equipment and Operationsa............. 9 (iv) Port Finances and Investment ......11 -III THE PROJECT 13 XII. T_ RJC ....................*.............................. 13 A. Project Origin and Objectives ............................. 13 B. Rationale for Bank Involvement ............................ 14 C. Project Description ...***,.. ......................... 14 D. Project Cost and Financing ............................ 16 9, Financial Prospects of Project 2orts ...................... 18 P. Ecoromic Justification .... .....................0.......... 20 G. Sensitivity Analysis and Project Risks .................... 20 H. Project Execution .................... 21 I. Performance Indicators, Targets art Monitoring ............ 21 Jo Procurement *.................................eeeeeeeee 22 K. Disbursement, Accounts and Audits ........................ 24 L. Environmental Aspects .................................... 25 IV. AGREEMENTS REACHED AND RECOMMENDATIONS ....................... 25 This report is based upon the findings of an appraisal mission that visited Mexico in November 1986. The mission comprised Messrs. Zvi Raanan, (Senior Financial Analyst), D. Hill (Port Engineer) and Malise Dick (Senior Economist); R Laver (Financial Analyst, Consultant), RLE.G. Smith (Economist, Consultant), J.B. Newvman (Dredging Consultant) and K. Fratzke, (Operations Specialist, Consultant). This document has a restricted distribution and may be used by recipients only In the peorfomne of their ofcial duties Its contents may not otherwise be dislosed without World Bank authoration.  - ii - Page No. TABLE OF CONTENTS (Cont'd) TABLES 2.1 Prior Transport ........... .................................. 27 2.2 Dry Cargo Traffic at Principal and Project Ports.............. 28 3.1 Detailed Cost Tables: Guaymas, Manzanillo, Tampico-Altamira, Veracruz; Dredges Supervision of Construction and Studies ...................... 29 3.2 Summary Accounts by Year - Base Costs......................... 35 3.3 Breakdown of Summary Accounts ................................ 36 3.4 Summary Accounts by Year - Including Contingencies............ 37 3.5' Project Components by Year - Base Costs ....................... 38 3.6 Project Components by Year - Including Contingencies.......... 39 3.7 Summary Account by Project Component ......................... 40 3.8 Project Cost Summary .. .....oo.oo.o.. .. ... .. ...... ........... 41 3.9 "roject Finwncing Plan ....o........o........eoo...eooeooee..o 42 4.1 Estimated Schedule of Disbursementt............................ 43 ANNEXS i Institutional Framework of Mexico's Portso..................... 46 2 Port and Waterway Dredging......................................0....000000 48 3 Port Efficiency ..............o......................0........ 53 4 Survey of Cargo-Handling Equipment ............................ 59 5 Description of Project Ports ................................. 62 6 Action Plans for Port Operators .............................. 64 7 Technical Assistance aid Studies Program ..................... 66 8 Methodology for Economic Evaluations for Project Ports ....... 70 9 Detailed Project Description ................................. 72 10 Action Program for Project Execution ......................... 76 - Project Execution and Monitoring ............................. 80 12 Doc ments in Project File .................................... 84 CHARTS 1 SCT Organization 2 SEDRA Organization MAPS IBRD 20359 - Port of Guaymas IBRD 20360 - Port of Manzanillo IBRD 20361 - Port of Tampico and Altamira IBRD 23362 - Port of Veracruz IBED 20358R - Transportation Network and Principle Port Locations  MEXICO PORTS REHABILITATION PROJECT PROJECT SUMMARY Borrower: Bnaco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS). Guarantor: United Mexican States Project Executing Agency: Secretaria de Comunicationes y Transportes (SCT) Amount: US$50.0 million Terms: Repayment in 15 years, including three years of grace at the standard variable interest rate. On-lending terms would be the same, plus a small fee to BANOBRAS for its intermediation role. Project Objectives: The project would facilitate foreign trade as well as progressively reduce Government subsidies to port operations. Specific project objectives are to: (a) improve port efficiency through the rehabilitation and modernization of port operations, ilfrastructure and equipment; (b) improve equipment management and maintenance; (c) assist in the acquisition and maintenance of dredging equipment and training in its operation; and (d) strengthen port livestment planning and financial management. Project Description: The project would finance specific investments in 1988-1994 in the four main ports of Guaymas, Tampico-Altamira, Manzanillo and Veracruz which handle about 70% of non-petroleum sea-borne foreign trade, so as to improve their efficiency, modernize cargo handling methods and improve equipment maintenance. It would help finance new construction and wharf rehabilitation (30X of total costs), cargo equipment (49%), dredges (18%), and technical assistance (3%) for the recently formed Dredging Service - SEDRA, and provide assistance to the Ministry of Transport and Communications (SCT) to improve investment planning and organization in the port-subsector. Benefits Port efficiency is an important element in Mexico's and Risks: economic recovery and iD. the Government's efforts to stimulate trade, restructure the industrial sector and better utilize limited public sector resources. The last two port projects, though limited in scope, have helped to establish a basis for rationalizing the system of port administration and the pricing of port services. Further Bank involvement would help improve iDvestment planning, operational efficiency and cost recovery policies. The main risk is the availability of sufficient counterpart funds to carry out investments in  a timely manner. Hmwever, this risk is small sirce the items lcluded in the project constitute the essential core of the sector investment program and close review will be malntained on the overall port investment program and in partlcular that for the project ports and SEDRA. AMother risk will be the ability of SCT to carry out the needed institutional reforms given conflicting political ilterests. Actions already taken, however, have confirmed the Government's commitment to such reforms. Estimated Project Cost: 1/ - U5$ Million- Port Civil Works Local Foreign Total N nstruction T1.1 8.3 19.4 Wharf Rehabilitation 2.0 1.3 3.3 Sub-Total Port Civil Works 13.1 9.6 22.7 Cargo Equipment Now Equipment and Spare Parts 13.2 19.3 32.5 Rehabilitation of Equipment 0.9 1.6 2.5 Sub-Total Cargo Equipment 1T4:T 20.9 35.0 Dredges Parts, Auxiliary Craft and Measuring Equipment 2.7 4.0 6.7 Rehabilitation of Old Dredges 2.7 3.8 6.5 Sub-Total Dredges 5.4 7.8 13.2 Technical Assistance Supervision and S..udies 0.5 1.7 2.2 Total Base Cost: 33.1 40.0 73.1 Physical Contingencies 2.9 3.3 6.2 Price Contingencies 4.2 6.7 10.9 Total Project Costs 40.2 2/ 50.0 90.2 Financing Plan: US$ Million Local Foreign Total Government 30.2 - 30.2 Ports 10.0 - 10.0 IBRD - 50.0 50.0 Total 40.2 50.0 90.2 Estimated Disbursements: Fiscal Year 1989 1990 1991 1992 1993 1994 1995 --(UISillion) - Annual 14.0 3/ 9.0 13.8 5.4 4.4 2.2 1.2 Cumulative 14.0 23.0 36.8 42.2 46.6 48.8 50.0 Rate of Return: About 22X 1/ As of April 6, 1988. 2/ Taxes and duties amounting to US$22.3 million are included. Foreign finaneing costs during construction is not included. 3/ Includes retroactive financing and Initial disbursement Into Spectal Account.  -3- IL. 1= TRAMSPOKT SECTOR A. The Transport System (i) Transport and the Economy 2.01 The dramatic swings in the Mexican economy over the past 10 years have had a significant impact on the transport s-etor. The surge in economic activity in the late 1970's and early 1980's with GDP rising by an average 6% per year in real terms coupled with an unprecedented demand for imported grains led to a period of high traffic growth for all modes of transport. The ports registered annual average increases of over 8X in cargo tons handled from 1978 to 1981. Railway traffic increased by 5% per year from 1977 to 1981 and would have been higher except for serious operational and physical bottlenecks. Highway traffic grew by over 13X annually during the same period. Despite an extensive transport network, including some 225,000 km of roads (75,000 km paved), about 20,000 km of railways, 20,000 km oc pipelines, some 33 ports serving international traffic and 50 airports capable of handling medium and larger size aircraft, transport bottlenecks were occurring which directly affected major economic sectors. Investment in transport, which had declined In relative terms from 20% of public sector investment before the 1970's to 9%, was accelerated, particularly for ports and railways. The sectoral focus was on providing sufficient capacity to support the oil-led growth of the economy. 2.02 By 1982, however, the rate of expansion of the economy, led by public sector expenditures, became untenable. The fiscal deficit reached over 17% of GDP. Subsidies had already reached over 8% of GDP by 1980. Capital flight accelerated and the peso had to be devalued by 268% in nominal terms in 1982. GDP fell in 1982 and in 1983. As the Government's stabilization, demand-management program took hold, traffic declined and the focus in the transport sector was on helping to reduce the fiscal deficit by improving operational efficiency, curtailing investment and reducing unwarranted subsidies. With declining personal income and industrial activity, and substantial real increases in transport-related prices, road traffic grew by only 4% per year from 1981 to 1985 and rail traffic by a little over 1% annually. Port traffic declined by 3.5% over the period as domestic grain production recovered, replacing import requirements. 2.03 During 1987 economic activity seems to have started a modest recovery. However, the uncertainty in the long term macroeconomic prospects makes long range estimates of transport needs difficult. The restructuring of Mexican industry, particularly in the steel and fertilizer subsectors, has important implications for the transport sector. Furthermore, the focus on promoting non-traditional exports to fuel the economic recovery suggests that new types of commodity movements, which require higher levels of transport services as compared with traditional traffic flows, will place new demands on the transport system. Over the next several years, however, as budgets remain limited, the emphasis in transport will be to: treat the backlog of maintenance and rehabilitation works which have accumulated; minimize new construction; and continue to rationalize public sector expenditures. A recent Sector Strategy Paper (Green Cover, Report No. 6552-ME) provides a broader assessment of the main sectoral issues. In addition, recent Staff  - 4 - Appraisal Reports for the Second Highway Sector Project (Loan 2428-MF, FY84), the Railway Sector Project (Loan 2575-ME, FY85) and the Highway Maintenance Project (Lo4u 2875-ME, FY88) provide a detailed discussion of land transport. (ii) Institutional Framework 2.04 The transport sector in general is characterized by a relatively stable and qualified cadre of high level staff which do not change significantly with changes in Government administration. The principal issue, however, which was continuously identified by Bank sector reviews in the 1970's, was the lack of coordination in the transport sector due to the multiplicity of ministries responsible for the various modes. In late 1982, the Secretariat of Communications and Transport (SCT) was reorgan'szed (Chart 1) to encompass all transport modes with three subsecretariats: one for infrastructure, responsible for the design, execution and maintenance of all civil works; one for operations, responsible for all transport operations, tariffs and regulations and for overseeing parastatal enterprises; and one for communications. ln addition, a Directorate General for Planning (DGP), answering to the Secretary, was established with responsibility for investment and general budgetary planning and monitoring. While the reformulation with regard to the subsecretariats was carried out relatively smoothly, it has taken more time to establish an effective planning entity with the capability to handle all transport modes. Staff, organizational and technical constraints have had to be overcome. 2.05 Planning units within the various modal directorates are responsible for identifying and proposing capital investments and operating budget estimates. They provide the technical details required for the analyses of investments and, in some cases, carry out the economic evaluations, DGP, in turn, has the responsibility for carrying out or reviewing the economic evaluation and providing a multimodal, consistent analytical framework for the preparation of the medium- and long-term investment programs. The Secretariat for Programming and Budgeting (SPP) has played an important role in ensuring consistent modal planning. The Directorate General for Public Infrastructure and Social Development of SPP must approve the proposed SCT investment and operating budgets and conducts a serious review of all major investments in the sector. This Directorate is alsen responsible for approving the budgets of the transport parastatal enterprises and calls on the relevant directorates of SCT for their opilion. 2.06 Bank efforts through the recent loans to the various subsectors have sought to help the Government in the upgrading of DGP's capabilities with the belief that once DGP can demonstrate its ability to effectively assess the various modes, iu. zole within SCT, vis-a-vis the subsecretariats, will be enihanced. While the unit's analytical skills and tools cire well-developed for highways, assistance has been provided to help DGP acquire similar skills and tools for the evaluation of rail and port operations and investments. Foreign and local consultant support has been contracted and a team of young engineers has been organized as the analytical core of DGP. Currently, consultants are working to develop a sectoral data base, to develop and upgrade a set of consistent evaluation methodologies and to prepare draft operational and investment strategies, for each *ode. The objective is to have established a well-organlzed and trained planning unit  -5 - by the end of 1988 with a well-defined sector strategy for the new administration. B. Bank Involvement in the Sector and Current Lending Strategy 2.07 The Bank has made a total of 20 loans to transport to date covering roads (11), railways (5), ports (3) and air (1) (Table 2.1). In ports the first IBRD loan of $20 million was made in 1972 and started the process of rationalizing the organization of the subsector through the creation of port operations companies (ESPs) and a central equipment fund (FIDEMAP). Further institutional improvements are taking place under the current Lazaro Cardenas Industrial Port Project (Loan 2450-ME). While there have been substantial advances in terms of investment planning, design and construction and operational improvements under these projects, prior to 1982 there was much less success or dialogue about policy issues regarding pricing, user charges, regulation and subsidies. The problem was partially institutional, with the loans going to the Secretariat of Public Works (SAHOP) or the railways for example, while the policies were determined by another secretariat. There was also, however, a basic difference in outlook. Project Completion Reports for Highways (Ln. 1671-ME), Railways (Ln. 1232-ME) and Ports (Ln. 1964-ME), have noted that although the quality of work executed is satisfactory, cost changes, construction delays and Insufficient budget allocations have generally resulted in delayed completion of Bank projects. On the other hand, sector projects in highways, railways and the Port Development Preparation project have brought about a much more consistent approach to Investment planning and the use of feasibility studies in the transport sector, as well as a dialogue with the SCT on p:icing policies and administrative improvements. 2.08 Since the change of administration in 1982, the role of the BUnk in the sector has changed significantly. The two basic reasons for the change were the Institutional reorganization bringing SCT and SAHOP together (para 2.04) and, more importantly, the economic crisis highlighted the need to confront major policy issues. With the reorganization of SCT, the raising of fuel prices to international levels, the increase and reclassification of railway freight tariffs reducing railway operating ratios from 145 in 1981 to 95 in 1985, the enactment of a comprehensive contract between Government and the National Railways (NdeM) to improve the railway operations and financial status, and the preparation of studies and concrete proposals to rationalize and Improve cost recovery for roads and administration of the ports, the Government showed its commitment to take the necessary actions in the sector. The Bank responded with a comprehensive lending program resulting in the Second Highway Sector Project (Loan 2428-ME, FY84), the Lazaro Cardenas Port Project (Loan 2450-ME, FY84), the Chiapas Rural Roads Project (Loan 2525-ME, FY85) and the Railway Sector Project (Loan 2575-ME, FY85) and the Highway Maintenance Project (Loan 2875-ME, FY88). 2.09 The extended economic recession, exacerbated by the fall in international oil prices coupled with the fact that the administration is in its last two years, have led to a more limited lending program for the sector. The present lending strategy is directed at meeting the lmmediate needs of the present administration, as well as providing a financing bridge into the early years of the new administration. In the ports subsector, the proposed project is designed to rationalisse public sector investment as well  - 6 - as improve and strengthen the institutional framework developed by the current administration for the subsector - with a view to establishing greater financial and managerial autonomy for the principal ports. To this end, a condition of negotiation was the preparation of a ports policy paper by SCT, which could serve as a satisfactory basis for such negotiations. This was received before the invitation to negotiate was sent. C. The Ports Subsector (i) Port Administration and Planning 2.10 There is no comprehensive system of port administration in Mexico. Planning and control is split between a number of Government agencies and port operations are in the hands of commercially constituted, mainly Government-owned, operating companies except in two important ports, Tampico and Veracrus, where labor unions control the operations. At the national level, responsibilities for the port subsector are divided between the Infrastructure and the Operations subsecretariats of SCT, the National Port Coordinating Commission (CNCP) and the National Port Development Fund (FONDEPORT). The Directorate General for Marine Works (DGOM), %hich comes under the Subsecretariat for Infrastructure, is responsible for port construction while the Directorate General for Ports (DGPP), which comes uder the Subsecretariat for Operations, is responsible for overall port operations (see Chart 1). Some of the functions of these two Directorates overlap with those of the CNCP which is responsible for coordinating port development plz.aning and policy, as well as for serviDg as a vehicle to consult port users on port development. CNCP also has Directorates General responsible for port administration, port systems analysis and industrial ports and is the 'holding company', on the Government's behalf, of the majority of the shares in the Port Services Companies (ESPs) - the port operating companies (para 2.13). Since 1985, CNCP has been the principal recipient of port dues with responsibility for their allocation among the countries' ports, subject to SPP approval. During the current administration CNCP has played the key role in determinirg the direction of port policy. Another institution with a specialized role is FONDEPORT, a trust fund under SCT's jurisdiction, which has responsibility for the development, sale and/or lease of land adjacent to port areas. In the last two years, SCT has been making an effort to coordinate the efforts of all these agencies through DGP as the central planning agency for all modes of trarsport. A more detailed description of the various agencies and an analysis of the institutional framework at the time of appraisal is given in Annex 1. 2.11 At the local level, DGPP has Sttperintendencies in each of the principal ports which are, on behalf of SCT, the agencies supposedly owning the port facilities, responsible for their maintenance and controlling all port operations. Until 1985, port dues were collected by the Superintendencies. Since then, however, collection of dues and tariffs have been consolidated and been made the responsibility of the ESPs (para 2.13). Maintenance of port infrastructure, until 1986 a responsibility of the Superintendencies, has also been transferred to ESPs with regard to the landside installations, leaving the former with reduced functions, though not in all cases with reduced personnel. In the four project ports, maintenance personnel has been transferred to ESPs and to SPTA respectively.  - 7 - 2.12 Because of the proliferation of different Government agencies' representatives at the local level, an SCT regulation In February 1984 provided the legal basis for the esitablishment of a Port Development Committee (CDP) as overall coordinating body in each principal port or group of ports. All local agencies dealing in port matters (including principal users) are represented in the CDP. The CDPs prepare development plans, agree on annual operating plans, supervise the purchase and maintenance of equipment and generally are supposed to be the normative body for all operations, development and navigation matters. The CDPs meet every two months and set up the working groups, when necessary, to perform their assigned functions. By coordinating the work of all the Government agencies at local level, rather than each agency referring decisions to Mexico City, ports thus respond more efficiently to user needs. 2.13 With a few exceptions, notably that of Tampico-Altamira (para 2.14), the ports are operated by local port service companies (ESPs) set up under the first port project (Loan 820-ME) in the 1970's as commercially constituted operators which are jointly owned by the Governmes.t through CNCP, (which acts as a holding company of most of the shares), port unions and port users. The nature of these companies and their efficiency vary. SCT has decided to widen the powers of the ESPs by giving them broader responsibility, including that for port equipment acquisition and maintenance, cargo storage, and collection of all port tariffs and dues. The latter, however, are collected on behalf of CNCP and revenues therefrom do not pass through the ESPs' accounts. In some of the main ports on the Pacific, e.g., Lazaro Cardenas, Guaymas and Manzanillo, the ESPs' administrations and operations are being strengthened through the addition of more highly qualified staif for administration, finance, statisticc, maintenance, and operations. 2.14 The case of Tampico-Altamira is a special one. With the completion in 1985 of the one-wharf public terminal in the new industrial port of Altamira (z3me 30 km north of the old river-port of Tampico), the Government establish.d the Tampico-Altamira Port System (SPTA) as a possible prototype decentralized (regional) Port Authority to take responsibility, on the Government's behalf, for the integrated development, administration and operation of the two ports. The Director General is responsible to a Board of Directors representing nine agencies of Government, state and municipality. In June 1985 SPTA contracted with the union-owned cooperative w1tch had previously operated Tampico port to continue doing so with exclusive rights also to the operation of the new deep-water facility in Altamira. 2.15 Maintenance dredging of Mexico's ports and some irrigation canals had, until recently, been the responsibility of the Directorate General for Dredging (DRAGADO) within the SCT. DRAGADO also did some construction dredging although the la-ter was and will continue to be done mainly by private dredging contractors under contract to the Directorate General for Maritime Works. A Presidential Decree was issued in November 1985, establishing the Dredging Service (SEDRA), a "deconcentrated' federal government agency but still under the SCT (Annex 2). As a "deconcentrated" agency, instead of a regular government directorate, SEDRA is permitted a higher degree of independence and flexibility in establishing its  - 8 - organization (Chart 2) and procedures and also more discretionary use of its annual budget. 2.16 The proliferation of agencies dealing with the ports has not created complementary functions in all cases, but rather some functions for which two or more agencies are nominally responsible and fighting for domination. Investment in the port subsector has until recently been dictated largely by political considerations with insufficient economic justification. As a first step towards the reorganization of the port subsector, the project will focus on the consolidation of the planning function in the SCT and the strengthening of the CDPs as coordinating bodies with decision-making power at local level. The details of the proposed iAstitutional improvements in these areas are discussed below. 2.17 During negotiations it was confirmed that the duplication of effort with regards to traffic forecasting and planning and the isolation of the statistics function in DGPP (Annex 1) has been resolved by consolidating these functions in one organizational unit, the Ports and Systems Directorate of CNCP. As CNCP seems to have the relevant skills, is the officially designated ports coordinating body responsible for port systems and port administration, and also has the most direct access to port operations and their costs, it was the obvious choice for locating a federal ports planning bureau. Furthermore, CNCP is a staff unit and comes under neither of the Sub-Secretaries, Operations or Infrastructure, but directly under the SCT Secretary. This puts it in a good position to be above the inter-departmental fray. 2.18 The evelving network of the regional Port Development Committees (CDPs), will play a critical role in the investment planning process and the decentralization of decision making and better coordination at the local level. It is through these that the primary information on port capacity and demand for port services will be fed to the central body. The CDPs should, to this end, appoint specialized subcommittees of two or three members to deal with finances, accounting, auditing, technical matters, and operations. The exception is the relatively new decentralized organization at Tampico-Altamira, which, theoretically at least, embodies all these functions, but is having some difficulty getting started. Some of these difficulties will be addressed through the proposed project (paras 3.10, 3.14). (ii) Maritime Traffic 2.19 There are about 33 ports with commercial traffic in Mexico, but most are of minor importance. Excluding petroleum, largely centered on three Gulf ports, and the salt and gypsum ports of Baja California, some five ports handle the bulk of Mexican seaborne traffic: Veracruz and Tampico-Altamira on the Gulf Coast, and on the Pacific Coast, Guaymas, Lazaro Cardenas and Manzanillo. This concentration, and the preponderance of traffic through the Gulf ports (Pacific ports account for under 30% of general cargo, and 35X of grain traffic) is explicable in terms of a high concentration of population and economic activity in the central Mexican region with good transport to the Gulf Coast and the strong economic links with the United States.  - 9 - Veracruz, which handles the largest volume of general cargo and agricultural domestic traffic, only totalled 3.0 million tons of dry cargo in 1985 of which 500,000 tons was bulk mineral, mainly cement clinker. 2.20 Part of the reason for the fairly small total volume, and the consequent medium scale of port activity, is the importance of land movements to and from the United States. Nearly 30% of imports went overland in 1985, and the proportion of high value general cargo was probably nearer to 40%. A similar pattern applies to non-petroleum exports. 2.21 Partly because of topography and mainly because of the development of the railway and highway systems, most of the main ports have moderately well defined hinterlands. Veracruz is the principal port for Mexico City, with good rail connections. Tampico-Altamira has good connections to Monterrey, and a circuitous connection to Mexico City. Manzanillo is the principal port for the Guadalajara region. Guaymas serves the North-Western region including the new industrial developments at Hermosillo. 2.22 Port traffic statistics, excluding petroleum for all Mexican ports and for the four project ports, Guaymas, Manzanillo, Veracruz and Tampico-Altamira are given in Table 2.2. Total dry cargo at these ports was about 10 million metric tons. The table shows that in 1985 the four project ports accounted for 80% and 62% of general cargo imports and exports respectively; together with Lazaro Cardenas the shares are 83% and 74% respectively. For agricultural imports, the project ports account for 65% of traffic, and for the small export traffic, 100%. Only for mineral traffic, which is normally handled either over specialized berths or at least with specialized equipment, are the project ports comparatively unimportant. This also applies to coastal shipping. Detailed traffic statistics of the project ports are given in Tables 1 through 4 of the Economic Evaluation (available from the project file). (iii) Infrastructure, Equipment and Operations 2.23 While no shortage of infrastructure capacity is anticipated in the foreseeable future, the budget constraints of recent years have meant that, as a short-term cost saving measure, very little maintenance has been done, leaving the busiest ports with problems of deteriorating and dangerous structures. In the port of Altamira, which was the object of very large investments in recent years within the framework of the Industrial Port-s Program, an excellent and capacious landside facility has ontLy one betth, leaving the port poorly equipped to fulfill its future assigned function as a deep-water container terminal and extension to the constrained old river port of Tampico. The general level of productivity in the four project ports has improved in recent years (Annex 3), bus a major problem impeding further improvements, has been the lack of proper maintenance of operational equipment. Much of it is old and inappropriate to modern handling techniques. CNCP undertook a country-wide inventory of the state of port equipment with a view to establishing a centrally controlled program for its rehabilitation, where appropriate, scrapping of obsolete equipment and the acquisition, where justified, of suitable specialized equipment. During negotiations agreement was reached on the proposed program (Annex 4) eOvering the period to December 31, 1992 to which the project will give suppoft,  - 10 - through partial financing of the program applicable to the four subject ports and technical assistance for improving maintenance procedures, and the application of economic and operational analyses to future equipment acquisition and rehabilitation programs. Furthermore, an important step to improved productivity is the country-wide training program of port operating staff undertaken by CNCP with UNDP assistance, partially financed through the ongoing Lazaro Cardenas Industrial Port Project (Loan 2450-ME). 2.24 The following is a brief description of each of the ports (details in Annex 5) and SEDRA (Annex 2) and how the proposed project intends addressing the principal problems: (a) Guaymas. (See Map IBRD 20359). The port has 5 berths (some 878 m with water depths ranging between 8 and 11 m), a grain silo with a storage capacity of 64,000 tons and two storage sheds with a total area of about 11,000 m2. The port is inadequately equipped for container handling and some of its water and electrical supply systems are in a bad state. Ship waiting time should be reduced by the completion of infrastructure works. Given the forecast rapid growth of container traffic for the new auto plant in Hermosillo, the project will help redesign the port and equip it to handle such traffic efficiently. It will also equip the port for more efficient handling of imported grain and break-bulk general cargo. Productivity targets for this traffic are included in the proposed Action Plan (Annex 6). (b) Manzanillo. (See Map IBRD 20360). The older part of this port is a finger pier opening onto the city's central square. With eventual improvements to the new port facilities on the San Pedrito lagoon, the Government intends turning this old pier into a terminal for tourist vessels. The San Pedrito facility now has three wharves with a depth alongside of about 11 m. As in Guaymas, the conventional equipment is in a state of disrepair, and there is insufficient specialized equipment for container and grain handling. These deficiencies have led to costly and inefficient operations. The project will address these shortcomings as well as rehabilitate some essential utilities (water and electricity) which are badly deteriorated. Productivity targets to be attained as part of the ESPs Action Plan appear in Annex 6. (c) Tampico-Altamira. (See Map IBRD 20361). The common user terminal (TUM) in the new facility at Altamira has one berth of 250 m with a present depth alongside of 12 m but designed for 18 m, an ample storage area and a freight-shed of 4,500 m2 for the handling of future container traffic. SPTA has purchased a container crane from PEMEX and some back-up equipment which have been refurbished and put into operation. An additional berth and container crane and auxiliary equipment to be financed under this project would help transfer container traffic from the congested berths of the old river port of Tampico nearby, with marked effects on port productivity. Tampico itself is some 12 km up the Panuco River and is a classical old port with the railway line and downtown confining it within a narrow strip along the river bank. There are 9 berths for general cargo and 4 for bulk mineral handling. The  - 11 - water-depth of 10-11 m alongside however, can only be maintained by annual dredging of some 3-4 million m3, a serious cost item. The project intends improving efficiency in the old port by creating better roadway access to the port, better equipment availability, rehabilitating some of the infrastructure and introducing a proper maintenance program, as well as by relieving present congestion by diverting container vessels to the Altamira terminal. Productivity targets to be attained are set out in Annex 6. A study of the costs and benefits of relocating some of the waterfront industries with their own wharves to the new industrial port sites at Altamira would also be financed by the project. Terms of Reference for the study are in the Project File. (d) Veracruz. (See Map IBRD 20362). The country's oldest port, is also the port with the best access to the central metropolitan region. It has some 3.3 km of wharves with water depths ranging from 9 to 11 m, additional shallow water wharves, and ample covered and open storage area. Its productivity is low, its equipment badly neglected, including container-handling equipment, and much of its infrastructure is in need of repair. Because, however, of administrative deficiencies in the port's management, the project proposes to limit investments under this project to those necessary to improve container and grain handling (see relevant Action Plan, Annex 6). Such assistance will be made conditional on administrative reform (para 3.15). In addition to container (and grain related investments), the project would help rehabilitate cargo handling equipment and introduce, through technical assistance, proper maintenance programs for such equipment (Annex 7). (e) Dredging (SEDRA). The national dredging fleet is in a state of disrepair - with a capacity of 13.5 million m3 in 1981 reduced to an effective 8 million m3 in 1985. In an attempt to avoid further deterioration of effective dredging capacity, the Government, in November 1985, formed the Dredging Service (SEDRA), a "deconcentrated" federal government agency, to be fully responsible for all dredging operations in Mexico, through its own or contracted operations. The Government has expressed the desire to see the dredging fleet rehabilitated to an extent which will allow it to do all maintenance dredging in the ports at an internationally competitive price. The project is intended to help achieve this. A detailed analysis of the situation and the proposed remedies are included in Annex 2 and in the Action Plan in the Project File. (iv) Port Finances and Investment 2.25 Although most of Mexico's principal ports are operated by Port Services Companies (ESPs), all port installations remain national property. Except in the case of Tampico-Altamira (para 2.31), -ESPs do not pay any concession fee for the use of such installations. Instead, port dues and berthage fees are collected directly from vessel operators, and wharfage and storage charges are collected from cargo owners or their agents, to cover the  - 12 - capital for port infrastructure, as well as for the costs of their maintenance and admiunistration. These dues are equal throughout Mexican ports. Though such dues have been collected by most of the ESPs since 1985, the monies thus collected are channeled directly to CNCP (as oi 1986) which redistributes it to the ports throughout Mexico as required. These redistributed funds (with SPP's approval) are meant to pay for the landside maintenance of port installations Pad their administration for which the ESPs have recently been made responsible. In effect, some of these funds were used in 1986 to buy new equipment and help some ESPs with some much needed rehabilitation works. Through such livestments, the Government's equity in the relevant ESPe was increased. harine conservation of the ports (i.e., dredging and maritime civil works maintenance) is the responsibility of DGOM, funded by the federal budget. 2.26 After the basic adjustment of port dues made at the end of 1985, following a Bank-flianced study (under Loan 2450-ME), the Government introduced an automatic monthly linkage of ship's dues (port and berthage) to changes in the dollar exchange rate, thus keeping this part of revenues from decreasing with the creeping devaluation of the peso. As DGPP Superintendencies accounts are cash-based and do not include depreciation allowances, only specific studies from time to time allow dues adjustments to relate to full costs. During negotiations, agreement was zeached on annual updating of the basic cost information and appropriate adjustment of dues, if necessary. 2.27 In addition to port dues, charged basically for the use of the infrastructure, clients also pay tariffs for the services rendered by the ESPs, such as towage, stevedoring, cargo handling, etc. These tariffs vary by port and are generally cost-related in that total revenue from tariffs bave to cover the total costs of the ESPs. Tariffs have to be approved by SCT's General Directorate of Tariffs and with the high inflation pushing costs up steadily, ESPs are constantly demanding approval for further tariff increases. Excessive delay in approving such increases has resulted in the ESPs' revenues declining in real terms, and operational losses in recent years. Furthermore, tariff adjustments to date have been across-the-board ones, irrespective of specific costs for handling different types of cargo. The object of tariff-increases, as mentioned above, is to assure that the ESPs' overall revenues do not fall below their overall costs. However, overall costs have not in the past included properly inflation-adjusted depreciation but have usually been based on historic values. The project will therefore also introduce mechanisms, as part of the Action Plans for the ESPs, whereby operational assets will be properly valued and a reasonable depreciation allowance will be included in the ESPs costs as of 1988. 2.28 The existing, highly complex system of port tariffs is currently being replaced by a simplified uniform tariff structure, being implemeated on a port by port basis by a Joint Commission of the Directorate of Tariffs and CNCP. No systematic analysis has been made to determine whether the level of existing tariffs is adequate. Part of the project therefore will be to ensure a detailed analysis of operational costs in each of the relevant ports, and appropriate adjustments where required and authorized by the Government.  - 13 - 2.29 The project requires cost analyses to be made in each of the project ports and consequent progressive adjustment on tariffs or cutting of costs so as to attain target financial ratios of the Action Plans (Annex 6). 2.30 It was agreed at negotiations that consolidated port financial reports will be kept by CNCP aided by the relevant CDPs and port operating companies which will indicate the port position overall - including all port charges, both dues and tariffs on the revenue side, and on the expenditure side, the matching costs of all the relevant agencies, e.g., DGPPs Superintendencies, ESPs, etc. A phased plan for such consolidation of financial data for each project port as of 1989 was agreed upon at negotiations. 2.31 In the case of SPTA, which is already legally constituted as a two-port Authority, the present situation is that the operating contractor (GUA) bills port users throu4h the SPTA and pays agreed percentages to SPTA as a concession fee. 2.32 After the substantial investments in the industrial ports program and the Investments during the early years of this administration, there appears to be no substantial shortage of potential capacity in the principal ports, with the exception of some specialized installations for container and grain handling. This is the main reason that investment levels in 1986 have fallen by about 73X in real terms from 1981 levels, (from the equivalent of US$296 m to US$80 million per year) covering equipment, infrastructure construction and maintenance, dredging and ferry boats. 2,33 The initial results of preparatory study confirm that only minimal levels of investment in infrastructure are required in the principal ports during the next 4 years to meet the forecasted traffic demand. The proposed investments for Guaymas, Manzanillo, Veracruz and Tampico-Altamira and SEDRA total about US$90 million equivalent over the project period, including taxes. 2.34 During negotiations, Government assurances were received, whereby by November 30 of each year, it would review the annual port investment program with the Bank, and specifically before budget finalization, it would seek agreement with the 3ank on any new investment in the project ports. The investment criteria to be used in the preparation of the investment plan were also agreed upon during negotiations. III. THU PROJBCT A. Project Origin and Objectives 3.01 The project was originally identified in August 1984 as one of a number of potential projects in the port subsector. The Government at that time signalled interest in Bank involvement in a project focusing on the Tampico-Altamira port complex, and project preparation was carried out accordingly. In July 1985, the Bank was informed that the Tampico-Altamira project should be indefinitely postponed, and discussions again opened on the  - 14 - prospects for a broader project, oriented toward rehabilitation and modernization of the commercial port system, which would also address pricing and institutional reform issues. 3.02 In 1986, the Government requested that the proposed project be a sector loan operation modeled on the ongoing highway and railway sector operations in Mexico. While the level of policy reform to be associated with the project would lend itself to a sector operation, it was recognized that this would be the first Bank project to deal with the port sector on a broad basis, and it appeared that further strengthening of the planning functions of the agencies involved would be required. It was therefore proposed that a two-phase approach be taken. The proposed project, scheduled for FY88, would cover a limited time period (1988-94) and four main ports, i.e., Guaymas, Manzanillo, Tampico-Altamira and Veracruz, and the National Dredging Service (SEDRA) yet would start to address sector policy issues. The preparatory work on the proposed project, to be done together with DGP (the central planning body of SCT, which has not previously dealt wit'.h the ports subsector) will lay a solid foundation for a follow-up project of a broad sectoral nature. Such a proposed sector project, in FY91 or later, would then be based on the strengthened planning mechanisms and the experience with the institutional and pricing issues of this proposed project. 3.03 The objectives of the proposed project are to: (a) improve port efficiency through the rehabilitation and moderni- zation of port operations, infrastructure and equipment; (b) improve port equipment management, including equipment procurement, finance and maintenance; (c) assist in the acquisition of dredging equipment, maintenance and operational training and help with the administrative reorganization of the dredging functions; and (d) strengthen port investment planning and financial management. B. Rationale for Bank Involveuvnt 3.04 Port efficiency is an important element in Mexico's economic recovery and in the Government and Bank efforts to stimulate trade, restructure the industrial sector and better utilize limited public sector resources. The last two port projects, though limited in scope, have helped to establish a basis for rationalizing the system of port administration and the pricing of port services. Continued Bank involvement would help improve investment planning, operational efficiency and cost recovery policies. C. Project Description 3.05 The project will comprise primarily rehabilitation of port infrastructure and equipment, procurement of replacement equipment, replenishment of spare parts stocks, appropriate technical assistance and  - 15 - training. In addition there will be procurement of new container and bulk grain handling equipment for Guaymas, Manzanillo and Veracrus, and container equipment for Altamira and Veracruz as well as new measuring and survey equipment and auxiliary craft and barges for SEDRA. A summary of the project by ports, SEDRA and other components follows. A detailed description of the project is included as Annex 9. (a) Guaymas. The construction will consist of a new control building anidlihtiug for the container terminal, levelling, paving and striping for the container storage area, repairs to the railway tracks within the port, rehabilitation of the potable water, fire-fighting and electrical systems, and relocatiow of the transit shed now adjacent to Berth 2. Equipment would be procured or rehabilitated for the handling of container and break-bulk general cargo and grain. (b) Mauzanillo. The infrastructure work consists merely in the rehabilitation of the drinking water, fire-fighting and electrical systems and striping of the container yard and port area. Equipment would be procured or rehabilitated for the handling and storage of container and break-bulk general cargo and grain. (c) Tampico-Altamira. The construction at the port of Tampico will consist of marine protection works at the mouth of the Rio Panuco and south of the harbor, mooring and fendering systems, sheds, paving and storm drainage on the wharves, improvements to the road access to the Port of Tampico, rehabilitation and replacement of cargo handling equipment and procurement of one tugboat. The infrastructure work at the Port of Altamira will include improvement to the access road, completion of the railway access, construction of a 250 m extension to the container wharf including necessary dredging and construction of adjacent container yard and new equipment maintenance shop, control building and a new apron on the existing consolidation shed. Equipment would be procured or rehabilitated for the handling of container and break-bulk general cargo, and navigation aids would be procured. (d) Veracruz. The infrastructure improvement will consist of the lowering of the pipelines from the PEKEX terminal adjacent to the entrance of the existing container terminal ard construction of a bridge at this point to provide easier access to the large container yard at the west side of the port. Equipment would be procured or rehabilitated for the handling of container and break-bulk general cargo and grain.  - 16 - (e) This sub-project will include rehabilitation and modernization of the basic fleet of trailing suction hopper dredges and cutter suction pipeline dredges, acquisition of auxiliary vessela, measuring equipment and spare parts. Also included will be the execution of studies on national dredging needs and on means of strengthening SEDRA's management and planning capability. (f) The technical assistance to be financed under the proposed project would comprise (details in Annex 7): (i) supplementary studies to assist SEDRA to carry out the action plan; (ii) a cost-benefit study of relocating bulk traffic facilities from Rio Panuco to Altamira; (iii) a study of the environmental impact of the project; (iv) assistance in the preparation and implementation of equipment maintenance programs; (v) cost/tariff studies; (vi) assistance in developing port management accounting systems, and (vii) construction supervision for the major civil works. The training program developed and begun with UNDP participation under the last two projects will be implemented with funds from Loan 2450-ME. Environmental issues for the project ports will be covered with UNDP's assistance to the the Mexican Ministry of Environmental Affairs (SEDUE), and funded from Loan 2450-ME. D. Project Cost and Financing 3.06 The total cost of the project is estimated at US$90.2 million, (*including taxes of about US$22 million), of which US$50 million is foreign exchange. The proposed Bank loan of US$50 million would finance the foreign exchange part which represents about 55X of total project costs. The relatively high proportion of foreign exchange is due to the equipment acquisition and rehabilitation (spare parts) components which make up the larger part of this project, These estimates include pbysical contingencies varying from 5X to 1OX and price escalation in both foreign and local costs components (denominated in US$).  - 17 - Details of project costs are presented in Tables 3.1-3.8. A summary cost table is presented below: Project Cost Summary (US$ '000) % Total Local1/ Foreign2/ Total Base Costs A. Port Rehabilitation & Equipment 1. Guaymas 3.1 3.8 6.9 9 2. Manzanillo 1.8 2.8 4.6 6 3. Tampico-Altamira 17.5 16.4 33.9 47 4. Veracruz 4.8 7.5 12.3 17 Sub-total 27.2 30.5 57.7 79 B. Dredge Rehabilitation 5.4 7.8 13.2 18 C. Techbical Assistance 0.5 1.7 2.2 3 Total Baseline Costs 33.1 40.0 73.1 100 Physical Contingencies 2.9 3.3 6.2 8 Price Contingencies 4.2 6.7 10.9 15 Total Project Costs 40.2 50.0 90.2 123 1/ Includes US$22.3 million equivalent in duties and local taxes. T/ Does not include foreign cost of interest during construction. April 1988 3.07 Cost estimates made during appraisal in 1986 were revised in April 1988 and are based upon: (a) final design cost estimates for extension of the container wharf, associated dredging and container yard and rail access at Altamira; (b) final design of the connection of the Metals and Minerals wharves at Tampico; (c) current unit prices in Mexico for similar construction and rehabilitation of structures, paving and utilities systems; (d) current prices for rehabilitation of light and heavy motorized equipment by privately owned repair shops; (e) recent market prices for the new cargo handling equipment; (f) estimates by Astilleros Unidos de Veracruz for rehabilitation of the dredges; (g) recent market prices for the measuring and survey equipment, and spare parts for the dredges; and (h) manpower estimates and prevailing consultant's fees for studies and supervision of construction.  - 18 - 3.08 The project and related capital and other costs will be finnced through three principal sources as follows (details in Table 3.9): Sum_ary of Project Financing Plan Funds Required Local Foreign Total I Project Investments 40.2 50.0 90.2 80 Debt Service During Project a/ - 22.5 22.5 20 Total Required: 02O 72R.5 112.7 100 Funds Available Internally Generated by the Ports: 20.6 20.6 18 IBIRD Loan: ' 50.0 50.0 44 Government: 19.6 22.5 42.1 38 Total Available 40.2 72.5 112.7 _00 ai Includes estimated interest and commitment fees, during project Implementation period. Government assurance was received at negotiations that the funds required for project implementation,would be made available and had already been budgeted to the end of 1988. E. Financial Prospects of Project Ports 3.09 All the project ESPs are in a precarious financial position and the reason lies not only in inflationary developments, but also in the fact that none of the port operating companies began with a solid capital base. Thus the need to acquire large items such as specialized machinery or a tug has put severe strains on essentially revenue-based operations. Currently CNCP is helping in the acquisition of new machinery, partially with revenues which it receives from port dues and which it is putting into select ESPs as additional Government equity; also it is proposed to have CNCP take over the ownershlp of very costly pieces of equipment from the ESPs and then charge a lease for use of such equipment. Further Government participation in equity financing as counterpart funding of this project and assumption of part of the debt, will help strengthen the relevant ESPe. 3.10 SPTA is temporarily in a soomewhat different position from the ESPs. It acts malily as an administrative agency, collecting concession fees from the operator, GUA and port dues from users. It also receives additional capital support from the Government. However, the accumulation of, and appropriate adjustment, of port dues, should reduce Government participation considerably by the end of this project. Agreement was reached at negotiatioss that the Government would provide, by June 30, 1989, a program of measures to strengthen and improve the effectiveness and efficiency of SPTA'S control of operations, at the two ports of Tampico and Altamira.  - 19 - 3.11 The financial objectives proposed for the ports will be expressed in target working and operating ratios, which express the need to generate sufficient funds to cover all working costs and interest payments and eventually make some contribution to future investment. These results would be based on a consolidated accounting of all port revenues both from dues and tariffs on the one hand and of all costs, operating and infrastructure, on the other. The introduction of a system of consolidated financial reports for each of the project ports, as of Juue 30, 1989, was agreed during negotiations. For this purpose a review of a proposal with the Bank should be done before November 30, 1988. Agreement was reached on the following maximum working (WR) and operating ratios (OR)1/, which will be incorporated into the Action Plans for the relevant ports:- 1987 1988 1989 1990 1991 WR OR WR OR WR OR WR OR WR OR Guaymas 0.67 1.04 0.55 0.91 0.54 0.89 0.56 0.93 0.57 0.94 Manzanillo 0.67 1.18 0.61 1.05 0.60 1.06 0.58 1.01 0.57 0.97 Tamptco-Altamira 0.61 0.93 0.77 1.06 0.81 1.14 0.82 1.17 0.85 1.18a/ Veracruz 0.72 1.13 0.66 1.22 0.56 1.00 0.57 1.02 0.59 1.04 a/ The worsening operating ratio in Tampico-Altamira expresses partial absorption of dredging costs. 3.12 The financial forecasts (available from the project file) for the four ports, based on the lower traffic scenario, indicate that in order to attain even the very modest financial targets incorporated into the ports' action plans (Annex 6), some relatively drastic increases in the real level of dues and tariffs will be necessary. Even if increased efficiency resulting from project investments is taken into account, some such specific adjustments will be necessary. On the basis of existing information, it appears that revenues from port dues will have to be raised in real terms by over 50X by December 31, 1989. 3.13 It was also agreed at negotiations that satisfactory costing systems be established and maintained at each of the project ports, that annual review of the systems and the targets and indicators included in the Action Plans would be undertaken with the Bank by November 30 of each year, and that on the basis of such reviews, modification of the Action Plans and the measures needed to achieve targets would be agreed with the Bank. 3.14 In the case of SPTA, it was agreed at negotiations that the Government would present a specific action plan to improve SPTA's operations, including exercising greater control over the operating contractor, by June 30, 1989, in keeping with the existing operating contract. 1/ The working ratio is defined as the ratio of working costs without depreciation to operating revenues. The operating ratio is defined as that between working costs plus depreciation to operating revenues.  - 20 - 3.15 In Veracruz, DGODP's Superintendency is having problems controlling port operations because of the complex union situation i.e., two port workers' unions inside the ESP with 75X of the total shares, the limited share of the Government in SERPOVER's capital, and an independent stevedoring union. Agreement was reached at negotiations that disbursement of loan funds for Veracruz port would be made dependent on the signing of a program-contract between SERPOVER and SCT satisfactory to the Bank. Such a contract needs to include financial, administrative and operational targets and responsibilities and a mechanism for their monitoring and subsequent adjustment. F. Economic Justification 3.16 The traffic forecasts for the four ports are based upon the general premise that the Mexican GDP will grow at about 2 to 4% p.a. on average over the next decade and that with increasing trade liberalization, international trade through the ports system will grow by 3 to 51 p.a. on average. Within that general framework local conditions in the four port regions have been reviewed to determine the port and conmmdity group specific (general cargo, agricultural and mineral) traffic forecasts. The existing operating conditions have been reviewed, the effects of work underway assessed, and the probable future operating conditions with and without the project determined. Avoidance of the deteriorations which would occur in operating conditions without the project forms the basis for the benefit assessment; quantification of these benefits has been based, inter-alia, upon queuing theory and the Bank's "Shipcost' model. Full details of the economic analysis are available from the Project File; and the economic rates of return for the civil works and specialized equipment in each of the project ports, SEDRA and the equipment rehabil'tation component are given below: Economic Rates of Return I of Total Economic Rate Project Items Project Cost of Return (1 Civil Works and Specialized Equipment Guaymas 8 25 Manzanillo 5 15 Veracruz 18 42 Tampico/Altamira 46 17 SEDRA (Dredging) 17 20 Equipment Rehabilitation 3 14 Technical Assistance 3 - Total Project 100 22 G. Sensitivity Analysis and Project Risks 3.17 The sensitivity of the ERR to variations in costs and benefits has been investigated. The minimum ERR on the total project is about 161 with increases of 201 in cost and reductions in benefits of up to 20%. The major risks are slower-than-anticipated institutional progress and less rapid traffic growth. With regard to the former, the project design is such that productivity and effective capacity improvement will take place in the  - 21 - project ports and SEDRA even in the absence of major Institutional change. The economic analysis has been based on very conservative productivity improvements. The second risk has been minimized by assuming a rate of growth of only 3% p.a. in dry-cargo traffic which is substantially lower than the rate of growth of 5% p.a. in the late 70's and early 80's, and results in a traffic forecast for 1995 which is 8% lower than the actual traffic handled in 1931. Another potential risk in the lack of sufficient budgeted funds which may result in slower project implementation. However, thVi risk is small since the items included in the project constitute the essential core of the sector investment program which will be kept under close review in the context of our overall relationsbip with Mexico. H. Project Execution 3.18 SCT through DGOM, CNCP, the various ESPa, and SEDRA, would be responsible for the implementation of the project. Though FIDENAP has officially been dissolved as a separate trust fund, its functions are being continued by a special equipment unit set up within CNCP, still referred to as "FID&AP". A project coordinator with necessary support staff, has been appointed in the Ports and Systems Directorate of CNCP to be responsible for Implementation and monitoring progress, including the preparation of quarterly reports for IBRD. Such a coordinator will also be responsible for obtaining the necessary budgetary appropriations from SPP to assure continuity of the works. A detailed program for project execution has been prepared (Annex 10). During negotiations, agreement was reached with SCT and the various agencies on that program and on the project implementation schedule attached thereto. 3.19 The project would be supervised and monitored by the Bank through the normal supervision mechanism, and through provision by SCT of regular reports to the Bank, in a manner satisfactory to the Bank, on all phases of the project. These reports would be produced by the project coordinator using data and contributions from each of the agencies carrying out the project. In addition, the Bank and SCT would meet during March of each year, to assess the status of the project using the agreed targets and monitoring indicators established under the project and to discuss and resolve outstanding issues and implementation problems. SCT will, in addition, provide, within six months of the Closing Date of the Loan, a Project Completion Report. During negotiations, it was agreed that SCT will provide adequate and timely data and information to the Bank for project monitoring purposes. Annex 11 provides details concerning project execution and monitoring. I. Performance Indicators, Targets and Monitoring 3.20 In order to maintain close control of project execution activities, set goals to attain, and correct deficiencies or solve problems before difficulties become unmanageable, SCT will continuously monitor appropriate performance indicators including physical operational and financial targets set out in the Action Plans. (Action Plans targets for each of the relevant entities are presented in Annex 6). The operational targets relate to the quality and efficiency of the maintenance operations of the various ESPa and of SEDRA, and will include: (a) average number of hours that the equipment  - 22 - is utilized; (b) percent of fleet available for use; (c) percent of fleet actually utilized; d) equipment (including dredge) downtime; and (e) number of cubic meters of in situ material or tons of dredged material removed per day per dredge. SCT will provide infcrmation concerning these performance indicators to the Bank by February 28 of each year prior to the joint review of project progress that will take place each March. During negotiations, agreement was reached regarding this process, along with confirmation of the specific physical and operational targets to be achieved in the Action Plans. J. Procurement 3.21 Procurement under the project would be carried out as shown in the following table. Agreement was obtained from the Government during negotiations that the procurement processes used will be satisfactory to the Bank. Procurement Method (USM Million) Responsible Project Element Agency ICB LCB Other Total Civil Works Construction DGOM 10.1 13.8 - 23.9 (4.4) ( 6.1) (10.5) Rehabilitation DGOM - 3.9 - 3.9 <1.5) (1.5) Equipment Purchase of New Equipment and Spare Parts 2/ 39.0 - - 39.0 (23.4) (23.4) Rehabilitation of 2/ - 3.0 - 3.0 Existing Equipment (1.8) (1.8) Dredges Spare Parts, Auxiliary Craft and Measuring Instruments 3/ 8.9 - - 8.9 (5.4) - - (5.4) Rehabilitation 3/ 8.8 - - 8.8 (5.3) (5.3) Project Supervision and Studies 4/ - - 2.7 2.7 (2.1) (2.1) Totals 66.8 20.7 2.7 90.2 (38.5) (9.4) (2.1) (50.0) 1/ Amounts in parentheses show the allocations from the proceeds of the Loan. 2/ The local procurement committee assisted by "FIDEMAP" except for major pieces of equipment which would be "FIDEMAP". 3/ SEDRA assisted by "FIDEMAP". 4/ DGOM for civil works including the National Dredging Study, SEDRA for the dredge rehabilitation and "FIDEMAP" for assistance in the procurement of equipment and spare parts. 3.22 Civil Works: The major items of work/procurement under the project and the procedures for bidding are shown in the table above. The domestic construction industry is quite active and there are many competent and experienced construction firms located throughout the country which would be  - 23 - prepared to bid on both large and small construction contracts. Contracts for civil works with an estimated cost of US$1 million or more will be contracted on the basis of International Competitive Bidding (ICB) utilizing procedures and bidding documents comparable to those approved by the Bank for Loan 2281-ME, suitably modified for the components in this project. The civil w.orks rehabilitation is scattered in four ports and is likely to be too small to be bid as ICB, therefore it will be let on the basis of Local Competitive Bidding (LCB); however, any foreign contractor who wishes to do so may participate on an equal basis with the domestic contractors. 3.23 LCB Procedures: Local competitive bidding procedures have been reviewed and, except where indicated below, have been found to be satisfactory. Procurement pract4ces, relating to contracting of civil works under LCB, which need to be modi id in order to conform to Bank policies are: the registration process (prequalification); the time periods allowed during the procurement process for the various steps and functions to be carried out; the evaluation and award process and the budgetary process. 3.24 New Equipment: Under the project, cargo handling equipment, aids to navigation and spare parts valued at approximately US$39 million will be purchased. Of this amount, about US$23 million equivalent will be financed by the Bank. All equipment to be purchased with financing under the project will be procured in accordance with ICB based upon the Bank's Guidelines, utilizing bidding documents and procedures comparable to those approved by the Bank for Loan 2281-ME, suitably modified for the components in this project. The preference for domestic manufacturers will be 15% of the c.i.f. bid price of the foreign goods or the amount of customs duties and other import taxes which a non-exempt importer would have to pay, whichever is lower. 3.25 Equipment Rehabilitation: Under the project, about US$3.0 million equivalent will be spent to rehabilitate port equipment. This work will be done by domestic industry or local commercial machine shops on a contract basis using LCB. It is very unlikely that foreign firms would be interested in this work due to its small size, except in special cases where particular expertise or special machinery is needed to carry out the required work, but is not available in the country. 3.26 Dredge Rehabilitation: The existing trailing suction hopper dredges and cutter suction pipeline dredges are in need of rehabilitation. In addition, it is intended to procure and fit the dredges with modern measuring and recording equipment to attempt to improve the productivity of the dredges and make it much easier to monitor their performance. The rehabilitation work on the dredges will be procured through ICB. The detailed evaluation procedure will be outlined in the bidding documents. 3.27 Dredge Measuring Systems: The measuring and recording system for use in controlling and monitoring the dredging operation will be procured through ICB and will be provided to the shipyard for installation during dredge rehabilitation work. The purchase price of the system will include the cost of a factory representative to inspect and certify the installation, train operators in the use of the systems and also technicians in the servicing of the systems. 3.28 Dredge Auxiliary Plant: Barges, tugboats, auxiliary craft and spare parts will be procured through ICB.  - 24 - 3.29 Consulting Services: Consulting services for technical assistance, for studies and for design of improvements and supervision of construction amounting to approximately US$2.7 million equivalent will be obtained in accordance with the Bank's Guidelines for the Use of Consultants. The local domestic consulting industry is very active, qualified and experienced and will be able to satisfactorily carry out the work required with the possible exception of certain specific expertise that may not be readily available within the country. While the consultant selection process will be open to foreign firms, it is likely that foreign experts, when needed, will be engaged as individuals or through joint ventures with local firms. During negotiations, agreement was reached with the Government on outline terms of reference (Annex 7) for these consulting assignments and on the procedures to be followed in making selections, appointments and awards, i.e., Bank Guidelines for the Use of Consultants. 3.30 Prior Review. All contracts for civil works costing the equivalent of US$500,000 or more and all contracts for goods costing the equivalent of US$250,000 or more wlll be subject to the Bank's prior review of bidding documents and price quotations. The consultants' terms of reference, their suitability for the specific assignment and the draft contract for all assignments will be subject to prior review and approval by the Bank. These criteria will enable the Bank to make an ex-ante review of some 60% of total contract amounts to be financed by the Bank. K. Disbursements, Accounts and Audits 3.31 Disbursements from the Loan Account will be made on the basis of 42% of total expenditures for civil works; 100% of foreign currency expenditures, 100% of local expenditures (ex-factory) for equipment rehabilitation or repair work performed locally through contract and 65% of local expenditures for purchases of new equipment or for spare and replacement parts for existing equipment; and 100% of costs for consulting services. Agreement was reached during negotiations that retroactive financing wil be provided for project related expenditures incurred after December 1, 1986 but before the date of loan signature, up to a maximum of 10% of the Loan Amount, for civil works and associated consultant servicea; and for expenditures connected with the equipment rehabilitation and repair program. 3.32 No disbursement of funds will take place for the port of Veracruz subproject until a program contract has been signed between SERPOVER and SCT which incorporates the relevant elements of the Action Plan outline (Annex 6), and agreement is reached with the Government concerning the future administration of the port (para 3.15). Disbursements on the other ports are subject to the condition that each port operating company enter into an appropriate Subsidiary Loan Agreement with BANOBRAS and agree to carry out its action plan. 3.33 BANOBRAS will be the borrower at the Bank's carrent terms of 15 year repayment, including 3 years of grace. On-lending terms would be the same, plus a small fee to BANOBRAS fcr its intermediation role. 3.34 In order to reduce the time interval during which the Government would be financing the Bank's share of' project costs with its own funds, a Special Account would be set up in the Banco de Mexico under the control of  - 25 - BANOBRAS, which could be drawn against on the basis of project expenditures for previously approved subprojects and/or contracts and which would be replenished from time to time by the Bank at the request of the Borrower as needed for project purposes. These replenishments would be made on the basis of documentation justifying the withdrawals previously made but would not exceed US$6 million at any given time. Disbursements and withdrawals from the Special Account will be made on the basis of Statements of Expenditure for civil works, for costs incurred relating to the equipment rehabilitation program, and for costs of services. Disbursements relating to the new equipment purchase program and for consulting services will be based on the Bank's usual documentation requirements. BANOBRAS has adequate accounting and auditing procedures and control to permit disbursements to be made on the basis of Statements of Expenditure. Supporting documentation would be retained by executing agencies, would be subject to auditing under agreed procedures and would be available for inspection by Bank staff during project supervision missions. 3.35 Standard disbursement profiles prepared by the Bank for the LAC Region, and in particular for Mexico, Indicate that a seven-year period is required to obtain full disbursement for this type of project and the implementation period has accordingly been estimated to be seven years (Table 4.1). 3.36 Agreement was reached during negotiations that annual audits of the special account and the SCT project accounts would be carried out in a manner satisfactory to the Bank in accordance with the Memorandum of Understan lng (Aide Memoire) of November 25, 1986, between Bank representatives and those of the Mexican Government. Annual audit reports, from each of the ESPs and from SEDRA, by auditors satisfactory to the Bank, and in a format satisfactory to the Bank, would also be furnished to the Bank within six months of the close of the fiscal year. L. Environmental Aspects 3.37 The project is not expected to have serious environmental effects. However it does include dredging at the port of Altamira, and the environmental Impact of this and other project related a sivities will be studied with financing under the proposed project, and appropriate actions taken. IV. *SREAIS RECUK AND RKCC