C ~~~~~R E S T R I C T E D FLehReport No. P-175 This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE AUTORIDAD PORTUARIA DE GUAYAQUIL, ECUADOR September 29, 1958 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPIIENT REPORT AND RECOhiMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE AUTORIDAD PORTUARIA DE GUAYAQUIL, ECUADOR Li I submit the following report and recommendations on a proposed loan of $13 million or its equivalent in other currencies to Autoridad Portuaria de Guayaquil, Ecuador (hereinafter sometimes called the Port Authority) to fin- ance the construction of a new port. PART I - HISTORICAL 2. When the Comite de Vialidad de la Provincia del Guayas was established in 1945 the improvement of the port facilities of Guayaquil was included among its responsibilities. Engineering studies made on behalf of the Comite recommended that a new port be built, six miles from the present port on the Guayas River, on an inlet of the sea called the Estero Salado. 3. A Bank mission visited Ecuador in October 1953 to study the project for building a new port. On the basis of the mission's findings, the Bank in- formed the Comite in a letter dated February 11, 1954 that, while the project was of a type which the Bank could assist in financing at the proper time, its execution was not yet economically justifiable. The Bank recommended that the Comite give priority to the execution of its highway projects (financed byr the Bank's first loan to Ecuador), which would eventually have an appreciable effect on the imports and exports of Guayaquil, and suggested a number Of additional preparatory steps to be taken on the port project. 4. In 1955 another mission to Ecuador reviewed the status of the project. In a letter dated March 1, 1956, the Bank informed the Government that it would be prepared to consider a loan for the construction of a new port. provided that satisfactory studies were prepared by consulting engineers, a satisfactory Port Authority was set up, and that adequate local currency was made available. 5. In November 1956 the Comite engaged a firm of consulting engineers to make the preliminary studies. The Bank received their report in September 1957. A Bank mission visited Ecuador in February 1958 to study the project recommended in the report and to advise the Government on the drafting of a charter for a new Port Authority. A Decree was issued on April 10, 1958 creating a Port Authority to construct and operate the new port and to take over the operations of the old port on January 1, 1959. 6. Formal negotiations for a loan began in Washington on June 3, 1958. The Government of Ecuador was represented by the Minister of Public Works, Mr. Sixto Duran Ballen and the Port Authority by its President, Mr. Juan Marcos. In July, when negotiations had been virtually completed,the Port Authority decided not to retain for the detailed design and supervision of the project the firm of consultants which had made the preliminary -studies and instead to en- gage a different firm. It therefore became necessary to await the review of the preliminary plans and estimates by the new consultants before proceeding further with the loan. The Bank received the report of the new consultants early in September. - 2 - 7. If the proposed loan were made, it would increase the Bank's lending to Ecuador from $32.6 million to $45.6 million net of cancellations. The Bank has already made the following loans to Ecuador: Year Serial No. Purpose Amount 1954 94 EC Guayas Highway Project 7,500,000 / 1956 137 EC Quito Power Project 5,000,000 1956 176 EC Highway Maintenance and Construction 14,500,COO 1957 177 EC Revised Quito Power Project 5,000,000 1957 181 EC Railway Project 600,000 2/ Total (Net of Cancellations) $32,600,000 Amount sold 456,000 Amount repaid 149,000 605,000 Net Amount held by Bank (in- cludes '$25.1 million not yet disbursed) $31,995,Doo 1/ Loan 94 EC was originally for 9,8,5oo,o0o, of which $1 million was later cancelled. 2/ This loan cannot become effective until the vacant post of General Manager of the Railway has been filled. The General Manager in office when the loan was made was dismissed shortly afterwards as the result of a dispute with the President of the Railway, and difficulty is being encountered in finding a successor. No further loans to Ecuador are at present under active consideration. PART II - DESCRIPTION OF THE PRDPOSED LOAN 8. The proposed loan would finance the foreign exchange cost, including interest and other loan charges during the period of construction, of the construction of a new port at Guayaquil. The loan would have the following characteristics: Borrower: Autoridad Portuaria de Guayaquil, an autonomous Government agency created by a Decree dated April 10, 1958. Guarantor: Republic of Ecuador Amount: The equivalent in various currencies of $13.0 million. Amortization: 42 semi-annual instalments, February 1963 to August 1983. -3 - Interest Rate: 5 3/4% Conriiitment Charge: 3/h4 per annum Paarment Dates: February 1 aid August 1. PART III - LEGAL INSTRUMAENTS AND LFLGAL AUTHORITY 9. Drafts of the following legal instruments are attached (Nos. 1 and 2): 1. Loan Agreement 2. Guarantee Agreement These agreements are substantially in the forms currently used by the Bank. 10. The followi:g provisions are of special interest: Loan Agrecnmert a, Section 5.08 requires the Borrower to establish charges for the services of the new port at a level calculated to assure t'lat the excess of revenues from these charges over expenses will cover its long-term debt service at least one and a half times. b. Section 5.09 requires the Borrower to employ a qualified a,I experienced general manager satisfactory to the Bank. c. Section 5.10 requires the Borrower to make adequate provision 2or the recruitment and training of personnel for the operation of the new port. Guarantee Agreement a. Section 2.03 requires the Guarantor to permit the Borrower to establish rates in accordance with Section 5.08 of the Loan Agreement, and not to amend the charter of the Borrower without the agreement of the Bank. b. Section 2.04 requires the Guarantor to reimburse the Borrower for any loss of revenues exceeding one million sucres per annum resulting after 1962 from exemptions from port charges granted by the Guarantor. c. The negative pledge (Section 3.01) has been modified, as in previous Loan and Guarantee Agreements between the Bank and the Republic of Ecuador, to avoid problems arising out of the autonomy granted by the Ecuadorian Constitution to certain governmental agencies and political subdivisions and, as previously, the Central Bank will accept its obligations under this pledge by signing the Guarantee Agreement together with the Guarantor. 11. The Port Authority is authorized to enter into the Loan Agreement by its charter and a resolution of its Board of Directors authorizing its President to negotiate and execute the loan on behalf of the Port Authority. The guarantee of the Republic of Ecuador would be given pursuant to authorization by Presidential Decree, subject to ratification by the Congress of the ReDub- lic of Ecuador. 12. The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Banc is attached (No. 3). PART IV - APPRAISAL OF THE PROPOSED LOAN The Project 13. A detailed appraisal of the project (T.O. 179 a) is attached (No. 4). 1h. The present port of Guayaquil, situated on the estuary of the River Guayas 40 miles from the sea, is not accessible, even at high tide, to vessels of more than 23.5 feet draft, and even those able to reach Guayaquil are mostly loaded and unloaded in midstream by lighters because of the lack of deep-water wharves. The port's facilities are inadequate to handle its pre- sent traffic efficiently. These deficiencies are a handicap to Ecuador's growing external trade, the greater part of which passes through Guayaquil. 15. The prohibitive cost of dredging and keeping dredged the River Cu-iayas rules out the improvement of the present port as a solution of the problem. Fortunately, engineering studies have shown that it is feasible and eccnoric to construct a new port on the Estero Salado, an arm of the Gulf of Cuayaq'-il, within six miles of the existing port. Here ships would lie at wharves oro- viding a depth of 35 feet at low water. A reasonable expenditure on dredinag would suffice to provide and to maintain a channel through the Estero Salado which would be navigable by ships of 28 feet draft at all states of tide. 16. The technical report estimates that, on the basis of the present traffic of the old port, the new port would not only save importers and exporters about 8 million sucres (equivalent to about US $530,000) annually in handling charges, but would also save shipping using the port about 23 million sucres (equiva- lent to about US $ 1.5 million) annually. An appreciable part of these savings to shipping would eventually be passed on to Ecuador in one way or another. Administration and Management 17. The fact that a Port Authority has been established as an autonomous government agency to take over the operation of the existing port as well as to be responsible for the construction and operation of the new port should sim- plify the transition from the old to the new port as well as help to ensure effective management of both. The Board of Directors of the Port Authority includes representatives of private enterprise and of the Comite de Vialidad as well as official or officially nominated members. The President of the Republic has appointed as the Board's first President (i.e. chairman) a prominent Guayaquil businessman. 18. Section 5.09 of the Loan Agreement provides that the Port Authority will employ a qualified and experienced general manager satisfactory to the Bank. The Borrower would also agree not to make withdrawals from the Loan Account except to meet engineering costs until a general manager has been appointed ard taken up his duties. This would ensure that the Port Authority would have the benefit of his knowledge and experience throughout the crucial period of construction and transition. Arrangements for financing local currency cDsts 19. Local currency costs of the project are estimated at 92 million sucres. As indicated in the technical report, the greater part of this amount is to come from the proceeds of customs duties specially assigned by the Government since 1955 to create a New Port Fund. This Fund has hitherto been administered by the Comite de 'Vialidad but will now be taken over by the Port Authority, which will also hereafter receive the assigned revenues. The remainder of the funds needed are to be provided from the operating surpluses expected to be realized by the existing port during the construction period and from the pro- ceeds of a special surcharge on goods handled at the port imposed in the Decree establishing ti-e Port Authority. 20. Over the construction period as a whole the funds available from these sources should cover the local currency costs ui th a substantial margin to spare. If the rate of expenditure at the peak of construction rises to a level high enough to cause some temporary depletion of the Port Authority's working capital, the Borrower would have a satisfactory basis for short-term borrowing. If necessary,additional funds would be provided by the Guarc-nr3or under its undertaking, in Section 2.02 of the Guarantee Agreement, to make good any deficiency of funds for the execution of the project and the operation of the port. YNethods of Procurement 21. All contracts exceeding 200,000 sucres in value for the construction of the project and the supply of equipment for the project would be awarded on the basis of international competitive bidding, except that if it should be decided that it would be more economic for the Comite de Vialidad to dredge the canal which will connect the new port with the River Guayas, tenders would not be invited for this part of the work. Economic Situation 22. A report entitled "The Current Economic Position and Prospects of Ecuador" (W.H. 74 a) was distributed to the Executive Directors on June 17, 1958 (R 58-64). 23. Ecuador's long-run economic prospects are good. There is wide scope for development, especially in agriculture, and the development projects of recent years are only now beginning to bear fruit. 24. In the immediate future, the falling-off of the rate of expansion which began in 1955 is expeeted to continue,while the external debt service burden will remain heavy for several years. The Government will therefore have to observe strict financial discipline if an adequate rate of development expendi- ture is to be maintained without recourse to inflationary fiscal policy or to - 6 - excessive borrowing. However, Ecuador has displayed a resistance to infla- tionary tendencies over the post-war period as a whole which has been excep- tional among Latin-American countries, and in 1957 the Government confronted a difficult budget situation arising from the deficits of preceding years Aith considerable success. 25. With the help of the Special Economic Miission which the Bank helped to organize in 1957, important fiscal reforms are being carried out. Improve- ments in tax collection and administration should substantially increase the yields from existing taxes and improvements in budget administration should help to raise the productivity of Govemment expenditures. 26. It is estimated that the service of Ecuador's present external debt will absorb 13% of foreign exchange earnings in 1958 and 1959 but, in view of the relatively short term of much of the debt and a gradual expansion of ex- ports, less than 9% in 1961, and steadily declining percentages thereafter. Foreign exchange resources remaining after debt service are expected to in- crease gradually after the present bulge in service payments is passed. There is therefore a margin for additional long-term debt for well-chosen productive projects. This margin should provide ample room for the loan now proposed, repayment of which is not scheduled to begin until February 1963. Prospect of Fulfilment of Obligations 27. Under the supervision of experienced consultants, the project should be efficiently executed. The establishment of a Port Authority with an appro- priate charter and its undertaking to appoint an experienced and qualified manager give grounds for believing that the new port will be efficiently operated. 28. The project is well designed to enable the new port to provide efficient service at Guayaquil. The large savings ihich it would make nossible for importers, exporters and shipowners and the commitments made in the Loan Agree- ment on rates to be charged should assure that the Port Authority's revenues will be adequate to provide the local currency needed to purchase the foreign currency needed to service the loan. An additional safety margin lies in the fact that the assignment of certain revenues by the Government, referred to in paragraph 19 above, to provide funds for construction is for an indefinite period and, as this assignment is confirmed in the charter of the Port Authority, it cannot be modified without the Bank's consent. 29. Ecuador should be able to make available without undue strain the foreign exchange needed to meet the services of the loan in addition to its other obligations. PART V - CaVIPLIAiCE WITH ARTICLES OF AGRMIENT 30. I am satisfied that the proposad loan would comply with the Articles of Agreement of the Bank. - 7 - PART VI - REOiV,El'iDATIONS 31. I recoxmriend that the Bank make a loan to Autoridad Portuaria de Guayaquil EL th the guarantee of the Republic of Ecuador, in an amount in various currencies equivalent to $13 million for a total term of 25 years with interest (including commission) at 5 3/4% per annum and on such other terms as are specified in the attached draft Loan and Guarantee Agreements and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). Davidson Sommers Vice President Attachments Washington, D.C. September 29, 1958