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R E S T R I C T E D

Repo r t N 0.TO-273c

This report was prepared for use within the Bank. It may not be publishednor may it be quoted as representing the Bank's views. The Bank accepts noresponsibility for the accuracy or completeness of the contents of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

APPRAISAL OF

PORTS AND HARBORS DREDGE PROJECT

PHILIPPINES

July 13, 1961

Department of Technical Operations

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PHILIPPINES

APPRAISAL OF PORTS A1ND HARBORS DREDGE PROJECT

Table of Contents

Page

SIflMII~IARY

I* I-NTRODUCTION1

II. GE M RAL~ 1-3Organization of Public Ports 3-4

III. DREDGING REQUIRE1NENTS

IV. THE PROJEC T 6-7

V. JUS TIFICATION~ OF PROJXflT 7Operwational Needs 7-8Economic Belnefits 8-9Financial Aspects 9

IV. PROCUR-711UET AND FITNANC E 9Supply Contract 9-10Financial Arrangements 11

VII. HAINTEiNANCE AND OPERATION OF BQUIPHi~NT 12

VIrI I. CONCLUSIONS AND REC Oii-54NDATIONS 12-13

Table of Contents (continuaed)

Appendix 1:Page 1 Foreign Trade Through Philippine Ports - 1958159Page 2 Domestic Trade Through Philippine Ports - 1958/59

Appendix 2 Shipping Using Philippine Ports

Appendix 3 10-Year Program of Essential Dredging in PrincipalPhilippine Ports

Page 1 Total Program by Works and PortsPage 2 Estimated Progress 1960/61-1970/71

Appendix 4 Division of Ports and Harbors - Non-Project DredgingEquipment in Service or on Order

Appendix 5 Estimated Cost of Project Equipment

Appendix 6 Port TWTorks Fund - Actual Revenue and Expenditure1954-1960

Appendix 7 Port Works Fund - Estir,mated Revenue and Expenditurei960/61 - 1968/69

Map - Republic of the Philippines - Principal Ports

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PHILIPPILES

APPRAISAL OF PORTS A\D3 HARBORS DREDGE PROJECT

SUNIVIAY

i. Arrears of maintenance dredging have to be made good at thePhilippine ports; deeper channels are needed because of larger ships; and re-curring natural siltation has to be offset. Non-deferrable, priority needs ofmaintenance and improvement dredging for navigational purposes total an esti-mated 60 million cubic meters over the next 10 years.

ii. The governmental entity responsible for navigational dredging, theDivision of Ports and Harbors, is re-equipping itself for the task ahead. Itspresent dredges can do 2¢4 million cubic meters annually at most; and much ofthis equipment is over-age or run down. The Government is acquiring sufficiectnew dredges and auxiliary facilities to balance the effective capacity at theDivisionts disposal with the essential work which has to be done in thle next10 years. Some of these purchases are being financed by the Ex-Im Bank andfrom local sources, and are not part of the request for a Bank loan. It alsoproposes to provide a slipway and workshop for the better repair of the Divi-sionts floating equipment.

iii. The Government wishes the Bank to finance the purchase of new dredg-ing equipment, capable of dredging 208 million cubic meters annually, the pur-chase of various ancillary equipment, and the provision of a new slipway andworkshop. The total cost of these items is estimated at US$9.85 millionequivalent, of which us`8.5 million eauivalent will be in foreign currency.

iv. The dredging and ancillary equipment is technically suitable, thishaving been confirmed by independent expert advice. Designs prepared by DPHfor the slipway and workshop will be reviewed by a Consultant before tWhe workis put in hand. Construction of the slipway and workshop will be supervisedby competent staff.

v. Most of the dredging and ancillary equipment has already been orderedunder a suppliers' credit contract awarded after international competitive bi &°ding, which contained a provision for reversion to cash payment if alternativefinance were found. An agreement has already been concluded, specifying thecash payment arrangements to be applied if the loan is made. Orders for theremaining equipment and construction contracts in connection with the slipwaywill be awarded on the basis of international competitive bidding.

vi. The equipment for which the loan has been asked is essential for tl,safe navigation and ready maneuver of deep-sea and inter-island shipping.Dredging the Philippine ports to depths of 15, 25, 35 and 40 feet as now plan-ned would safeguard Philippine exports, keep dotn import prices, and stimulateinternal trade by the impact on shipping, cargo-handling and lighterage costs.The purchase price of the necessary equipment is inconsequential compared witrthese large but indeterminate economic benefits.

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vii. There are sound operational reasons why the Division of Ports andHarbors should increase the capacity of its dredging fleet. Financially, itsuse of the Bank-financed equipment wo'ild yield cash savings, compared with coli-tract dredging, large enough to repay the full capital expenditure in 9 - 10years at 6% interest.

viii. The local currency to asseTnble and commission the Bank-financed equip-ment, to operate, maintain, and repair it, and to reimburse the Government forthe debt service, would come from a Port Works Fund set up by law some years agoas a separate, cumulative, and non-divertible account in the iTational Treasury.The Fund is fed by various port-user charges which are then applied, in a com-plex order of priorities, to debt service, capital expenditure and current ex-pense arising from the construction, improvement, and maintenance of ports.Sufficient local currency for the purposes of the project is likely to be forth-coming from the Fund as and when needed. Should this not prove the case theGovernment will make the necessary funds available from other sources.

ix. DPH has agreed to re-examine the dredging program in the light of ccrn-ments made by the Bank. The program will be kept under reviewr by elperiencedengineers in the light of changing circumstances and the experience gained inoperating the new equipment. Should substantial changes in the program beconmnecessary at any time, the Government will consult with the Bank before puttiqgthem into effect.

x, The present standard of maintenance and operation of dredging equip-ment is inadequate. Improvement will be facilitated by the acquisition of theadditional craft and the provision of the sLipway and workshop. To effectfurther improvement experienced engineers will be employed to advise on dredgemaintenance and operation and on the operation of the slipway.

xi. The project is suitable for a loan of US$8.5 million. The Governmertwould be the borrower; an appropriate term would be 17 years with a two-yearperiod of grace.

PHITIIPPINESAPPRAISAL OF PO-RiS AND HARBO3. D.EDOE PG.Vj,CT

I. INTMODUCTION

1. The Philippine government has requested a Bank loan to finance theforeign exchange costs, estimated to total US$8.5 million, of nay dredging andauxiliary equipment and a slipway for the repair of its dredging fleet.The equipment is to be used for the maintenance and improvement of shipchannels and turning areas where and when needed at the various ports of thePhilippines. It would be operated, maintained and repaired by a departmentalorganization for navigational dredging known as the Division of Ports andHarbors.

2. There is a serious backlog of dredging in Philippine ports becauseof maintenance arrears which trace back to the discontinuation of mainten-ance dredg4ngduring the war; port extensions which have enlarged the navigation-al and turning areas requiring to be dredged regularly; and increasing draftof ships which has made it necessary to dredge beyond pre-war depths. Owingto the age and inadequacy of the dredging equipment at the disposal of thePhilippine authorities, the backlog is increasing. To eliminate it graduallyand to carry out necessary improvement dredging as well, the Government isbuying new equipment, partly as replacements and partly as additional capaci-ty. Some of this equipment would be financed from the requested Bank loanand the rest from a recent Exim Bank credit and various internal sources.

3. This report is based on an appraisal by a Bank mission, which visitedthe Philippines during December 1960, and on a report prepared by Mr. W. H.Roberts, an expert in dredge design engaged by the government at the requestof the Bank. Other data drawn on include a study (as of 1957) of the econom-ics of Philippine transportation by the Stanford Research Institute and aprogram (as of 1959) for port development at Manila by Bader and Associates,both of which recommend the purchase of additional dredging equipment.

II. GENERAL

4. The Philippine archipelago (Map 1) consists of 7,100 islands. Itextends 700 miles Fast-West and 1,200 miles North-South from an island within100 miles of Taiwan to an island within 30 miles of Borneo. All towns of anysize are sited on or close to a coast, as is much of the productive activity.T'he coastal towns are not only the trade centers of their local areas, butalso - via road networks on each island plus some railway lines on Luzon andPanay - clear the export, import, and inter-island trade of the agricultural..forestry, and mineral areas of the interior.

5. Efficient sea communications are thus essential to the country'seconomic well-being. There are 351 public ports for overseas, inter-islandand coastal shipping; 74 of these are administered by the national authoritiesand 277 by municipal entities. Of the 74 national ports, 25 are ports of

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entry for vessels engaged in the carriage of foreign trade. Manila is themost important port, especially for imports and trans-shipment, but many ofthe other ports which will here be termed "outports" handle a substantialamount of cargo, especially exports.

6. The foreign trade of the Philippines has been increasing since theend of the war. However, growth has been irregular. }xport volume has fluc-tuated mainly because of variations in agricultural output caused by weatherconditions. The volume of dry cargo imports has fluctuated because of theneed to restrict imports from time to time for balance-of-payments reasons.However, bulk petroleum imports have increased steadi.ly as a result of roadconstruction, a growing road vehicle fleet, and power plant demand for fueloil.

Ocean-Borne Foreign Trade-000 metric tons-

Mionthly Exports - …--Imports --- -

Average Total Dry Cargo a) Bulk Petroleum a)

1953 375 283 151 1321954 1442 251 115 1361955 483 280 131 1491956 587 347 193 151l1957 494 297 130 1671958 4.66 2142 79 1631959 44.9 309 139 1701960 (Jan.-Harch) (615) (310) (140) (170)

Source: UN Statistical Bulletina) Conposition of imports per mission estimate.

7. TITards of 8.2 -11illion tons of er-port/impart cargo moved through theports of entry in 1958/59, the latest year for which compLete data are avail-able (Appendix 1). This traffic was distributed between Mlanila and the out-ports as follows:

---- Pillion metric tons-----Manila Outports Total

Imports: Liquid bulk petroleura a) 0.7 1.3 2.0Dry cargo a) 1.3 o.6 1.9

Total 200 1.9 3.9

TNports: Dry cargo 0.4 3.9 4,3Total 7277

a) lNission estimate.

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8. Present traffic patterns do not diverge materially from thoseof 1958/59. About nine-tenths of the export volume originates at theoutports from which most is carried to overseas markets by deep-seafreighters, although part goes by inter-island craft to Manila fortrans-shipment. Roughly 70% of all imports by volume and 80-90% byvalue are discharged at public and private port facilities in the Manilaarea for local consumption or processing, for distribution to inland Luzon,or for trans-shipment to other Philippine ports.

9. Complete current statistics of coastal and inter-island trafficare unavailable, but in 1958/59, 1.9 million tons were loaded and about2.1 million tons discharged at the largest ports concerned (Appendix 1).Less than one-tenth of this traffic normally originates in the Manila area,but 15-20% terminates there.

10. About 5,700 ships a year call at Philippine ports to load exports,discharge imports, or both. Typical ocean-going freighters and passengerships (Appendix 2) range from 3,800 to 17,500 NRT and draw up to 31'7-3/4"fully laden. Coastal and inter-island traffic is carried by a fleet of 171ships with an average tonnage of 30f( NWT and a maximum draft of 23'5".1

11. Most of the inter-island and coastal ships are converted smallcraft, built during the war, which are now coming due for replacement. Theshipowners operating domestic services have prepared 5-10 year fleet modern-ization programs to start as soon as finance can be arranged. The newvessels would be, for the most part, 1,600 GET cargo-passenger ships draw-ing about 16', but would also include some small tankers, bulk carriers,and passenger ships.

12. The Bank has been approached by the Government to finance theforeign exchange costs of the planned modernization of the inter-island andcoastal fleet. A definite project which could amount to US$50 million worthof new shipping is now being prepared on the assumption of adequate depthsfor the craft at the outports as well as Manila.

Organization of Public Ports

13. The Philippine ports are administered by various governmental andmunicipal entities. The Customs Department is responsible by law for opera-ting all the national ports, but delegates all or part of these responsibili-ties at some of them, including Manila and Cebu, to other entities. Cargohandling at Manila is done by the Manila Port Service, a subsidiary of theGovernment-owned Manila Railroad Company. A similar arrangement exists atCebu. At ports where no customs personnel are stationed, all operationsare carried out by the local municipality or by the local staff of the Bureauof Public Works (BPW), a bureau of the Department of Public Works, Communica-tions and Transportation.

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14. The Division of Ports and Harbors (DPH) is a division of thisBureau. As such, DPH is responsible for (i) dredging the national andmunicipal ports and harbors and (ii) planning and design of port ex-tensions. However, the actual construction of the civil works andtheir later maintereance is in the hands of the local engineers of theBureau itself. Structures are maintained to adequate standards.

15. The DPH funds for planning, constructing, maintaining, and dredgingports come from assigned port-user charges, as explained later. The portoperational costs of the Customs Department are paid entirely from budgetappropriations. It is the Government, not the BPW or DPH, which borrowsfor port development and construction.

16. The DPH personnel are technically competent. Many of the staffhave had training, abroad or at home, from U. S. port engineers. However,the general standards of operating and maintaining the Division's dredgingequipment are not at present adequate.

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fII. DREDGING REQUIREIEN TS

17. The DPH has worked out a schedule of the dredging it proposes tocarry out during the next 10 years. The bulk would be navigational dredging toreduce maintenance arrears, affect inprovements, and ensure normal maintenance.Part of the planned dredging would serve existing port facilities and partwould serve new facilities being constructed.

18. The present maintenance arrears trace back to a complete cessation ordredging during the war. They have continued to grow over the past 15 yearsmainly because of the inadequate capacity of the dredging equipment at theDPHts disposal.

19. The essential, priority work which should be carried out as soon aspossible totals approximately 60 million cubic meters. About half t.lis amourtwould be dredging to make good arrears of maintenance and to improve port chan-nels and turning areas and the other half would be routine maintenance dredgingto off-set siltation over the ten year period. Details of the individual worksand an estimate of progress are given in Appendix 3.

20. 1Manila alone accounts for tt'ro-thirds of the necessary dredging on as-count of maintenance arrears and ninor improvements and for half the necessarydredging on account of ordinary maintenance (Appendix 3). The planned works atthe outports as well as IIanila are adequate for the shipping which would usethem in the next 10 years, but the phasing of the works would be reconsideredif the inter-island fleet is modernized rapidly with the help of a Bank loan orotherwise. Some of the improvement works at Manila and various outports in-volve reclamation by hydraulic fill; sufficient material would be availablefrom the programed dredging for navigational purposes to provide the neededquantities.

21J The DPH proposes to dredge the channels and areas of lhanila Harborused by international shipping to a depth of 40 feet below low water. Thisdepth is adequate for the deep-sea freighters calling at Philippine ports andwould provide a margin for silting. The proposed depth for international ship-ping in the outports is 35 feet below low water in most cases,a minimum require-ment. Denths varying between 15-25 feet are proposed for the facilities usedw '-inter-island shipping. These depths are justified by the draft of exist-ing and contemplated inter-island vessels, and would include a margin for silt-ing.

22. Following on the Mission's appraisal of the project, attention wasdrawm to various items in the DPH dredging program which appeared to requirefurther study. The Government has agreed to arrange for these items to be re-examined in the light of the Mission's comments, The Govern;nent has also unde-.taken that in the event of any substantial changes in the program becoming nez>-essary, it will consult with the Bank before putting them into effect.

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IV. THE PROJECT

Equipment lNeeds

23. The loan project will be the dredging of the Philippines public portsto provide depths of water adequate for the navigational needs of inter-islandand ocean-going snipping and dredging thereafter to maintain such depths, towhich end certain dredging and ancillary equipment will be acquired, operatedand maintained and a repair slipway built and operated.

24. The DPH has in service at present a dredging fleet and auxiliaryequipment as listed in Appendix 4. The main items are:

One sea-going hopper dredge, 720 cu.yds. hopper capacityTwo 20-in. cutter suction dredges with pipelinesOne 12-in. cutter suction dredge with pipelineOne bucket dredgeThree 3/4 yd. dipper dredges

Miuch of this equipment is obsolete, and certain items are in bad condition.Effective working capacity is only a fraction of the essential dredging tobe done.

25. To supplement the existing eouipment, (i) the Government recentlybought a second-hand bucket dredge to be delivered in 1961, (ii) the Govern-ment recently signed a contract wqith illicott IHachine Corp. USA for a new20-in. cutter suction dredge and pipeline to be delivered in 1963, and (iii)the National Shipyards and Steel Corporation (MASSCO), a Government-ownedshipbuilding and repair organization, is building some hopper barges for DPHuse. The foreign exchange cost of (ii) will be met from an Ex-Im Bank loannegotiated last year for the expansion of Manila Nlorth Harbor, a project onwhich the new dredge will be used exclusively for some years.

26. There would still be insulficient working capacity after the aboveequipment had been commissioned because much of the present capacity consistsof over-age items due to be scrapped in the next few years. The Governmenthas therefore arranged for the purchase of enough additional dredging andancillary equipment to balance capacity with needs. This equipment is listedin paragraph 28 below and in Appendix 5.

27. DPH dredging equipment is at present repaired in the ship repair es-tablishments of NASSCO. In the past this arrangement has been unsatisfactory,since NASSCO were unable to give DPH equipment repairs sufficient priority a:dthe standard of work done was also inadequate. The Government accordingly i: -tends to build a slipway and workshop to be operated by DPH solely for the ro-pair of their floating craft.

28. The Government has asked the Bank to consider a loan for the foreionexchange costs of the equipment and slipway as detailed hereunder and in Appen-dix 5. The total cost would be US`>9 85 million equivalent, including a foreLoncurrency corponent of US$8.5 million equivalent.

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Foreign LocalCurrency Gurrency Total

TUS: equivalent 000 Cost Cost Cost

(a) 1 Sea-going hopper dredge, 1,000 cu.yd.hopper capacity 2,433 - 2.433

(b) 1 20-in. cutter suction dredge withpipeline 1,200 276 1,476

(c) 3 14-in. cutter suction dredges withpipelines 1,414 - 1, 4Ji

(d) 1 Grab hopper dredge 673 - 673(e) Ancillary floating equipment and

spare parts 942 - 9h2(f) Slipway and workshop 981 791 1,772(g) Consultantsf charges, persormel training

costs and miscellaneous costs 180 100 280(h) Contingencies 677 183 860

Total 8,500 l,0 9,850

V. JUSTIFICATION OF PROJECT

Operational Needs

29. The present DPH equipiment has a working capacity of about 2.4 millioncubic meters a year. Allowing for items now being procured and for existingitems which ought to be scrapped in the next few years, working capacity as of1963/64 would be 6.4 million cubic meters a year. This should be enough toeliminate, by 1969/70, the bulk of the maintenance arrears now outstanding andto complete all the improvement dredging now deemed essential (Appendix 3).The annual workload thereafter would be about 3 million cubic meters of normalmaintenance dredging plus such minor improvements, not yet in sight, as DPH maylater have to undertake. There would be available for this job, sufficientequipment (after allowing for obsolescence) to dredge about 4.4 million cUbicmeters a year. Bearing in mind the need for reserve capacity to provide forfluctuations in the rate of siltation and unforeseen requirements, this capac-ity would be appropriate to the estimated annual maintenance dredging togetherwith a limited volume of minor improvement dredging as described above.

30. It is a widespread practice for public bodies in charge of naviga-tion channels to do maintenance works and minor improvements with their oTndredging equipment. The practice is operationally sound because maintenanceand improvement dredging generally consists of many small jobs, often widelydispersed. Work is liable to be interrupted to suit the needs of shipping,and may have to be done at short notice when sudden shoaling occurs as a re-sult of floods or storms. Although occasional contract bids may be lower thaidepartmental costs, contract dredging for maintenance and ninor improvementswill be more expensive in the long run. Moreover, at times of active world-wide demand for dredges, an authority or department without equipment may fin3itself unable to cope with emergencies, because contract equipment is ue:a>iable, or available only at a prohibitive cost.

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31. The DPH is therefore operationally justified in havinrg its onm 1eeeFfor navigational dredging. It is not procuring more equipment than it needsfor essential maintenance work and minor improvements. It would be using itsold and new equipment for essential dredglng only-.

32. The provision of a slipway and workshop exclusively for the use ofDPH floating equipment will be well justified operationally. In future theDPH fleet, which includes some craft used for construction purposes not listedin Appendix 4, will total upwards of 120 items, a number sufficient to keepthe slipway occupied to capacity throughout the year. As stated in paragraph27 above, NASSCO is unable to give DPH adequate service in respect of the re-pair of the equipment. Since other repair facilities are limited, only by theprovision of the proposed slipway and workshop can the prompt carrying out ofrepairs, programed so as to permit a maximum output from the dredging fleet,be assured. It is estimated that repair work carried out by DPH will be atleast as cheap as that done by NASSCO, while at the same time being of a moresatisfactory standard.

Economic Benefits

33. Almost the entire foreign trade of the Philippines is ocean-borne.So is a large part of its domestic trade, including almost the entire inter-change of goods between the various islands and much of the interchange betweenthe coastal toTms of individual islands.

34. The main exports of the Philippines are copra, sugar, hardwood,abaca and some minerals. They are sold overseas in highly competitive worldmarkets. It is essential that they reach their distant markets at reasonablecharges for ocean transport in order not to prejudice the future growth of ex-ports which have increased almost 50% since 1953.

Index Numbers of Export Volumie

CoconutYear Total Products Sugar Abaca Wood

1953 100 100 100 100 1001955 121 129 118 100 136l958 10 133 124 83 2571959 139 113 119 87 2851960 147 129 180 83 284

Source: I17 - International Financial Statistics.

35. The Philippines depend entirely or largely on imports for various es-sentials such as petroleum, machinery, vehicles, wheat, chemicals, paper, yai nand fabrics. Excessive charges for ocean freight would tend to raise the cc'tof imported goods thereby af fn_ting foreign exchange boldin-, productive eifficiency, and living st-ndard. 7ha interests of the countly's internal tradecall for low cost inter-island and coastal shipping.

36. Channels and turning areas dredged to shallower depths than the pro.-posed depths of 40, 35, and 15-25 feet cculd deter the growth of foreig:i ;ar.domestic trade by making goods more costly becaase of (a) higher ocean frci;b{

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rates to offset delays awaiting a berth or the tide of large, fully-ladenships; (b) the need to trans-ship a larger fraction of the export/importgoods via Ilanila at higher haulage and handling costs than for direct carriageto or from outports, and (c) the need to lighter more of the cargo at higlhercosts than for alongside loading and discharge.

37. Each component of the dredging program will contribute materially tGmore efficient, lower cost transportation of foreign and domestic trade. Thearrears of maintenance dredging at Manila and the outports ought to be elimi-nated as rapidly as practicable in order to speed ship turn-around and reducecargo handling costs. The channels and turning areas of miany ports ought tobe deepened beyond pre-war standards in order to facilitate the proPpt passageand ready maneuver of large vessels already in common use. Normal maintenancedredging ought to be raised to an annual average of 3 million cubic meters inorder to offset recurring natural siltation.

38. The economic benefits of the dredging program cannot be definitelyevaluated. However, in return for a capital outlay of the order of US$10 mil->lion equivalent for the Bank-financed and other new dredges, the DPH would beproperly equipped for dredging which would safeguard the world market positionof Philippine copra, sugar, abaca, hardwood, etc. as affected by ocean trans-port, trans-shipment, and cargo handling costs; which would keep dowm theprices of essential imports as affected by the same factors; and which wouldstimulate the growth of inter-island trade. These are large benefits indeedfor the amount of investment involved.

Financial Aspects

39. The DPH could do maintenance and improvement dredging with the Bank-financed equipment at average working costs of P 0.76 a cubic meter before de-preciation and interest, but after adequate allowiance for maintenance and re-pairs. If the work were to be let out to foreign contractors, the contractprice might well be P 1.90 a cubic meter. The cash savings for 2.8 millioncubic meters a year would approximate US%1,060,000 a year on a 3:1 valuationof the peso. This is equivalent to 1212% annually, counting amortization aswell as interest over the 20 year economic life of the equipment. Assuningthat 6% ought to be earned, the cash savings would pay for the equipment in9-10 years. Ihe financial return would therefore be satisfactory.

VI. PROCUREDOITT AND FINALNCE

Supply Contract

40. In August 1960, the Government signed a contract with a Dutch firm,Industriele Handels Combinatie (IHC), for dredging equipmento The contractincludes all the dredging equipment covered by the loan request with the ex-ception of the 20-in. cutter s-uction dredge with pipeline, and its spare partE.i,e. it covers items (a), (c), (d) and the greater part of item (e) in the tab-ulation given in paragraph 28 above. The individual iteims are due to be com-pleted ready for trials in Holland at various dates from July/August 1961 toAugust/Septernber 1962

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41. The contract specifies a basic price of $j,265,10o c.i.f. Manila,payable in U. S. dollars. The purchase was to be financed by progress pay-ments during construction totaling US$1.5 million, with an 8 years' suppliers'credit for the remaining US$3.8 million. However the contract contains aclause providing that in the e-vant of an alternative source of finance beingfound, arrangements for cash payments of the total cost would be drawn upunder a supplementary agreement. The Government and IRC have already con-cluded an agreement specifying these arrangements, which will come into forceif a loan is made.

42. About 80% of the contract price covers the cost of a sea-goingharbor dredge and three 14-in. cutter suction dredges, the contract for whichwas awarded to IHC after obtaining competitive bids, based on specificationsof performance and general dimensions, from selected firms in the main dredge-building countries. The remaining minor items were included in the contractat negotiated but reasonable prices after the bids for the main items hadbeen evaluated.

43. The suitability of the equipment has been confirmed by a Consultan`whom the Government retained at the suggestion of the Bank. His report recom-mends some minor design changes, not apt to affect costs materially. The Gov-ernment has agreed to arrange for these changes to be carried out as far asis practicable.

44. The IHC contract stipulates that the craft shall be built under thespecial Survey of Lloyds Register and authorizes the borrower to appoint twoinspectors to watch construction. It would be desirable that the inspectionarrangements include periodic visits by a dredge design specialist for thepurpose of verifying that the detailed layout is satisfactory from the opera-ting point of view. The Government has agreed to arrange this.

45. Item (b) of the tabulation given in paragraph 28 above, one 20-in.cutter suction dredge with pipeline, was included in the bidding referred toin paragraph 42 above, on the basis of which an order will be placed. In thecase of this craft, assembly will be carried out in the Philippines usingimported materials and equipment. The design proposed by the recommendedbidder was examined by the Consultant referred to in paragraph 43 above, whorecommended minor changes which the Government has agreed to effect. Adequatearrangements will be made for inspectiorn during construction, but as DPEalready operates craft of similar design and manufacture, visits by a designspecialist as referred to in paragraph 44 above, will not in this instancebe necessary.

46. The slipway and workshop will be designed by the engineering stafi'of DPH. This staff is competent and has already successfully designed sub-stantial port works in various Philippine ports. However the design of theslipway and workshop are specialized matters in respect of which outside ad-vice is desirable, and the Government has agreed that the DPH designs will bereviewed by an independent consultant before the work is proceeded with.Supervision of construction will be by the field staff of the Bureau of Publi-Works, which is competent for the task.

47. Procurement of all equipment not yet ordered, and the ar7-anrgeLerfor any construction contracts plThced in connection with the slip,y ayshop, will be ori thb basis of international coankctitive bidding.

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Financial Arrangements

48. Besides providing the local currency costs of assembling and commis-sioning the new equip.nent, the D?H will require substantial sums of local cu2-rency, over the life of a Bank loan, to operate, repair and maintain the equip-aent and to reimburse thle Government for the debt service. All the necessaryfunds are expected to become available as and when needed from a Port WorksFund created some years ago.

49. By law, there are paid into this Fund (i) the wharfage, berthincg andstorage charges at the public ports; (ii) a portion of the net income fromcargo-handling (so-called "arrastre") by public port services and (-ii) a per-centage of the rentals of leased public lands in port areas. The presentsources of revenue will be enlarged, if legislation now pending is enacted, toinclude a portion of proposed new e,xcise taxes on liquid fuels,

50e, By law, stipulated percentages of the Fundts revenue have to be ap-plied, and can only be applied: first, to the service of Government debt fo:'port development, construction and improvem-ent; then to surveys and studiesof ports and the maintenance of port works "including the purchase of necessaryequipment'"; and finally to pay for port improvements as authorized by Congress.The first priority charges on the Fund at present are (i) the service of aUSMM.5 million Ex-Im Bank loan for enlarging ikIanila rlorth I-arbor, (ii) aUS;3le2 million portion, assigned to ports, of a DLF credit for spare parts, axid(iii) P 10 million of internal bond issues for port development.

51. The Fund is a separate, cumulative and non-divertible account in tbeIlational Treasury. The costs of operating, maintaining, and repairing theproject equipment as well as the service of a Bank loan for its purchase wouldbe authorized charges on the Fund.

52. The income account of the Fund to date and forecasts of future reve-nue and expense are summarized in Appendices 6 and 7. According to DPH esti-mates, which seem reasonable, annual revenue would increase gradually fromabout P 22 million at present to P 35 million 10 years from now, while annualcharges, including the service of the proposed loan, would increase concurreait-ly from about P 20 million to P 32 million. Total expense would exceed totalrevenue by approximately P 6 million only over the entire 10 year period, re-ducing the present working balance of P 13 million to about P 7 million, astill substantial figure. There is thus good reason to believe that sufficientfunds would remain available for the operation and upkeep of the Bank finan=cdequipment.

53. Nevertheless, as a precaution against possible adverse changes, as-surances have been obtained from the Government that sufficient local currer.,yfunds will be made available as and when needed for the operation and upkeep CZthe Bank financed equipment.

- 12 -

VII. IMINTENAJ'CE, AND OPE&RATI0 OF EQtYI-EP T

54. As stated in paragraph 16 above, wh1ile individually the DPII personnelare technically competent, the present standard of dredge maintenance and opera-tion is inadequate.

55. As regards maintenance, this is to a considerable extent because therepair service provided by NASSCO is unsatisfactory, and because the lack ofsufficient dredging capacity leads to pressure to defer repairs which it isdifficult to resist. The availability of additional craft will eliminate tWhispressure and the provision of the slipway and workshop will make it possible toeffect repairs promptly and to the required standard. However, the day-to-dayrunning maintenance of the present equipment is also unsatisfactory. Similar-ly, in respect of dredge operation, although the availability of additionalequipment and adequate repair facilities will remove difficulties which havehitherto militated against effective operation, there will still remain a needto improve the co-ordination of operations and improve operating methods.

56. The Government is. aware of this position and appreciatesthe need forimprovement. As a measure to this end, it has agreed to appoint, in consul-tation with the Bank, one or more qualified persons to advise on dredge mainte-nance and operation and on the operation of the repair facilities. It willalso arrange for the builders to provide certain additional key crew members totrain personnel in the use of the newi equipment.

57. Almost all the project equipment would be floating equipment liableto wqreck and total loss at any time. Arrangements will therefore be made tokeep it insured for its foreign exchange value during the life of the loan.

VIII. C.ONCLUSIOT ,S AIM RECOO1SDATIONS

53. The dredging program on which the loan would be based, is justifiednavigationally by the needs of the overseas and inter-island shipping whichuses the Philippine ports. It is well-founded economically as expenditurewhich would safeguard world markets of Philippine exports, help keep down thecost of essential imports, and promote internal trade between the islands.

59. There are sound operational reasons why DPH should have its owndredging fleet for maintenance work and minor improvements. The dredges forwhich a Bank loan has been asked and the other new dredges now on order areneeded for, and would be fully occupied in, essential maintenance and improve-ment work. The saving to DPH resulting from using these dredges instead ofletting the work to contract would afford a good financial return. The provi--sion of the proposed slipway and workshop is well justified as a measure toensure adequate maintenance of the dredging fleet and an optimum output from :

60. The dredging and ancillary equipment to be purchased under the loanis technically suitable, this having been confirmed by -ndependent expert ad-vice. The slipway and workshop have been designed by the DPH staff who arecompetent to do so, but in view of the specialized rnature of the workl a Cons-sultant will review the designs before the work is put in hand, Construc4aionof the slipway will be supervised by competent staff,

- 13 -

61. A contract, awTarded after international competitive bidding, has al-ready been placed for most of the dredging and ancillary equipment. The con-tract called for deferred payment under a suppliers' credit but included aclause providing for a supplementary agreement permitting cash payment shouldalternative finance be found, An agreement has already been concluded specif,y-ing the cash payment arrangements which will be applied if a loan is made. Cr-'ders for the remaining equipment and construction contracts for the slipway andworkshop will be awarded on the basis of international competitive bidding.

62. Present standards of equipment maintenance and operation are inade-quate. The provision of additional craft and repair facilities will aid im-provement in this respect but will not of themselves entirely correct matters.The Government appreciates the position and as a measure to effect further im-provement has agreed to engage experiencod engineers to advise on maintenanceand operation and additional qualified personnel to train crews.

63. Besides providing the local currency costs of the project, the DPHwill need substantial annual sums of local currency to operate, maintain, andrepair the equipment and to reimburse the Government for the debt service. 6cf-ficient funds for these purposes promise to become available through the PortWorks Fund. The Government has undertaken to provide the necessary funds fro.mother sources should this prove not to be the case.

64. The project is suitable for a loan of USIQ8.5 million. A 17 yearloan, including a two-year period of grace, would be appropriate in view ofthe economic life of the equipment and the scheduled timing of deliveryO,

ForuiZn Trade ThroaQTi Philippines Pcrts _____ - _ _ _ -- _ _ _ -- - a-,),- P 1i

II M P O R T s J L X P x R T S

Custcms '_____Vessels _ _Cargo__ 'Vessels---- Cargo---------District Arrivals 000 NRT 000 MT P Million Departures 000 NRT 000 MT P Million

Hqanila 1,812 7,486 2,077 859.0 1,809 7,466 445 341.6Ctbu 611 2,462 547 67.7 616 2,475 345 114.8Iloilo 431 1,705 160 23.4 427 1,701 850 176.2Davao 372 1,103 808 49.9 372 1,103 n.a. n.a.San Fernando 33 136 137 10.2 218 856 563 43.9Cagayar4 de Oro 500 1,661 16 9.1 502 1,667 121 78.6Taclotaan 300 928 n.a. 0.0 300 928 n.a. 0.0Tabaco-Legaspi 173 829 18 5.5 173 829 120 49.5Jolo 897 13 n.a. 0.5 897 13 n.a. 5.8Zamboanga 242 1,325 n.a. 0.3 409 1,250 613 52.6J. Panganiban 164 570 76 0,2 159 553 1,113 23.6DLwaguete 84 345 18 1.6 84 345 n.a. 35.4Batangas 52 453 n.a. 44.4 83 344 135 33.2

To tal above 5,671 19,015 3,85?2/ 1,071.8 6,049 19,529 4,305 955.2

jource: Division of Ports and Harbours.a' Includes bulk liquid petroleum (about 2.0 million metric tons)

brought in by tankers: No data available on number and capac-ity of tankers aeparttely or on. distribution of tanker traffic by ports.

b! Except cargo discharged at Tacloban, Jolo, Zamboan6a and Batangas./ Except cargo loaded at Davao, Tacloban, Jolo and Dumaguete.di Except cargo loaded at Davao.

Page c

Domestic Trade Through Fhilippines Ports1955/59

INBOUND OUTBOUND

Vessels Cargo Vessels Cargo

Arrivals 000 NRT 000 MT P Million Departures 000 NRT 000 MT P Million

Manila 7,185 1,606 378 D227 .7 7,272 1,633 159 R211.9

Cebu 9,948 2,341 749 278.6 10,161 2,347 605 225.4

Iloilo 6,689 977 269 69.2 6,756 1,008 153 50.7

Davao 1,301 429 139 75.6 1,295 424 172 87.9

Zamboanga 4,396 1,010 92 43.6 5,293 1,009 641 7.1

Cagayan de Oro 966 404 62 27.0 966 404 52 12.2

Tacloban 3,911 296 46 27.0 3,911 296 17 10.2

Jolo 1,376 223 57 20,2 1,376 223 30 15.1

6an Fernando 224 61 76 6.o 127 21 (a) (b)

Jose Panganban 125 35 14 5.3 125 35 5 2.8

Tabaco-Legaspi 2,496 167 212 21.5 2,496 167 17 8.2

Total above 38,617 7,550 2,094 801.7 39,778 7,568 1,851 631.8

Source: Division of Ports and Harboursj/ Less than 500 MT;b/ iess than R50,000.

Appendix 9

Shipping Using Philippine Ports

Typical Larger Ocean-going NRT Draft with Full LoadPassenger Vessels and Freighters

Vessel

Caronia 19,570 31 ft.-7 in.Keystone Mariner 7,596 31 fto-7-3/4 in.Olga Maersk 3,788 27 ft.-81 in.Orcades 15,743 31 ft.-OC in.Orsova 15,878 30 ft0-llj in.President Cleveland 7,768 30 ft,-l-7,sdin.

Inter-Island Fleet, mid-1960

No. of Vessels

3 Over 2,000 23 ft.-5 in.2 1,500-25000 21 ft.-6 in.-18ft.-32in.3 1,000-1,500 18 ft 7 4-3/4 in.

-16 ft.-6-3/8 in.7 500-1,000

156 o-500

Total number of vessels 171Total net registered tonnage 50,832

Appendix I

10-Year Program of Essential Dredgingin Principal Philippine Ports

Total Program by Works and Ports

1,OO cubic meters (in situ)

Maintenance Backlog Estinated Annualand Comnitted Improve- Maintenance

Port menl, Dredging Dredging

Manila (South Harbor) 11,400 1,005Manila (North Harbor) 10,200 556Pasig River (Manila) 1,000 93Cebu 2,200 172Iloilo 500 120

Palupandan 600 42Tacloban 3,400 400Catbalogan 200 18Davao 200 14Aparri 300 138

Butwin 200 47Zamboanga 100 21Calbayog 200 15Legaspi 100 30Capiz 100 20

30,700 2,691

say 30,000 say 3,000

Source: Prepared by ilission from DPH data,

Appendix 3Page 2

Dredging Program in Principal Philippines Ports

Scheduled Timing 1961-70 1,000,000 curn. (in Situ)

1960/ 1961/ 1962/ 1963/ 1964/ 1965/ 1966/ 1967/ 1968/ 1969/ 1970/Year 1961 1962 1963 1964 1965 1266 1967 1968 1969 1970 1971

Outstandingat beginningof year 300 30.6 29,7 27.1 23.7 20.3 16.9 13.5 10.1 6,7 3.3

I,essdredgedduring year 2^l4 3.9 5.6 604 6.4 6.4 6.4 6.4 6.4 6.4 3.3

27.6 26.7 24.1 20.7 17.3 13.9 10.5 7.1 3.7 0.3 -

Addsiltationdilring year 3.0 3.0 3.0 3.0 3,0 3.0 3.0 3.0 3.0 3.0 3,0

Outstandingat end ofyear 30e6 29.7 27.1 23.7 20.3 16.9 13.5 10.1 6.7 3.3 3.0

~...c DPI est30ate m e b

IzcLrce: DPX estirnates modified by TOD.

Appendix 4

Division of Ports and Harbors - Non-Project Dredging E mnpetin Service or on Order

Sl0No. No. Description of Item Age Condition

Dredging Equipment in Service

1~ 1 Sea-going hopper dredge, 18 in.suctim 15 yrs Very poor, almost720 cu.yd. capacity hopper derelict.

2, 1 Cutter suction dredge with pipeline, 3 Fair20 in. dia. suction

3. 1 Cutter suction dredge with pipeline, 47 Falir, needs re-20 in.dia. suction steam driven boilering

4.. 1 Cutter suction dredge with pipeline, Unkncwn Vexy poor, aLnost12 in. dia, suction derelict

1 Bucket dredge 12 Fair6. 3 3/1 cu.yd. dipper dredges 10 Fair7 2 1/2 cu. yd. grab dredges 8 & 14 FairC,, 5 500 cuem. hopper barges Fair

6 500 cu.yd. " " - Unserviceable10. 65 10 cu.m. dumping scow 3 Fair

Ancillary Equipment in Service

='. 7 Launches 6-35 tons - Poor to fair.2. 11 Tugs 45-229 tons Up to 15 yrs Fair

13. 3 Anchor barges - FairUl. 2 Oil barges - One poor, one fair157 4 Cargo barges - Fair:6., 1 60 ton floating crane 16 Fair1t. 1 17 ton floating crane 2 Fair

Equipment on Order but not included in Bank Project

lb., 1 Second-hand bucket dredge19. 1 20 in. cutter suction dredge (Ex-Im Bank loan)20. 2 500 cu. m. hopper barges (being built by NASSCD)

i The above ancillary equipment is used partly to attend on the dredgingfleet and also for work in connection with port construction, portoperations, and the requirements of other Government departments.

Appendix 5

Estimated Cost of Project

000 US$ Equivalent

Foreign LocalSi. Currency Currency TotalNo. No. Description of Item Cost Cost b/ Cost

1 1 Seagoing hopper dredge1,000 cu.yd.hopper capacity 2,433 - 2,s433

2 1 20-in. cutter suction dredgewith pipeline 1,200 276 1,476

3 3 14-in. cutter suction dredgeswith pipe'lines 1,414 - 1,0 4

4 1 Grab hopper dredge 673 - 6735 1 lWork launch 39 - 396 2 Dredge tenders 120 - 1207 1 ~40-ton floating crane 408 - ho88 2 Sets echo sounding equipment 10 - 109 - Spare parts for above equipment 365 - 36510 - Slipway and mechanical equip-

ment for same 696 624 1,32011 - Workshop and machine tools for same 285 167 452l2 - Consultantst charges and personnel

training costs 180 50 23013 - Miscellaneous costs in connection

with commissioning and install-ing equipment - 50 50

lt - Contingencies a/ 677 183 860

Total 8,500 1,350 9,850

Source: Division of Ports and Harbours, modified by Bank staff.

a/ Includes USS250,000 for modifications to dredging equipmentrecommended by dredge design consultant.

bJ Converted at official rate of USdl.100=P 3.00

Port Vcrks Funds - Actual Revenue and Expenditure1954 - 1960 a/

- 1,000 Pesos -

1954/55 1955/56 1956/57 1957/58 1958/59 1959/60

Total Revenue 4,737 9.818 11,739 13,354 14.057 15 IZ39

Ex enditure Maintenance 2,850 2,367 3,494 8,277 5,878 n.a,

New Construction and Loan Service 2,621 4,520 3,506 3,168 3,740 n.a.

Total Expenditure 5,471 6,887 7.000 11.445 9,618 2,.626T1

Surplus of Revenue Over Expenditure During Year (734) 2.931 4,739 1,909 4,439 (6,.Lu

Cumulative Surplus of Revenue Over Expenditureby End of Year 6,320 9,251 13,990 15,899 20.338 13,L9t

a/ W4harfa-e charges only. From 1960/61 on receipt will also includeHarbor fees, Berthage charges, Storage charges, Share of arrastrecharges, and 25%o of rental of port lands.

b/ Reflects abnormal expenditure including purchase of two secondhandbucket dredges and payment for Rader and Stanford Research Institutereports.

Source: DPH

Appendix 7.

Port Works Fund - Estimated Revenue and Expenditure 1960/61 - 1969/70

- 1,000 Pesos -

1960/61 1961/62 1962/63 1963/64 1964/65 1965/66 1966167 1967168 1968/69 1969/70

Balance at Start of Year 13.494 15.364 15.611 15.670 15,154 9.450 5.472 2.694 2.434 4.278

Revenue durinn earlaws RA 2694 a 100 100 100 100 100 100 100 100 100 100

Law RA 2695 bJ 21.900 23.100 24.200 25.926 27.126 28.852 30.052 31252 33.356 34.556

Total Revenue Available 35,494 38,564 39,911 41,696 42,380 38,402 35,624 34,046 35,890 38,934

&xpenditure during yearLoan interest and amortizationEx-Im and DLF loans gJ 126 302 1,998 2,826 5,177 5,177 5,177 4,412 4,412 4,412

Local bond issues 2,120 523 523 523 523 523 523 523 523 523

Proposed IBRD loan /J - 375 504 942 2,509 2,509 2,509 2,509 2,509 2,509

Central Bank charges, etc. e/ 25 742 1.184 956 1.426 1426 1.426 1.273 1.273 1.273

Total 2,271 1,942 4,209 5,247 9,635 9,635 9,635 8,717 8,717 8,717

Surveys, Studies and MaintenanceSurveys, studies and administration 854 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Maintenance of structures 6,930 4,342 3,000 3,000 3,000 3,000 3,000 4,ooo 4,000 4,000

Dredging, including improvement and

new dredging 3330 3,894 5,157 6,420 6,420 6,420 6,420 6,420 6,420 6,420

Lighthouse upkeep 245 75 75 75 75 75 75 75 75 75

Total 11,359 9,311 9,232 10,495 10,495 10,495 10,495 11,495 11,495 11,495

New ConstructionPort of Manila, including local currency

cost of IBRD and Ex-Im projects 2,300 5,40o 4,500 4,500 4,500 4,500 4,500 1,000 1,000 1,000

Other national ports 1,850 4,000 4,000 4,000 5,000 5,000 5,000 6,ooo 6,000 6,000

M?nicipal ports 2,000 2,000 2,000 2,000 3,000 3,000 3,000 4,000 4,000 4,000

Lighthouses 350 300 300 300 300 300 300 400 400 400

Total 6,500 11,700 10,800 10,800 12,800 12,800 12,800 11,400 11,400 11,400

Total Expenditure Incurred 20.130 22.953 24.241 26.542 32.930 32,930 32.930 31.612 31.612 31.612

Balance at End of Year 15.364 15.611 15.670 15.154 9.450 5.472 2.694 2.434 4.278 7.322

Source - DPH estimate adjusted by Bank staff.2 Wharfage fees.b Sum of (i) harbor, berthing, tonnage and storage fees; (ii) arrastre charges; and (iii) rentals.

2/ Calculated at official conversion rate of US$1.00=p 3.00 .A| 5-3/4% interest and repayment in 31 equal semi-annual payments commencing September 1963 assumed for purpose of computation.

2 Includes thi margin fee payable by DPH when purchasing US$ for IBRD and Ex-Im loan service.

REPUBLICOF THE

PHILIPPINESPrincipal Ports

N San Forindo L U Z ON

Manila

Jose Pongorn.bon

No sugb u

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~~~~~~~CotbologonS v7tCapizC.t l

PANAY

S~~~~s U U SE _ ilgn

Puerto Princeso~~~~~~~~~~~~~~~~ul

S U L U SE A gvndr

(} < ~~~~~~~~~~~~~~M I N D A N A O 0

:CagoYon de Sulu Dov

0 40 s0 020 IS0

Jobr CELEBES SSA

JANUARY 1961 IBRD 776