Document of the world bank

Document of

The World Bank

FOR OFFICIAL USE ONLY

MICROFICHE COPY

Report No. :10990 PO Type: (PCR)T itle: COAL HAN)DLING PRUJECT LN 2521- Report No.10990Author: DE WEIL,LFh 0Ext.:31708 Room:T9102 Dept.,:OEDD3

PROJECT COMPLETION REPORT

PORTUGAL

COAL HANDLING PORT PROJECT

(LOAN 2521-PO)

August 7, 1992

Infrastructure Operations DivisionCountry Department IEurope and Central Asia Region

This document has a restricted distribution and may be used by rcipients only in the performance oftheir ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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EXCHANGE RATES

Appraisal Year Average 1984 USD 1 = 135 escudos

Intervening Year Average 1985-87 USD 1 = 150 escudos

Completion Year Average 1988 USD 1 = 150 escudos

WEIGHTS AND MEASURES

Metric System British/US System

1 centimeter (cm) = 0.39 inches (inch)

1 meter (m) = 3.28 feet (ft)

1 kilometer (km) = 0.62 miles (mi)

1 square meter (m2) = 10.76 square feet (sq. ft)

1 square kilometer (kM2) = 0.38 square mile (sq. mi)

1 metric ton (m/ton) = 0.98 long ton (1g. ton)

1 liter (L) - 0.26 gallon (G)

GLOSSARY

APS = Sines Port Authority(Administragao do Porto do Sines)

DGP = General Directorate of Ports (Direcgao Geral dos Portos)

DGTT = General Directorate of Land Transport(Direcqao Geral Transportos Terrestres)

EDP = Electric Company of Portugal

(Electricidade de Portgual)

GAS = Sines Regional Council(Gabinete da Area de Sines)

GEP = Council on Studies and Planning

(Gabinete de Estudos et Planeamento)

JAE = Highway Department

(Junta Aut6noma de Estradas)

MIEE = Ministry of Industry, Energy and ExportsMPWTC = Ministry of Public Works, Transport and Communications

MS = Ministry of the Sea

PORTUGAL - FISCAL YA

January 1 - December 31

_ ___~~I

FOR OMCIL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Oirectv.CeralOpefatinm Evaluatimn

August 7, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Portugal Coal Handling PortProiect (Loan 2521-PO)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Portugal Coal Handling Port Project (Loan 2521-PO)"prepared by the Europe and Central Asia Regional Office with Part II of thereport contributed by the Borrower. No audit of this project has been madeby the Operations Evaluation Department at this time.

Attachment

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rThis document has a retricted distribution and may be used by recipients only in the performance|of their official duties. Its contents may not otherwise be disclosed without World Ban,k authorization.

FOR OFCIAL USE ONLY

PROJECT COMLETION REORT

PORTUGALCOAL HANDLING PORT PROJECT

(LOAN 2521 -PO)

* TABLE OF CONTNS

PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EVALUATION SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . ,

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE . . .. . . . . . . . 1

Project Identity . . . . . . . . .. . . . 1

Project Background . . . . . . . . . . . . .. . . . . . . . 1

Project Objectives and Description . . . . . . . . . . . . . . . 2

Project Design and Organization ..... . . 3Project Implementation.. .. 4Results. .. . . . ........ . . . 6Sustainability . . . . . . . . . . . . . . . . . . . . . . . . 9

Bank's Performance . . . . . . . .. . . . . . . . . .. . 9

Borrower's Performance . . . . . . . . . . . . . . . . . . . . 9

Bank-Borrower Relations ............ . 10Consultants' Services . . . . . . . . . . . . . .. . . . . . . 10

Project Documentation and Data ..... . . . ....... . 10

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . . . 11

PART III: STATISTICAL INFORMATION

Table 1: Related Bank Loans . . . . . . . . . . . . . . . . . . . . 12

Table 2: Project Timetable . .. .. ..... . ... .. . .. . 13

Table 3: Cumulative Loan Disbursements . . . . . . . . . . . . . . . 14

Table 4: Project Costs . . .. .. . . . ... . ... .. . . . . 15

* Table 5s: Project Financing .................... 16

Table 6: Status of Covenants . . . . . . . . . . . . . . . . . . . . 17

Table 7: Missions . . . . . . . . . . . . . . . . . . . . . . . . . 19

Table 8s Staf£ Inputs . . .*.... 0 20

MAP: IBRD 18446R - Portugalt Port of Sines and Power Station

rThis document has a restricted distribution and may be used by recipients only in the performanceof their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.



(LOAN 2521-PO)

PREFACE

This Project Completion Report describes the preparation, appraisal,and implementation of a Coal Handling Port Project in Portugal, for which Loan2521-PO in the amount of USD 66 million was signed on October 3, 1985. The loanbecame effective on July 1, 1986, following two deferrals of the effectivenessdeadline to allow time for the Government to clarify the overall structure andmanagement of port operations. Ultimately, USD 62.3 million were disbursed andUSD 3.7 million cancelled. The loan was prepaid on December 1, 1989, 13 monthsbefore the original loan closing date.

The Preface, Evaluation Summary, Parts I and III of the PCR wereprepared by the Infrastructure Operations Division of Country Department I,Middle East and North Africa Regional Office, and the Infrastructure OperationsDivision of the Technical Department for Europe and Central Asia, and MiddleEast and North Africa Regional Offices, on behalf of the InfrastructureOperations Division of the Europe and Central Asia Regional Office, which wasassigned portfolio management responsibility beginning December 1, 1991. Inplace of Part II, the Sines Port Authority (APS), implementing agency andproject beneficiary, has submitted a letter verifying the adequacy and accuracyof Parts I and III. The Dank's contribution to the report was prepared on thebasis of, inter alia, the Staff Appraisal Report, the Loan Agreement,supervision reports, correspondence between the Bank and the Portugueseauthorities, internal Bank memoranda, and consultation with APS officials andstaff, and former project officers, and additional information furnished by APS.

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(LOAN 2521-PO)

EVALUATION SUMMARY

Proiect Obiectives and Imolementation Experience

i. The main objective of the project was to construct a port facility forthe importation of coal for a new power plant situated in the port area at Sines(para. 3.01). Tenders for the coal terminal infrastructure works were received

in January 1984 from six prequalified consortia of contractors representing 24firms from eight countries (para. 5.03). The Government awarded the contract toa foreign firm in joint venture with a Portuguese firm, which had presented thelowest evaluated bid and proposed an alternate quay design. Constructionstarted in Ar-gust 1984, and the marine works, along with the coal storage area,were completed in December 1987 with only minor delays.

ii. To unload and transport the coal to the power plant, situated in theport area. coal handling equipment was to have been procured with supplier

financing (para. 5.04). Bids from three consortia were received in February1987, about one and one-half years behind schedule, for the financing andinstallation of equipment and operation of the terminal on a concession basis.

An inter-agency evaluation committee recommended that negotiations be undertakenwith the lowest bidder to finalize a concession agreement. But the Governmentunexpectedly rejected all proposals, deciding instead to use the new terminal to

cater to general cargo in addition to coal for local power plants and coal

transhipment.

iii. In 1988, when the Sines Regional Council (Gabinete da Area de Sines -GAS), responsible for project implementation, transferred all port assets to theSines Port Authority (Administragao do Porto de Sines - APS), the Governmentdecided that the latter would own and operate its own coal handling equipment.APS engaged consultants to assist in preparing technical specifications for coalhandling equipment. In late 1989, after considerable delays attributable toGovernment decision making, APS tendered for coal handling equipment and inApril 1990, entered into a contract with a concessionaire comprising five local

firms, which would own and operate the equipment. Procurement is proceedingwell, as the first items are presently being delivered and installed, and

operators are being trained.

iv. The project also provided financing for three studies. The first wasa port management study, which was not undertaken (para. 5.05). The Portugueseauthorities took the position that the study was unnecessary since the legal andorganizational structure for APS had already been decreed and measures wereunderway to improve APS's staffing, port operations, and financial structure.

The second study dealt with the repair to the west breakwater (para. 5.06). Thestudy was completed in May 1987, about nine months behind schedule.

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Rehabilitation worku are being executed outside the project scope. The thirdstudy, completed in December 1988, identified and evaluated coal transportationopt'one to serve the future expansion of Electricidade de Portugal (EDP), thenational electric utillty company (para. 5.07).

Results

V. The p.x-ject is being completed at a final estimated cost of USD 164.4

million, compared with the original estimate of USD 163.2 million (para. 6.01).The first phase of coal port operations is scheduled to begin by mid-1992 (para.6.02) and full operation to coincide with the commissioning and first-phase

operation of the Pego power plant in mid-1993. The project facilities have been

adapted to accommodate general cargo, container, and grain traffic.

SustainabilitY

vi. The coal terminal at the Port of Sines is an essential part of the

National Energy Program (para. 7.01). It represents the least-cost solution forsupplying coal to operate the Sines power plant. The terminal has the capacity

to meet the needs of the coal-fired power plant under construction at Pego.

Moreover, the project facilities are being used for coal transhipment, generalcargo, containerization, and grain. The port of Sines can be further developed

according to a master plan that provides for phased expansion in a feasible way.

The sustainability of the project's viability would depend on adequate financial

management of the port, including periodic and timely increases in tariffs.

FindinRs and Lessons

vii. The project raises some serious questions concerning the nature and

scope of Bank involvement in countries at advanced stages of development and

with ready access to other sources of external financing, which can undercut the

Bank's leverage in negotiating and ensuring compliance with key loanconditionalities and in influencing investment decisions. The Coal Handling

Port Project illustrates the difficulty the Bank experienced in seeking

compliance with loan covenants intended to ensure the managerial and financial

viability of the main project beneficiary, APS. Furthermore, at the onset of

project implementation, the Government reassigned implementationresponsibilities from GAS to APS sooner than stipulated in the project

agreements and without consulting the Bank. The Bank was not even party to

subsequent decisions on future port use.

viii. The Bank discussed the above issues with the authorities on a numberof occasions. The Borrower's continual contravention of legal agreements to

adjust tariffs to meet cost recovery objectives and to launch and carry out a

port management study led the Bank to consider euspending the loan (see Part

III, Table 6). However, the Bank concluded that such action would not secure

the desired results; by then the physical components had been completed and most

disbursements made. The substantial delays in reaching an agreement on theacquisition of coal handling equipment resulted in delays in achieving the

physical functioning of the port as intended. On the financial and managerial

side, it was clear at an early stage that the original objectives of full cost

recovery and transparency of Port/Government relationships would not be

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achieved. In retrospect, a "4" rating for the project may have more accuratelyreflected the implementation status (see Part III, Table 7). The lesson learnedis that the Bank should be more selective in supporting project. in countries onthe verge of graduating and limit such eupport to projects where there is aclear and unequivocal "value added" to Bank-financing and full Governmentcommitment to the project's objectives.



(LOAN 2521-PO)

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

1. Proiect Id-ntitr

Namn : Coal Handling Port Project

Loan Number X 2521-PO

Loan Amount i USD 66 mill±on

RVP Unit : Europe and Central Asia

Country t Portugal

Sector s Transportatiou

Subsector : Ports

Projiot Background

2.01 Economic development in Portugal has been well served by the

country's transport system. Continental Portugal has a diverse and extensive

land transport network that connects, through Spain, with the rest of Europe.

The highway network, including municipal roads, comprises some 54,000 km, and

the basic rail network some 3,500 km. Although total land traffic expanded

rapidly in the 1960c and early 1970., the transport network remained virtually

unchanged. Few additions were made to the basic rail network in the last

decade, and the national highway network has also remained essentially the

same. Much of the highway infrastructure and equipuent is overdue for renewal

or modernization. The relative share of the roads for both freight and

passenger traffic has increased and some railway lines now carry little

traffic.

2.02 The ports of Lisbon, Leixoes, and Sines account for about 90% of the

country's total maritime traffic, with the remainder scattered among seven

other mainland ports and facilities on the Azores and Madeira. Lisbon and

Leixoes are multi-purpose ports, whereas, until the late 1980., facilities at

Sines have catered exclusively to oil traffic and petrochemical products.

Sines is the first national port in tonnage. In 1990, total tonnage handled

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reached 22.6 million metric tons, of which 82.7% consisted of oil products,-15.2% coal, and 2.1% petrochemical products.

2.03 In recent years the administrative structure of the transport sectc,rhas undergone a number of changes. Responsibility for the sector lies withthe Ministry of Public Works, Transport and Communications (MPWTC) for landtransport and Ministry of the Sea (MS) for ports. Within the MPWTC, twosecretariats -- one for infrastructure, the other for public enterprisesproviding transport services -- oversee transport investments and operations.The Council on Studies and Planning (Gabinete de Estudos e Planeamento - GEP)has overall responsibility for the formulation of sector strategies, which arethen taken up by the modal agencies. The General Directorate of LandTransport (Direcgao-Geral de Transportes Terrestres - DGTT) is responsible forpolicy formulation related to land transport, under the overall supervisionand coordination of GEP. The planning of main inter-city roads and theiraccess to the metropolitan areas of Lisbon and Porto is in the hands of theHighway Authority (Junta Autonoma de Estradas - JAE). Aviation has its ownplanning unit within MPWTC. The three major port authorities report directlyto MS, the remaining port authorities report to the General Directorate ofPorts (Direcgao Geral dos Portos - DGP). Administration of the ports on theAzores and Madeira are the responsibility of the respective regionalgovernments.

3. Prolect Obiectives and Description

3.01 Proiect Obiectives. Designed to cover the first stage of a portmaster plan, the project would:

(a) ensure that the port of Sines be developed to meet the needs of theenergy and industrial sectors, and specifically to providefacilities urgently needed for the first phase operation of Sinespower station, which was being constructed under the Bank-assistedPortugal Power VII Project (Loan 2240-PO);

(b) assist in the development of the country's only port capable ofreceiving large vessels;

(c) improve Sines port operations, by assieting in the financing of aport management study and setting up an effective port managementorganization and training program based on that study; and

(d) provide a basis for consultation between the Bank and the Governmenton the future development of coal import facilities and the portsubsector.

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3.02 Proiect DescriDtion. The principal components of the project weres

(a) Coal Unloading Facilities

A coal unloading ber%h 345 m long with a minimum depth of 18 m atlow water capable of accepting vessels up to 150,000 dwt within theshelter of a breakwater approximately 1,100 m in length.

(b) Coal SBtrage Area

(i) area ashore for storage of about 250,000 metric tons ofcoal;

(ii) port buildings including administrative offices, fire andambulance station, workshops, and stores; and

(iii) utilities including a water supply and sewerage system,firefighting facilities, electrical substations, andcommunication system.

(c) Coal Handling Eouipment

(i) two unloaders at the berth, each with a grab of about 40metric tons and a nominal rated capacity of about 2,000metric tons per hour;

(ii) two combined stacker/reclaimers each of about 4,000 metrictons per hour stacking and 2,000 metric tons per hourreclaiming capacity at stockpiles;

(iii) a belt conveyor system complete with transfer and weighstations connecting tha ship unloaders to the portstockpiles, and also to the EDP conveyor system; and

(iv) miscellaneous mobile equipment for terminal operation.

(d) Engineering Services and Trainina

(i) construction supervision;

(ii) studies for repairs to the west breakwater, management ofthe port of Sines, and coal import facilities to serveEDP's future power stations; and

(iii) training in the operation of coal handling equipment.

4. Prolect Design and Oraanization

4.01 In 1981, the Sines Regional Council (Gabinete da Area de Sines -GAS) entrusted the master plan for the development of the port of Sines to aforeign consulting firm in joint-venture with several local ones. A

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concurrent study of the main ports of southern Portugal was commissioned bythe Port Authorities of Sines and Lisbon, and by DGP, for which anotherforeign consulting firm was engaged. Both firms regarded Sines as a suitablecenter for petroleum and coal traffic carried by large vessels, especiallycoal traffic for Sines Power Station, scheduled for commissioning in 1985.

4.02 The project was designed to meet long-term forecast coal traffic forSines power station and for coal traffic transhipped to another ZDP powerstation still in the planning stages. It was also designed in such a way thatproject facilities could be readily adapted tn accommodate the needs ofadditional EDP power plants as well as chang .LL patterns of maritime traffic.GAS, EDP, and their consultants collaborated throughout the planning of theport to ensure that port facilities were well linked to those beingconstructed for the power station. Designs and tender documents for civilworks and technical spec 4.fications for equipment were completed prior to Boardpresentation.

5. Proiect Implementation

5.01 Loan Effectiveness. The effectiveness deadline was deferred on twooccasions to allow time for the Government to clarify the overall structureand management of port operations at Sines (para. 5.02). In addition, theloan documents stipulated that port revenues must be increased by 50% beforethe loan could be declared effective. This percentage of increase would beneeded if APS were, eventually, to be held accountable for financing all portinvestments at Sines, including the storm-damaged west breakwater. As it wasdecided not to rehabilitate the outer berth and a considerable part of thebreakwater because sf obsolescence, the Government approved a partial tariffincrease and persuaded the Bank that the corresponding loan covenant was nolonger relevant (para. 5.06).

5.02 Proiect Manacement. In 1986, the Government informed the Bank ithad appointed a commission to dissolve GAS and reassign project implementationresponsibility to APS. The Bank initially sought to discuss the prospectiveproposals for dissolution of GAS with the commission so that the loandocuments might be modified and the loan, if declared effective, preventedfrom immediately going into default. When it became clear that the commissionwould not disclose its proposals before their review by the Council ofMinisters, the Bank acknowledged that project implementation responsibilities,as set forth in the loan documents, would be attributed to competent entitiesand would not be significantly affected by the dissolution of GAS. In August1987, GAS turned over execution of port works, which were nearing completion,and contracting of services to APS. In January 1988, GAS was legallydissolved.

5.03 Construction of Coal Terminal Facilities. Tenders for the coalterminal infrastructure works were received in January 1984 from sixprequalified consortia of contractors representing 24 firms from eightcountries. The Government awarded the contract to a foreign firm in jointventure with a Portuguese firm, which had presented the lowest evaluated bidand proposed an alternate quay design, which the Bank approved. Construction

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started up in August 1984, and the -.iarine works, along with the coal storage

area, were completed in December 1987. All other civil works and buildings,

which were financed by the Government, were restricted to Portuguese firms

under local competitive bidding as agreed in the legal documents. The

Government then decided to develop the terminal into a multi-purpose facility

and directed APS to launch a conceptual engineering study. In the meantime,

construction of a temporary coal import berth and related provisioi. 1

unloading equipment took place as scheduled and operations began in early

1987.

5.04 Procurement of Coal Handling Eauipment. Bids from three consortia

were recEived in February 1987 for the financing and installation of equipment

and operation of the terminal on a concession basis. An evaluation was

undertaken by a committee consisting of representatives from GAS, APS, EDP,

and the Treasury. The committee issued an evaluation report in July 1987

recommending that negotiations be undertaken with the lowest evaluated bidder.

EDP, the principal user of the coal terminal, fully supported the committee's

recommandations, but the Government rescinded the recommendation and

authorized APS to conduct a further review. One of the main reasons the

Government decided not to award a contract was the inadequate inclusion of

guarantees for transhipment for other EDP uses. The Bank considered this

action inappropriate since the Sines coal terminal project had been found

feasible on the basis of the needs of the existing EDP power plant. The

volumes transhipped to the future plant at Pego would enhance its viability

but in no way was transhipment a prerequisite for it. In 1988, when GAS

transferred all port assets to APS, the Government also decided that APS would

own and operate its own coal handl ng equipment instead of seeking a

concessionaire. APS engaged consultants to assist in preparing technical

specifications for coal handling equipment. Finally, in late 1989, almost two

years after the coal terminal facilities had been completed, APS tendered for

coal handling equipment, and in April 1990, entered into a contract with a

concessionaire comprising five local firms, which would own and operate the

equipment. Procurement is proceeding well, as the first items are presently

being delivered and installed, and operators are boing trained. Since Bank

funds were not involved, the Bank did not oversee the procurement process.

5.05 The port management study was not carried out. APS indicated that

the main objectives of the study had already been reached through statutes

covering the organization and staffing of the port authorities in Portugal and

Decree/Law 305/87, which provided APS with its charter. On reviewing the law,

the Jank was satisfied that the legal and organizational structures were in

line with existing regulations for public enterprises and other Government

authorities. However, Bank staff judged measures pertaining to staffing, port

operations, and financial structure to be inadequate.

5.06 The study of west breakwater repairs was completed in May 1987,

about nine months behind schedule. It concluded that rehabilitation of a

length of 300 meters woald provide the highest return on investment. The

outer berth on the west breakwater, which had been designed to cater to very

large oil carriers taking the route around the Cape of Good Hope instead of

through the Suez Canal, was no longer needed nor was a considerable part of

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the breakwater. The recommended rehabilitation is underway, with completionexpected in 1992 at an estimated cost of about USD 60 million. Rehabilitationworks are being executed and financed outside the project scope.

5.07 The coal transport study, completed in December 1988, identified andevaluated coal transportation options to serve the future expansion of thenational electric utility company (Electricidade de Portugal - EDP).

6. ResMlts

6.01 Proiect Costs. The project is being completed at a final estimatedcost of USD 164.4 million, compared with the original estimate of USD 163.2million (See Part III, Table 4). There were, however, variations amongdifferent project items. Temporary facilities cost USD 10.48 million insteadof the estimated USD 5.72 million, and coal handling equipment USD 61.16million instead of USD 50.11. The 22% cost increase for the latter was mainlydue to inflationary price escalations as procurement, delivery, andinstallation were delayed by nearly four years. These increases were offsetby savings in the installation of mechanical and electrical utilities byUSD 8 million as well as savings in civil works by USD 6.5 million.

6.02 Disbursements. Construction of the marine civil works for the coalhandling port started up in August 1984. By loan effectiveness in July 1986,there was a substantial backlog of disbursement requests, estimated to beabout USD 22 million, or one-third of the Bank loan amount. The Bank alsoprovided USD 7.7 million in retroactive financing. Within a year ofeffectiveness, cumulative disbursements reached 92% of appraisal estimates andmaintained the originally projected pace. The loan was fully disbursed onSeptember 14, 1989, more than a year ahead of the original loan closing dateof December 31, 1990.

6.03 Achievement of Proiect Obiectives. The first phase of coal portoperations is expected to begin by mid-1992 and full operation is expected tocoincide with the commissioning of the Pego power plant in mid-1993.Unfortunately, technical assistance in port enterprise management was neverprovided; the outcome of measures taken independently towards meetinginstitutional objectives has not been assessed by the Bank.

6.04 Achievement of Physical Taraets. In 1989, the temporary terminalhandled 2.5 million tons of imported coal, compared with 2.4 million estimatedat appraisal. With the installation of equipment and commissioning of the newterminal in May 1992, throughputs are expected to rise to 3.1 million byyear's end. Of the 4.5 million tons originally forecast for 1992, some 2million tons were to have been for the Pego plant, which is still underconstruction. Therefore, the 3.1 million tons expected in 1992 represents700,000 tons p.a. above the original target for the Sines power plant.

6.05 Economic Justification. The installation of coal handlingfacilities at the port of Sines represented the least-cost solution for theimport of coal via large non-geared ships to the Sines coal-fired thermal

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plant, which was at an advanced stage of construction at the time ofappraisal. An additional consideration favoring the project was the possibleexpansion of the port to handle other commodities emanating from localindustrial plants and additional coal traffic for a possible future EDP powerplant. As the development of this latter traffic was unclear, the analysis ofthe project viability was based solely on the import needs of the Sines plant,estimated at about 2.6 million tons p.a., which could not be handled by anexisting facility in Portugal. After reviewing a number of alternatives,including different designs at the Sines site as well as discharges andtranshipment via other ports, it was concluded that the Sines coal handlingport facility provided the least-cost solution and that the cost of thissolution was well within the limits needed to maintain the overall viabilityof the thermal plant.

6.06 There was no standard rate of return calculation for this project,as there was no realistic "without project" alternative. The risks for theeconomic viability of the coal handling facility were considered minimal. Thejustification of the project was based solely on the minimum expected usage ofthe facility, which represented only about 10% of the investment in thethermal plant. It was concluded that an increase in construction costs, evenby as much as 100%, would have a negligible impact on the determination of theleast-cost solution.

6.07 Financial Performance. The project's main financial objectives wereto provide for full cost recovery on the use of all port assets and contributeto the capital costs of expanding the port of Sines. Towards ensuring theadequacy of tariffs needed to achieve these objectives, the Bank and Borroweragreed on the following series of specific provisions for the debt/equitystructure of the oil port and the setting of tariffs to cover debt service(see Part III, Table 5):

(a) as a condition of loan effectiveness, port tariffs would beincreased by 50% (Section 6.02 of the Loan Agreement);

(b) beginning in June 1986, APS port tariffs and charges would beestablished and adjusted to enable APS to contribute 10% of the coalhandling port investment costs after covering operating expenses,including debt service but excluding depreciation (Section 3.05 (c)of the Loan Agreement and Section 4.03 (a) of the APS ProjectAgreement);

(c) a separate user charge for oil traffic would be established no laterthan December 31, 1986 and maintained thereafter at a level to coverat least the debt service related to the oil port assets (Section3.05 (b) of the Loan Agreement); and

(d) beginning in June 1989, when the coal handling facility would becompleted and in full operation, and all other port assets and theirrelated debt assigned to APS, the charges for the use of all portassets would be set to ensure a rate of return to APS of not lessthan 7.5% on the coal port assets separately, as well as for all APS

assets at the port of Sines (Section 4.02 of the Loan Agreement andSection 4.03 of the APS Project Agreement).

6.08 Loan effectiveness was delayed because tariffs were only partially

increased and did not satisfy the covenant. The Government proposedpostponing the tariff increase designated to service the oil port debt untilthe breakwater was revalued as a net usable port asset. Calculations based on

certain assumptions regarding oil port assets demonstrated that partial

compliance with the tariff increase requirement would not significantly alter

APS's overall financial position since APS did not assume the liabilitiesrelating to the port assets. The financial covenant under these circumstances

was, therefore, no longer technically appropriate. However, it would have

been preferable to ensure transparent financial relations between entities by

including full depreciation of port assets and the servicing of allliabilities relating to these assets, in the APS accounts.

6.09 In May 1988, when the Government transferred the fixed assets of the

Port of Sines from GAS to APS, the Government assumed responsibility for all

long-term debts related to investments in the port of Sines. Since theseassets have not yet been entered into APS's accounts and APS was relieved ofits debt service obligations, a comparison of projected and actual financialratios, at this stage, would be meaningless. One observation can be made oncomparing actual to projected net income. Actual net income, excludinadepreciation and interest exoenses related to Port assets, was Esc. 1.5billion in 1989 (approximately USD 9.5 million) and Esc. 1.8 billion(approximately USD 12.8 million) in 1990. However, at appraisal, a net income

of Esc. 1.7 billion in 1989 and Esc. 1.5 billion in 1990 were projected,including depreciation and interest expenses related to cort assets. Without

taking into account depreciation charges on other port assets or interestpayments, which were unrelated to the project's capital investment of over

$160 million (see Part III, Table 4), the port's net income would have been

negative. It is clear that the objective of "full cost recovery" was not

achieved.

6.10 Environmental Impact. The project had minimal impact on theenvironment. The conveyor system and coal handling equipment were designed to

achieve high standards of pollution avoidance. The conveyors in the port area

are screened and a water sprinkler system has been installed to dampen thecoal stockpiles. Any spillage at transfer points is automatically returned to

the main conveyors. The power plant and coal port are over 5 km away from the

town of Sines.

6.11 Emolovment Generation. The project provided employmentopportunities for about 800 local inhabitants during the first implementationphase. Once the coal port is fully operational, about 200 new jobs will becreated for concessionaire staff.

-9-

7. SustainAbilit

7.01 The coal terminal at the Port of Sines is an essential part of theNational Energy Program. It represents the least-cost solution for supplyingcoal to operate the 600-megawatt Sines power plant, which serves a growingindustrial complex. The terminal is also intended and has the capacity tomeet the needs of the newer 300-megawatt, coal-fired power plant underconstruction at Pego. Moreover, although this was not foreseen in theproject, the project facility is being used for coal transhipment, generalcargo, containerization, and grain. The port of Sines can be developed in thefuture in accordance with a master plan that makes phased expansion feasible.The sustainability of the project's viability would depend on adequatefinancial management of the port, including periodic and timely increases intariffs.

8. Bank's Performance

8.01 The Bank contributed significantly to the timely execution of themain civil works component. During the project preparation phase, threespecial procurement missions visited Portugal to review prequalification andbid evaluation procedures, which prevented foreseeable irregularities andensured that retendering would be conducted fairly and in accordance with Bankguidelines. During implementation, Bank supervision missions continuallypressed for Government action in setting a reasonable value on fixed assets,adjusting tariffs, and restructuring APS's financial management. After theGovernment stalled on efforts to procure and install equipment and beginoperations, the Bank pointed out repeatedly that having expensive facilitieslying idle for so long meant a substantial economic loss to the Portugueseeconomy.

9. Borrower's Performance

9.01 The Government was clearly committed to building a coal terminal atthe port of Sines. However, it seemed to place less emphasis on thefacility's timely operation and on agreed actions intended to ensure costrecovery, promote APS's managerial autonomy, and improve its financialposition. Target dates for most loan covenants had to be revised. Thus, non-compliance with loan covenants, beginning with conditions of loaneffectiveness, became a serious issue at an early implementation stage andeventually could have been cause for suspending the loan. One of the mostimportant elements of the project was the provision of technical assistance inthe management of a port enterprise. Not only was the agreed port managementstudy abandoned but Decree/Law 305/87, which set forth the general foundationand principles for APS's charter, introduced few innovations to deal withdeficiencies generally encountered in the operation of Portuguese publicenterprises. Experience, notably with the procurement of coal handlingequipment, indicated that Government involvement in the day-to-day operationof the port was increasing rather than being phased out.

- 10 -

10. Bank-Borrower Relations

10.01 The project raises some serious questions concerning the nature andscope of Bank involvement in countries at advanced stages of development and

with ready access to other sources of external financing, which can undercutthe Bank's leverage in negotiating and ensuring compliance with key loanconditionalities and in influencing investment decisions. The Coal HandlingPort Project illustrates the difficulty the Bank experienced in seekingcompliance with loan covenants intended to ensure the managerial and financialviability of the main project beneficiary, APS. Furthermore, at the onset ofproject implementation, the Government reassigned implementationresponsibilities from GAS to APS sooner than stipulated in the projectagreements and without consulting the Bank. The Bank was not even party tosubsequent decisions on future port use.

10.02 The Bank discussed the above issues with the authorities on a numberof occasions. The Borrower's continual contravention of legal agreements to

adjust tariffs to meet cost recovery objectives and to launch and carry out aport management study led the Bank to consider suspending the loan (see PartIII, Table 6). However, the Bank concluded that such action would not secure

the desired results; by then the physical components had been completed andmost disbursements made. The substantial delays in reaching an agreement on

the acquisition of coal handling equipment resulted in delays in achieving thephysical functioning of the port as intended. On the financial and managerial

side, it was clear at an early stage that the original objectives of full costrecovery and transparency of Port/Government relationships would not be

achieved. In retrospect, a "4" rating for the project may have moreaccurately reflected the implementation status (see Part III, Table 7). Thelesson learned is that the Bank should be more selective in supportingprojects in countries on the verge of graduating and limit such support to

projects where there is a clear and unequivocal "value added" to Bank-

financing and full Government commitment to the project's objectives.

11. Consultants' Services

11.01 Consultants implemented the studies of the west breakwater repairand coal transportation options and supervised the construction of the coalterminal. In each instance, performance was fully satisfactory.

12. Prolect Documentation and Data

12.01 Documentation and data were generally good before the impasse inimplementing the last remaining project component, the coal handlingequipment, which was not being financed from the loan proceeds. Since therewas little the Bank could do over the past three years to resolve this

impasse, a lapse in communication occurred. This was exacerbated by aninternal shifting of portfolio management responsibility within the Bank.Consequently, missing information requested of the Borrower but not receivedincludes documentation on port management and operations, audits of APS'sfinancial statements and project accounts for the period 1988-90, and

information regarding the acquisition and delivery of non-Bank-financed,albeit project-related, equipment.

- 11 -



(LOAN 2521-PO)

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

By letter of May 13, 1992, the Sines Port Authority (AF3) verified

the adequacy and accuracy of Parts I and III, averring that because the Sines

Regional Authority, original implementing agency, was dissolved and APS did

not have a relevant role in the loan process, it could not add to what had

been stated in Part I. The President of APS expressed his high regard for

the support from Bank staff characterizing APS's relationship with the Bank as

one that took place "in an atmosphere of mutual collaboration."

- 12 -



(LOAN 2521-PO)

PART III: STATISTICAL INFORMTION

Table 1: Related Bank Loans

Loan Number and Title Purpose FY Status

Loan 1 334-PO Rehabilitation of 500 km of roads in the Lisbon 77 CompletedFirst Highway Project area; equipment for road maintenance and PPAR #2882

workshops in the Lisbon area; consultancy and 3/11/80technical assistance to improve transportplanning, project preparation and evaluation, andoperational procedures.

Loan 1700-PO Continuation, nationwide, of the rehabilitation and 79 Completed;Second Highway modernization works and road maintenance PCR # 5652Project program initiated under the first project. 5/16/85

Loan 2240-PO P1rovision of electrical power to meet the forecast 83 Completed;Seventh Power Project growth in demand at least cost while maintaining PCR # 8472

the required reliability of the system. The project 3/28/90consisted of a three-year time slice of EDP'sdevelopment program including construction ofthe Sines power station.

Loan 2840-PO Road improvement works comprising the 87 Completed;Third Highway Project rehabilitation of 2,500 km, periodic maintenance PCR under

and strengthening of another 3,000 km, and the preparation.construction of 100 km by-passes; routinemaintenance; implementation of a road safetyprogram; enforcement of axle-load legislation;technical assistance including studies on freighttransport productivity, the North-South corridor,road user charges, and energy managementpolicy; and training.

- 13 -

Table 2: Project Timetable

Planned Revised Actual

Identification 4/82

Preparation Beginning 1/83

Preparation End 4/83 6/83 1/8410/83

Appraisal Mission 9/83 10/83 5/84

Loan Negotiations 1/85 2/15 to3/01/85

Board Approval 12/14/84 4/23/85

Loan Signature 12/31/85 5/85 10/03/85

Loan Effectiveness 1/03/86 1/31/86 7/01/86

Loan Closing 12/31/90

Project Completion a/ 12/89 12/88

1/ Bank-financed Components only.

- 14 _

Table 3: Cumulative Loan Disbursements

(USD millions)

ActualOriginal vs.

.Quarter Estimate Actual Estimated

-Y-86

Sep. 1985 7.5Dec. 1985. 11.0Mar. 1986 15.0Jun. 1986 19.0

Sep. 1986k' 23.0 0.43 2%Dec. 1986 30.0 0.43 1%Mar. 1987 34.0 9.28 27%Jun. 1987 40.0 36.88 92%

i | i-w~~~~~FY88

Sep. 1987 43.0 37.11 86%Dec. 1987 48.0 43.56 77%Mar. 1988 52.0 50.67 97%Jun. 1988 56.0 52.67 91%

FY 89

Sep. 1988 59.0 52.67 89%Dec. 1988 61.5 54.79 89%Mar. 1989 63.0 54.79 87%Jun. 1989 64.0 59.23 93%

Sep. 1989 64.5 62.273' 979%Dec. 1989 65.0Mar. 1990 65.5Jun. 1990w 66.0

1/ Effectiveness Date: July 1, 1986

2/ Closing Date: December 31, 1990

a/ Ultimately, USD 62.3 million were disbursed and USD 3.7 million cancelled.

Table 4: Erdiect Costs

(USD million)

l_______________ lAPPRAISAL | ACTUAL _ _i__

___________ Lcl Foegn Tta Local' 0W Foeg Total. ............ Variation .... ..

Marine Civil Works . 34.05 46.58 80.63 20.09 51.60 71.69 (8.94) 89%

Civil shore works, buildings andutilities 11 3.93 5.89 9.82 4.90 7.35 12.25 2.43 125%

Mechanical Utilities 1.51 6.06 7.57 0.39 1.58 1.97 15.60) 26%

Electrical Utilities 1.51 6.04 7.55 0.97 3.90 4.87 (2.68) 65%

Coal Handling Equipment 10.02 40.09 50.11 12.23 48.93 61.16 11.05 122%Ul

Studies and Training 0.41 1.38 1.79 0.46 1.53 1.99 0.20 111%

Temporary Facilities 1.57 4.15 5.72 2.88 7.60 10.48 4.76 183%

TOTAL 0 10.19 2163.1 1.49 164.41 1.22 191%

I/ Construction supervision costs have not been disaggregated.

Table 5: Project Financing

(USD million)

ORIGINAL ACTUAL

i~~~~~~~~~~~~~~Gvm Loc Coc= oen

Marine Civil Works 43.67 16.32 20.64 51.60 20.09

Civil shore works,buildings and utilities 9.82 4.21 2.11 5.93

Mechanical Utilities 7.57 0.68 0.34 0.95

Electrical Utilities 7.55 1.67 0.84 2.36

Coal Handling Equipment 50.11 21.03 10.51 29.62

Studies and Training 1.38 0.41 1.99 a

Temporary Facilities 3.61 2.11 10.48

TOTAL 45 1. a. S 5. 27.59 1 .87 30.5..

jJ EIB: European InvestmentBank

Table 6: Status of CompIlance With Covenants

Page 1 of 2

Lan/Pir,jectAgreement Desuiption Status of ComplianeReference

LA 3.02/PA 2.02 Subsidiary agreement transferring oil port assets and debts By Decree Law M . 182188 of May 21, 1988, the Govemmentfrom GAS to APS, by December 31, 1986; transfer of transferred the fied assets of the Port of Sines from GAS to APS.project-assisted port facilities from GAS to APS, by June 30, Insted of transfering the loan for this investment, the Governmmt1989. alssm responsibility for all debts and auhorized the Misr of

Finnce to establish a surcharge on crude oil and coal taffic to bepayable to the Teasury.

LA 3.03 (b) Completion of a study to identify and evaluate coal Complied with on December 17, 1988:transportation options to serve EDP's future expansionprograms, by December 31, 1986.

LA 3.05 (a) Establishment of tariffs for the temporary coal facility, by APS's coal tariff, established in December 1987, provides for a chargeMarch 31, 1986, and adjust them annually during the project of USD 0.75 per metric [on. This was judged to be adequate in light ofiwplementation period on the basis of recommendations of the limited services provided by APS and the delay incuned by APS inthe port maagement study. making the new port facilities available to EDP. The Port M _gement

Study was not completed and subsequent tariff adjustments did not meetproject cost recovery objectives.

LA 3.05 (b) Establishment of a user charge on oil traffic at the Port of Since the Government assumed responsibility for the loans, APS has noSines, by December 31, 1986, and annual adjustments during debt sorvice obligation. Nonetheiess, the current triff sticture wouldthe rmainder of the project implementaion period, to such be inadequate if APS were responsible for interest eharges and loanlevels as to produce revenues sufficient to enable APS to repayment.service the debt to GAS related to the oil port assets.

LA 3.05 (c) Establishmnt of tariffs sufficient to contribute 10% of the See LA 3.05 (a) and (b) above.coal port investment, by June 30, 1986.

LA 6.01 Increase in all port tariffs by 50% as a condition of loan The Government approved a paRial tariff incrase, and the Bankeffectiveness. determined that the underlying project objectives could be sstained

without recourse to all of the tariff incrases originaly foresee.

Table 6: Status of Compliance with Covenants

Page 2 of 2

LoanljectAgrment Description Status of ComplianeeReference

PA/GAS 2.02 (b) Completion of a study on repairs to the vrcst breakwater, by The study on repairs of the west breakwater, including timetabl andSeptember 30, 1986; submission of a timetable and financing financing plan, was completed in May 1987. The port managemintplan for implemeating repairs to the west breakwater, by study, for which responsbility was transferred frim GAS to APS, wasDecember 31, 19W; and startup of the study on the not undertaken. In a letter to the Bank, dated August 1987, APSrmnagement of the Pert of Sines, by June 30, 1986, and explained the current pnsition of its orgaizationl development,completion, by Jun) 30 1987. indicating that most of the areas to have been covered by the study had

already beea dealt with. Moreover, tile Govemmnt coordinated astudy, which drafted statutes covering the orgaization and staffing of alport authorities in Portugal. A review of Decree Law No. 305/87establishing APS showed a legal stnrcture generaly in liae with existingregulations for public enterprises. It did not address importantoperational deficiencies or inadequate accoutig sems and financilstnwcture.

PA/GAS 2.03 (b) Setdement of accounts payable and receivable on account of Seutement was implemented by Decree law No. 182188 of May 21,GAS port operatiots, by March 31, 1987. 1988, at the time of the ttansfer of fixed ssets from GAS to APS in

compliance with LA 3.02 and PA/GAS 2.02 above.

PA/GAS 4.02 Submission of audited project account and audited financial An audit of project accounts covering the period 198547 was submittedstatments, by June 30, 1987. in July 1989. Audits for 1988 and 1989 are iQ default.

PA/APS 2.04 Adoption of productivity targets and a time schedule for the Complied with in 1991.operation of tIe coal handling facilities under the project, byDecember 31, 1987.

PAIAPS 4.02 Submission of audited financial stements six mont after Audited financial statemets for 1986 were submited in August 1987each fiscal year during project implementation. and for 1987 in June 1988. Audit repors for 1988 and 1989 ar in

default. Annual reports fw 1989 and 1990 contning financialstaments were given to the November 1991 Bank mmission

PA/APS 4.06 Collection and preparatinon of data on port productivity and Complied with in 1987.port traffic, by June 30, 1986.

- 19 -

Table 7: MTssions

Identification 3/82 2 11 EconomistTrasport Engineer

Prepuadon 1/83 2 14 EconomistPort Engineer

3/83 1 9 Procurement Engineer

9/83 1 4 Procurement Engineer

11/83 1 4 Procurenent Engineer

PrAppaisl 1/84 3 21 EconomistFinanoial AnalystPort Engineer

Appaisa 5/84 3 21 EconomistFmancial AnalystPort Engineer

Supervision 11/8S 1 13 Port Engineer 2 FmancialManagerial

7/86 2 12 Fmancial Analyst 2 ManageialPort Engineer

1/87 2 21 Economist 2 Development ImpactPort Engineer

10/87 S 7 Economist 3 Project ManagementFinancial Analysts (2) Devolopment bnpactPort Engineers (2)

4/88 2 10 Economist 3 Prs.At ManagementTmansport Engineer Devoiopment Impact

9/88 3 10 Economist 3 P.eacL ManagementFinancial Analyst Dew 'dpment ImpactPort Engineer

3/89 1 9 Trnusport Engineer 3 Projec. ManagementDevekpment Impact

Completion 11/91 2 1 Transport EngineerOprtons Analyst

Total number of days in field = 167

J| I - Problem fre, or minor problem.2 - Moderat problens.3 -Major problem; whih are being addressd.4 - MaJor problems; which are not being addraesd.

- 20 -

Table 8: Saff Inpu1s

(Staff Weeks)

P p.8 ,. ,n" , N, .,. . .... - '' ....I...p ''ori on 'PC :''' .. ' '"'Preparation Appraisa ego ati oessng P Tot

FY82 I FY83 23.5 0.8 24.3FY84 49.4 21.3 1.9 72.6FY85 16.6 8.3 9.5 3.4 3,.°FY86 2.5 18.5 21.0FY87 1.0 11.4 12.4FY88 11.5 11.5FY89 16.0 16.0FY90 0.3 0.3FY91FY92 4.9 4.9

TOTAL V.9 8. 15. s1. 4.9 80

IBRD 1844PORTUGAL

COAL HANDLING PORT PROJECTPORT OF SINES AND POWER STATION

Main Roads

Other Roads and streets

------ Railways

S I N E S ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Pipe Corridor

Urban Area

...... Port Umits,-''>Natural Park

4' Project Port

F shing ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~PROJECT COMPONENTS APPEAR IN RED

-420 10 42'

MUII-KAUCW PORT ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ OTUA

z I.. b.- g=d ~ ~PAI N

ojnod.nondofc 3h.380-

#. b-d- h.'-' 4

I nesj ~~~ATLANITIC OCEAN 0 200 400 600 800 1000 METE-R- E.O.P. POWER STATION: coy elzm'o'o 70

JUNE 1992

Economy & Finance

Document of the world bank