Report No. 1354a-KO FILE COPY Korea: Appraisal of Second Port Project March 25, 1977 East Asia and Pacific Department Transportation Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENT EQUIVALENT Current Unit = Won US$1 = Won 485 Won 100 = US$0.21 Won 1,000,000 = US$2,062 WEIGHTS AND MEASURES 1 meter (m) 2 3.28 feet (ft) 2 1 square meter (! ) = 10.76 square feet (f5) 1 cubic meter (m ) = 35.29 cubic feet (ft ) 1 kilometer (km) 2 = 0.62 miles (mi) 1 square kilometer (km ) = 0.39 square miles (sq mi) 1 hectare (ha) = 2.47 acres (ac) 1 metric ton (m ton) = 1,000 kilograms (kg) or 2,240 pounds (lb) 1 revenue ton = on average approximately 600 kg or 1322.4 lb ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank BDMPA - Busan District Maritime and Port Authority dwt - deadweight tons EPB - Economic Planning Board GNP - Gross National Product GRT - Gross Registered Tonnage KAL - Korean Airlines KIST - Korean Institute of Science and Technology KMPA - Korea Maritime and Port Authority KNR - Korean National Railroad KPDS - Korea Port Development Study LWOST - Low Water Ordinary Spring Tides MOC - Ministry of Construction MOF - Ministry of Finance MOT - Ministry of Transportation TCMC - Transport Coordination Minister's Conference TCO - Transport Coordination Office TOC - terminal operating company TPO - Transport Planning Office FISCAL YEAR January 1 - December 31 N.B. All water depths given in this report are below LWOST. FOR OFFICIAL USE ONLY KOREA APPRAISAL OF SECOND PORT PROJECT TABLE OF CONTENTS PaRe SUMMARY AND CONCLUSIONS ........... ............................... i-ii I. INTRODUCTION . ................ ...... ................. * 1 II. BACKGROUND .................................... ... .o.... o 2 Ao Economic Setting ... o ..... .... . . ..... . ............ 2 B. Transport Sector ............. ... ...... o. .... 3 C. Transport Planning and Coordination ......o 5 III. PORT FACILITIES, ORGANIZATION AND OPERATIONS ........... 6 A. Facili-ties, Existing and Under Construction .....o 6 B. Organization ........ 00- ..... ..0.............................. 6 C. Finances .o ....... ...... oo..o..o ....... 7 D. Cargo Handling Operations ...o .......o .................. 8 IV. THE PROJECT ........ . ................. oo........ 9 A. The Capital Investment Program ...9oo ............ 9 B. The Project ................ . . ... ........ 9 C. Project Execution . ..... .. .... o..... 0. . ... ...... 11 D. Consulting Services .% ........ oo.. oo.oo ....... .... 11 E. Procurement and Disbursement .o ... .. ......... 11 F. Ecology ..... ..... .o...o...o..o*... o 12 V. ECONOMIC EVALUATION .o...o.. ... oo. oo.. ...o...o ........ o 12 A. General ........................ 12 B. Landward Port Access ,. ... .... ..o.o.. ...... . 13 C. Traffic Forecast ... ..... . o.'..o.o.o..... . .......... .. 13 D. Project Benefits and Risks ....o ...... ............ 14 E. Economic Return, Sensitivity Analysis and Risks ... 16 VI. FINANCIAL EVALUATION ............ ooo.oo...o ... o ...... 16 A. General ......oo.o.o.. o... oo... ......-..-.-..-..- 16 B. KMPA's Accounting and Costing Systems, Rates and Charges ... .. .................*. 17 C. KMPA's Asset Values and Depreciation ..... o ...... 17 This report has been prepared by Messrs. F. Gyi (engineer), R.H. Roberts (economist), and K.C. Rodley (financial analyst). This document hau a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents mAY not otherwise be disclosed without World Bank Authorization. -2- Page No. D. BDMPA's Receivables, Payables and Stores ............ 18 E. Financial Staffing ................ .................. 18 F. BDMPA's Past and Current Earnings and Current Financial Position ..... ................... 18 G. Establishment of Terminal Operating Companies ....... 19 H. BDMPA's Future Earnings and Finances .. .............. 19 I. BDMPA's Cash Position and Financial Plan ............ 20 J. Auditing and Insurance .............................. 21 VII. AGREEMENTS REACHED ANID RECOMMENDATION ... 21 ANNEXES 1. Technical Assistance and Training Program 2. Busan - Port Facilities Following Completion of First Port Project 3. The Government Budget System 4. KMPA Pro-forma Special Account 5. Terminal Operating Company (TOC) Contract 6. Project Details 7. Traffic Forecast 8. Valuation of Existing Assets 9. Assumptions Used in Financial Forecasts TABLES 1. Busan Port Capital Investment Program 1976-82 2. Detailed Project Cost Estimates 3. Proposed Grouping of Contracts 4. Annual Estimated Project Expenditure 5. Estimated Disbursement Schedule 6. Busan Port Traffic - 1973-82 7. Economic Costs and Benefits 8. Port of Busan - Cash Revenue and Expenditure 1973-75 9. Port of Busan - Profit and Loss Account 1975-82 10. Port of Busan - Balance Sheet at December 31, 1975-82 11. Port of Busan - Cash flows for the Years 1975-82 12. Summary Cash Flow Data; Financial Plan 1975-82 CHARTS 16510 - Design and Construction Schedule 16452 - Korea Maritime and Port Authority Organization Chart MAPS 11700R - Transportation Network 10382R3 - Second Port Project - Busan Harbor 12506 - Second Port Project - Container Pier Extension KOREA APPRAISAL OF SECOND PORT PROJECT SUMMARY AND CONCLUSIONS i. Freight traffic through Korean ports has increased from about 11 million tons in 1965 to about 70 million tons in 1975. This over six fold increase resulted in serious port capacity problems, particularly at Busan, the largest port, which handles 20% of the country's external trade and is chronically congested. The large and fast-growing external trade of south- east Korea moves largely through the port of Busan, which also handles a substantial volume of containerized goods moving to and from the Seoul area. ii. The Government has requested the Bank to finance a project for the further development of Busan port, consisting of a 700 m extension of the container wharf being financed under Loan 917-KO. The proposed project, which will meet traffic requirements until about 1985, is based on the Korea Port Development Study-Phase II (KPDS-II) financed under Loan 917-KO and undertaken by consultants (Trans Asia Engineering and King & Gavaris in association with Arthur D. Little - US). The proposed project would also provide container handling equipment, including four container cranes, to- gether with related buildings and services and two tugs. Rehabilitation of two existing piers and two wharves would also be included. Substantial technical assistance would be provided, covering cargo handling operations, maintenance of facilities and container handling equipment, port planning and accounting. iii. The Korea Maritime and Port Authority (KMPA) was set up in March 1976, in accordance with the requirements of Loan 917-KO 1/, and key appoint- ments were made soon after. While KMPA is operating satisfactorily and the organizational structure is generally acceptable, the project proposes a strengthening of its staffing, particularly in the accounting field, and a reorganization of cargo handling operations to reduce the number of cargo handling companies to one at each pier or specialized bulk-handling facility, with KMPA staff assuming a more active supervisory responsibility for cargo operations; improved procedures will be adopted to facilitate cargo movements within the Customs area. The financial autonomy with which the Government was required, under Loan 917-KO, to vest KMPA, has not yet been achieved because of the constraints of the Law under which KMPA was established. The Govern- ment has agreed to amend the Law so as materially to increase KMPA's financial autonomy. 1/ The Loan Agreement required the Government to set up the Korea Port Authority; however, the Government decided, with the Bank's agree- ment, to include in the Authority's functions supervision of maritime affairs. The Authority's title was changed accordingly to the Korea Maritime and Port Authority. - ii - iv. The proposed project is estimated to cost US$112 million, and the proposed loan would cover US$67 million equivalent of the foreign exchange component. The Government would finance the remaining US$3 million of the foreign exchange component, and local currency costs, estimated to be about US$42 million. v. The project would be executed by KMPA, with consultant assistance, under three civil engineering contracts and two procurement contracts, which would be awarded on the basis of international competitive bidding. A 15% preference for local manufacturers would be granted in respect of mechanical equipment and floating craft. Construction could start early in 1978 and would be completed by the end of 1981. vi. The proposed project would avoid the constraints on economic growth which a shortage of port capacity in Busan port would impose on south east Korea. It would also reduce transport costs by: (a) avoiding ship waiting time; (b) eliminating transfer of about 30% of containers to and from container yards outside the port; and (c) avoiding the need to route Seoul container traffic through Incheon at extra cost. These benefits yield a return of about 17% on the proposed project, which is the least cost way of meeting the fore- cast traffic growth. vii. Congestion in city streets surrounding the port is likely to result in steadily increasing transport costs on all goods moving in and out of the port and, ultimately, could limit the port's capacity unless measures are taken to improve the city's road network. The Government will construct, by December 31, 1979, a road from the port area to the Seoul/Busan expressway which will eliminate any congestion affecting traffic moving between the port and the Seoul area, and should help to relieve congestion in the city center. The Government will also undertake a study of city-wide transport and land use which will seek medium-term solutions to the city's congestion and assess their feasibility. viii. Busan port's present financial position is satisfactory and will remain so, subject to tariff increases, which have been assumed in the finan- cial projections, as follows: (a) overall increases of 15% on July 1, 1978, and 20% on July 1, 1981; (b) imposition, effective in 1978, of a charge to the cargo-handling companies for their use of port assets. ix. The proposed project provides a suitable basis for a Bank loan of US$67 million equivalent to the Government of Korea for a term of 17 years, including a grace period of 3-1/2 years. KMPA would assume a debt to the Gov- ernment in the same amount and on similar terms on January 1, 1979, following the necessary legislative changes. KOREA APPRAISAL OF SECOND PORT PROJECT I. INTRODUCTION 1.01 The Government of the Republic of Korea (the Government) has asked the Bank to help in financing a second port project at the port of Busan con- sisting of a 700 m extension of the container pier being provided under Loan 917-KO, together with rehabilitation of some existing piers and wharves, pro- curement of container handling equipment and floating craft, and provision of consultant services for detailed engineering and technical assistance. The proposed project would meet anticipated traffic growth at the port through about 1985 in the most economic manner. It forms part of the Government's Fourth Five-Year Development Plan 1977-81, and is based on a study, Korea Port Development Study-Phase II (KPDS-II), prepared by c'nsultants (Trans Asia Engineering and King & Gavaris in association with Arthur D. Little - US) and financed under Loan 917-KO. 1.02 The Bank Group's previous assistance in financing the transport sector has amounted to US$491 million, and includes one previous port project, Loan 917-KO in 1973 (US$80 million); three highway projects, Loan 769-KO in 1971 (US$54.5 million), Loan 956-KO in 1974 (US$47 million) and Loan 1203-KO in 1976 (US$90 million); and five railway projects, Credit 25-Ko in 1962 (US$14 million); Credit 110-KO in 1967 (US$10.7 million); Loan 669-KO/Credit 183-KO in 1970 (US$55 million); Loan 863-KO in 1972 (US$40 million); and Loan 1101-KO in 1975 (US$100 million). Performance on these projects has been generally satisfactory. In addition, a further railway project is expected to be appraised in April 1977. 1.03 Construction of the First Port Project is proceeding satisfactorily and it is expected to be completed on schedule in mid-1978. However, follow- ing the oil price increases of 1973-74 the project has experienced serious cost overruns. The total project cost is now expected to be US$42 million (35%) higher than estimated at the time of project appraisal, including about US$27 million foreign exchange. The Government signed a Loan Agreement, on March 8, 1976, with the Saudi Fund for Development, which will provide up to US$35 million equivalent towards the foreign exchange cost overrun. As re- quired by the conditions of Loan 917-KO, the Government established, in March 1976, the Korea Maritime and Port Authority (KMPA) and, at the same time, set up port administrative units at all first-class ports, including the project ports. The degree of financial autonomy which was to have been granted to KMPA upon its establishment will be granted by January 1, 1979, following the necessary legislative changes. 1.04 This report is based on the consultants' report, data supplied by the Government and the findings of an appraisal mission composed of Messrs. F. Gyi (engineer), R. Roberts (economist), J. Cuthbertson (consultant, finan- cial analyst), and J. Cracknell (consultant, traffic engineer) which visited Korea in May, 1976. -2- II. BACKGROUND A. Economic Setting 2.01 Korea's economy has maintained an average annual real growth of GNP of around 10% p.a. over the past fifteen years, including an impressive annual real increase of 11% over the Third Five-Year Plan period (1972-76). Per capita income which was around US$100 in 1962 has increased to nearly US$700, in current prices, by 1976, or nearly a three-fold increase over the period. During the past three Five-Year Plan periods the growth of the economy accelerated from 9% during the 1963-66 to 10.54-in 1967-71. The performance of the economy over the last three years of the Third Plan was particularly impressive in view of the recent world-wide recession which affected Korea's trade. The sustained high rate of growth over the fifteen- year period has transformed Korea from one of the poorest developing countries to a semi-industrialized, middle-income country with a significant industrial base that provides the main thrust of the economy's high growth performance. 2.02 The most striking feature of Korea's rapid economic growth has been the rapid expansion of exports from less than US$200 million in 1965 to nearly US$8 billion, an annual real expansion of over 33%. Industrial expansion re- sulted in a structural transformation of the economy as the share of agricul- ture declined over the 1961-76 period from about 44% to 20%, while the share of manufacturing increased from less than 11% to 35%, with value added in manufacturing growing at 19% annually in real terms. The social overhead sectors have kept up with the manufacturing sector, growing at about 15% per annum. Fixed investment increased from 11% of GNP in 1960 to more than 20% of GNP by the mid 1960's and has since been about 23% to 26% of GNP. 2.03 Over the past year, the Korean economy appeared to have fully re- covered from the 1974/75 twin shocks of high import costs and depressed de- mand for manufactured exports in the major importing countrie3. GNP grew at 15.2% in 1976 compared with the average rate of 8.5% in the previous two years. While employment levels declined somewhat during the 1974-75 recession, Government holding policies prevented a rapid decline in employ- ment through various financial incentives to enterprises to carry inventory and maintain a high level of production. This enabled Korean exporters to take advantage of the recovery in the export markets that occurred in the latter half of 1975. Inflation has been reduced in the process of high growth. In 1976 wholesale prices were only about 9% higher than their 1975 levels compared with increases of 42% and 26% in 1974 and 1975. The devalua- tion of the Won and the various price rationalization measures adopted in 1975 enabled domestic prices to adjust to the new international price levels. Other policy measures included a reduction in the rate of increase of money supply and a stricter price monitoring for major commodities. There has also been a sharp reduction in the balance of payments current account deficit from nearly US$2 billion in 1974-75 to less than US$300 million in 1976, and this lays a firm foundation for the Government's efforts to reduce foreign borrowing during the Fourth Five-Year Plan. The plan envisages an annual growth of GNP of 9.2% with exports and imports expanding at 16% and 12%, - 3 - respectively, in real terms. The Plan investment is set at Won 18 trillion in 1975 prices or 26.2% of GNP. Total investment allocation for the trans- port sector is Won 2.78 trillion including about Won 250 billion for Ports. While the Plan's targets are achievable, the resource requirements have been somewhat under-estimated. Additional domestic and foreign resource mobiliza- tion efforts will therefore be required if the Plan's target growth rate is to be realized. B. Transport Sector Recent Developments 2.04 The transport sector, measured in terms of value added, grew faster than the economy during the past decade and registered an average growth rate of about 16% p.a., compared to just over 10% p.a., for the GNP. The share of transport in the GNP increased to 5.1% in 1974 and over the same period the share of investment devoted to transport grew to 21% of the total capital formation. 2.05 The rapid expansion of transport demand has imposed a severe strain on the transport infrastructure which up to about 1966 had not been modernized, except for some improvements to the railways. The resulting shortage of capa- city caused bottlenecks which have required a massive reorientation of the transport development strategy within the last 10 years, but there are still deficiencies particularly in the highway network. Investments for transport and storage represented about 16% of the Third Plan (1972-76) and will be about 15% of the Fourth Plan (1977-81). However, total investments will rise rapidly and the constant value of transport investment will increase by about 50%. The allocation for railways and roads in the Fourth Plan will form 58% of total transport investment. The allocation for ports and shipping will be 36%, compared with 28% in the Third Plan, an increase which reflects Korea's emphasis on exports and expansion of its merchant marine. 2.06 As a result of the development of the highway network since 1968, rail/road competition has grown keener, particularly for passenger transport for which highway transport during the last decade progressively increased its share to nearly 75% of all pass-km. Also, the railway is meeting strong competition from trucks for short and medium distance freight traffic because of the flexibility of service and increasing trans-shipment costs from rail to trucks to reach the final destination, Undoubtedly, the virtual monopoly enjoyed by the railway only a decade ago has now ended, and the transport system is evolving through competition toward a more balanced multi-modal pattern where the different modes will complement each other. Highways 2.07 The present highway system is still inadequate to cope with the rapid growth of road transport, despite the Government's effort since 1968 to catch up with the backlog of necessary road improvements. Only about one- half of national highways and less than 20% of other roads are paved. This situation will require a continued high level of investment. -4- Railways 2.08 Korean National Railroad (KNR) at the end of 1973 operated 3,068 route-km of standard gauge, of which 529 km are double track. Electrification of some 321 km of industrial lines from Seoul to the northeast coast (carry- ing mostly mineral traffic) was completed in October 1975. Also about 100 km of suburban lines have been electrified, and a subway in the Seoul area was opened in 1974. 2.09 The railway is expected to retain its share (nearly 80%) of bulk commodity movements in line with its operational improvements and additional rolling stock. Continued competition from other modes is expected for general freight traffic and for passenger traffic. The railway is likely to retain a significant amount of such traffic, but tariff adjustments will be required to effect a major improvement in its finances. Ports and Shipping 2.10 Freight traffic through the ports has increased from about 11 mil- lion tons in 1965 to about 70 million tons in 1975. This sharp increase resulted in serious port capacity problems, particularly at Busan, the largest port, which handles 20% of the country's external trade and is chronically congested. Incheon, the nearest port to Seoul, is being expanded, with the assistance of the Asian Development Bank (ADB), through the addition of twenty deep-water berths, including five container berths. The project has been in partial operation since 1974, although two berths, the breakwaters and some ancillary works will not be completed until 1977. However, the facilities are substantially underutilized and are expected to remain so for many years be- cause transport costs to and from the Seoul area are higher via Incheon than via Busan. The port suffers from the inherent disadvantage of a very high tidal variation, necessitating entrance locks which result in delays to ship- ping. Additional investment in container handling equipment, including cranes, will be required as the volume of containers increases. 2.11 In addition to the ongoing Bank-financed project, at Mugho 1/ and Busan (Loan 917-KO), the Government began, in 1975, construction of major port facilities, costing about US$200 million, at Bugpyeong, Pohang, and Onsan on the east coast, and at Samil on the south coast (Map 11700R). These facilities were designed and are being constructed by the Ministry of Con- struction (MOC) as integral parts of the site preparation and infrastructure for a number of industrial plants: Bugpyeong will handle bulk cement; Pohang's new harbor, inbound iron ore, coal, limestone and scrap steel, and outbound steel products from the expanded Pohang steel mill; Onsan, inbound petroleum products and raw materials for the non-ferrous metals smelters, and outbound products from these plants; Samil, imports of raw materials for, and outbound products from, a fertilizer plant and petrochemical complex. None of these port projects was included in the recommendations of the Korea Port Develop- ment Study - Phase I (KPDS-I) and therefore, according to the Loan Agreement 1/ Previously spelled Mukho. of Loan 917-KO (Section 3.11), they required the Bank's prior agreement. The Government, however, did not seek the Bank's agreement before starting the projects in the belief that industrial ports were not covered by the covenant. The Bank has drawn the Government's attention to this breach of the covenant; however, it should be recognized that the economic justification for such "industrial" ports largely depends on the economic justification for the associated industrial facilities, a difficult matter for the Bank to pursue. The Government intends to establish an Inter-Ministerial Committee to review industrial port development proposals (para 3.06). 2.12 Korea's share in the merchant shipping serving its external trade has been increasing and it is estimated that, in 1976, about 38% of the country's total foreign trade tonnage was carried by Korean vessels. The important role of coastal shipping is largely due to the country's geography and the Government's development of industrial complexes at Pohang, Ulsan and other coastal sites and to the existing shortage of rail and road capacity. Aviation 2.13 Domestic passenger traffic carried by air is growing rapidly, but still amounts to only about 1% of the total. Domestic air freight traffic is negligible. Domestic routes are served by the privately-owned Korean Airlines (KAL), which also operates a number of international flights. There are international airports at Seoul and Busan, and at Jeju island, a major tourist center. C. Transport Planning and Coordination 2.14 In spite of the efforts of the Government since 1970 to create insti- tutions to improve transport planning, the investment decision-making process is still uncoordinated and dispersed among different Government agencies. The Economic Planning Board (EPB), is the central agency which is intended to pro- vide a comprehensive overview of investment in all sectors. However, it has not been able to formulate an investment policy for the whole transport sector. Nor has it had the capability to review transport investment proposals by line agencies, and to assess the merits of alternative solutions in meeting the Government's objectives. However, EPB is establishing a mechanism for de- tailed review of major investments by all agencies of Government with a view to increasing its capability for analysis of transport investments. 2.15 The transport coordination function was reorganized in late 1975; the old Transport Planning Office of the Ministry of Transportation (MOT) was renamed the Transport Coordination Office (TCO) and has assumed responsibility for economic regulation of transport, particularly with regard to pricing and entry. A recent Bank sector mission has reviewed transport coordination and will make recommendations for the strengthening of this function. 2.16 Over-investment in port facilities, such as that at Incheon, reflects the present lack of port planning and the fact that project designs are fre- quently not based on careful analysis and projection of port operational -6- statistics. Furthermore, MOC is not responsible for operating the port facil- ities which it constructed. The establishment in March, 1976, of the KMPA, to plan and administer Korean ports should assist substantially in alleviating this problem. However, KMPA lacks staff with planning experience and, there- fore, appropriate training is proposed (para 4.02 (e) and Annex 1). III. PORT FACILITIES, ORGAN4IZATION AND OPERATIONS A. Facilities, Existing and Under Construction (Map 10382R3) 3.01 The port of Busan has a natural harbor, further protected by break- waters, the northern section of which handles commercial shipping, while South Harbor handles fishing vessels and other small craft. The entrance channel has 12 m (40,000 dwt ships) water depth and is being deepened to 13.5 m (60,000 dwt) as part of the ongoing bank-financed First Port Project (Loan 917-KO). Maximum tidal range is 1.2 m. 3.02 Berthing facilities currently consist of about 4,100 m available at four finger piers, and at a central wharf; the south side of pier 3 and part of the central wharf are used for military cargo. Oil traffic is handled in the outer harbor, while 95% of the timber imports are unloaded in the stream. There are about 3,000 m of lighterage wharf and 24 ship anchorages with 5 m to 13 m depth. Adequate privately owned lighters are available; the port has four ship-handling tugs. Containers are handled with ships' own gear, and with a recently installed container crane on the north side of Pier 3, directly onto semi-trailers, because there is no space for stacking them at the pier. Ample transit shed and open storage space is available but needs modernizing, and lighting and water supply are inadequate at present, although improvements are being made under Loan 917-KO. Mechanical equipment for hand- ling general cargo is largely privately owned. 3.03 The berthing facilities are being substantially expanded under the ongoing First Port Project to be completed in July 1978. The project includes: (a) composite pier with 600 m of container ship berths, and a grain berth and silos; (b) Pier 7 for bulk coal and minerals; (c) rehabilitation of piers 1 and 2, which will include provision for an international ferry terminal, with roll-on/roll-off facilities; and (d) a coastal ferry terminal. A new Govern- ment-financed military pier will free pier 3 and the central wharf for commer- cial cargoes. Full details of port facilities as they will be following com- pletion of the First Port Project are shown in Annex 2. 3.04 With the completion of the proposed project, the port will have reached the limits of its physical capacity. It will be necessary, therefore, to look elsewhere to meet port expansion needs in southeast Korea beyond about 1985. The Government intends to conduct a study for port expansion in due course. B. Organization 3.05 In March 1976, following a 15-month study by consultants financed under Loan 917-KO, KMPA was established under the MOT for the purpose of - 7 - administering the construction and operation of Korea's 20 first-class ports. The 23 second-class ports and numerous minor local ports continue to be oper- ated by local government officials. KMPA administers the first-class ports through ten District Port Authorities. Key personnel were appointed in April 1976, and personnel from MOC's Bureau of Harbor Development have since been transferred to KMPA to staff the construction and maintenance function. The organizational structure (Chart 16452) is acceptable, although containing some overlapping of functions at present. The Korea Dredging Corporation has been transferred from MOC to MOT, and harbor dredging at first-class ports will now be under the control of KMPA. 3.06 Construction of "industrial ports," forming part of industrial complexes, continues under the control of MOC, which is responsible for con- struction of industrial complexes. While this is a reasonable division of responsibilities, KMPA's responsibility for overall planning of Korean ports needs to be clarified with respect to the planning of industrial ports, since the present law is not specific on this point. The Government has agreed to establish an Inter-Ministerial Committee under the chairmanship of the Vice- Minister of EPB, to review MOC's proposals for industrial port development, and will take whatever other action may be required to ensure that the views of MOT and KMPA on proposed industrial port developments are taken into account before they are approved by EPB. C. Finances 3.07 Section 3.02 (c) of the Loan Agreement for Loan 917-KO provided that KPA (KMPA) shall have independence and autonomy similar to that of Bor- rower's statutory corporations in their day-to-day operations". (The finances of statutory corporations are controlled under Law 1119.) However, the Plan of Action (Schedule 5 of the Loan Agreement) required the Government, by June 1, 1975, "... to establish KPA (KMPA) pursuant to Section 3.02 (b) of this Agree- ment as an Office (chong) ...", which was stated during negotiations to have powers similar to those of a statutory corporation. In fact, the finances of a chong are controlled by Law 928 (Accounting and Budget Law for Government Operated Enterprises), through the Government budgetary system (Annex 3). KMPA was established under Law 928, which contains constraints impeding ef- fective management of KMPA as a business enterprise, the principal of which are: (a) financial control is exercised through expenditure limitation rather than through operating performance as measured by overall financial results; (b) control authority relating to operating costs is exercised outside KMPA; (c) commercial accounting procedures, necessary for proper internal management, have to be carried out in parallel with the budget accounting procedures required by Law 928. The Government intends to amend Law 928, with effect from January 1, 1979, so as to provide all Government operated enterprises with greater flexibility in the use of their approved operating budgets. In addition, the Government has agreed to grant KMPA, by the same date, the power to incur debt, to fix the emoluments of its staff, to prepare its budgets in commercial form (Annex 4), to maintain a bank account, and to maintain its records in a commercial form. - 8- D. Cargo-Handling Operations 3.08 KMPA is nominally responsible for cargo-handling operations on the wharf but, in fact, it exercises little influence over the operations of the numerous private licensed operators who handle cargo at all piers. The effi- ciency of cargo-handling operations is low, due to (a) fragmentation of res- ponsibility between the various cargo-handling companies and waste of time and effort due to lack of coordination; (b) inadequate mechanical equipment and pallets, which are often used only when manual labor is incapable of the task; (c) excessive use of lighterage, resulting in low productivity; (d) use of transit sheds for long-term storage; (e) excessive documentation, particu- larly those of Customs, which requires forms even for cargo movement within the port; and (f) Customs control over cargo movements within the transit sheds. 3.09 The organization of cargo-handling operations has been studied by a consultant (Booz Allen & Hamilton - US) financed under Loan 917-KO. The con- sultant's recommendations have been discussed with KMPA, and the following measures to improve the efficiency of operations have been agreed with the Government: (a) at the ports of Busan, Mugho and Incheon, a single TOC will be appointed by March 31, 1978, on terms satisfactory to the Borrower and the Bank, to manage cargo handling operations exclusively at each of the bulk piers; and, by a date accept- able to the Bank, at each of the bulk piers of the other first class ports. For this purpose, the Bank will approve a standard form of contract applicable to all locations; (b) at Busan's container wharf, a single terminal operating company (TOC), with personnel drawn from the existing container terminal operators, will be appointed, by March 31, 1978, on terms satisfactory to the Borrower and the Bank (Annex 5), to manage container handling operations; (c) at the ports of Busan, Mugho and Incheon, a single TOC will be appointed by March 31, 1979, to manage break bulk cargo- handling operations exclusively at each pier or other desig- nated area; and by a date acceptable to the Bank, at each of the other first class ports. For this purpose, the Bank will approve a standard form of contract applicable to all locations; (d) by July 1, 1982, or such other date as the Borrower and the Bank may agree, when KMPA staff have gained sufficient experience of supervising the TOC's cargo-handling oper- ations, control of such operations will be taken over by KMPA; (e) by July 1, 1978, improved procedures for the control of cargo movement within the Customs area will be implemented; and - 9 - (f) at the port of Busan, the container wharf, including the container freight station, will be operated 24 hours a day. 3.10 The assumption by KMPA of a supervising and coordinating role in cargo-handling operations will necessitate their hiring a nucleus of staff experienced in cargo-handling operations. In order to recruit such opera- tions staff in competition with private companies, the Government has agreed to allow KMPA to fix the emoluments of its staff appropriately. 3.11 By 1978, when the new container wharf at Busan comes into operation, the staff of Busan District Maritime and Port Authority (BDMPA) should have a thorough understanding of its operating requirements. Some technical as- sistance in this regard is being provided under Loan 917-KO; additional tech- nical assistance and training is now proposed (para 4.02 (e) and Annex 1), including overseas training at suitable ports. IV. THE PROJECT A. The Capital Investment Program 4.01 The Capital Investment Program for the port of Busan for 1976-81 totals about US$269 million equivalent (Table 1). It comprises expenditures on the First Port Project through 1979; on the proposed project through 1981; and on minor capital works throughout the period 1976-81. As already noted, with the completion of the proposed project, Busan port will have reached the limits of its physical capacity and, therefore, the program includes no additional major project. B. The Project 4.02 The project is included in the Government's Fourth Five-Year Plan and is in accordance with the recommendations of the consultants as amended following the Bank's review of their proposals. The proposed wharf is the maximum length which can be accommodated in the present port of Busan, and it would meet the port's needs for capacity to handle containerized cargo until about 1985. Specifically, the project would comprise: (a) Civil Works (i) A 700 m extension of the common-user container births being financed under Loan 917-KO and a 335,000 m expansion of the stacking area provided under that project; (ii) dredging to provide an alongside depth of 12.5 m; (iii) an access road, insidg the port limits; a guard house; and an 8,000 m container freight station; - 10 - (iv) ancillary works and utilities; and (v) rehabilitation of piers 3 and 4, the central wharf, and a lighter wharf. (b) Mechanical Equipment Procurement of container cranes and mobile container handling equipment. (c) Floating Craft Procurement of two tugboats. (d) Engineering Consultant Services To carry out detailed design and supervision of construction and procurement of the above. (e) Technical Assistance and Training Program (Annex 1) To assist in four areas of port operations: cargo handling (including the handling of containers); maintenance; port planning; and accounting. Full details of the project are given in Annex 6. Provision has been made in the cost estimates for roll-on/roll-off facilities as traffic development dictates. To ensurce prop,-e. ,aaintenance of the container handling equipment, the project includes maintenance facilities and technical assistance to es- tablish an adequate maintenance program. 4.03 The total estimated project cost is US$112 million (Won 54,283 million). The proposed loan of US$67 million (Won 32,495 million) would finance most of the foreign exchange cost of the project; the local currency, about US$42 million (Won 20,334 million) and US$3 million (Won 1,455 million) of the foreign exchange cost would be financed by the Government. Details of the project cost estimates are given in Table 2 and are summarized below: - 11 - % of Won Equivalent (Million) US$ Equivalent ('000) Total Local Foreign Total Local Foreign Total Cost A. Civil Works 9,904 12,142 22,046 20,420 25,040 45,460 41 B. Mechanical Equipment and Tugs 1,054 8,536 9,590 2,170 17,600 19,770 18 C. Engineering Services 581 1,940 2,521 1,200 4,000 5,200 5 D. Technical Assistance and Training 150 582 732 310 1,200 1,510 1 E. Base Cost Estimate (BCE) 11,689 23,200 34,889 24,100 47,840 71,940 - F. Physical Contin- gencies 1,485 1,821 3,306 3,060 3,750 6,810 6 G. Expected Price In- creases (38% BCE) 5,060 8,928 13,988 10,435 18,410 28,845 25 H. Customs Duty on B 2,100 - 2,100 4,330 - 4,330 4 TOTAL 20,334 33,949 54,283 41,925 70,000 111,925 100 4.04 The cost estimates for civil works are based on preliminary designs and unit prices for similar ongoing works in Korea, and those for mechanical equipment on recent purchases, both at late 1976 prices; they are considered adequate. Physical contingencies are equivalent to 15% of the civil works. Expected price increases in foreign exchange for civil works have been calcu- lated, over the period from late 1976 to the completion of ccnstruction, at 12% in 1977-79, and 10% in 1980 and 1981; and for mechanical equipment and tugs, at 8% in 1977-79 and 7% in 1980 and 1981. C. Project Execution 4,05 The project will be carried out by KMPA, assisted by consultants. D. Consulting Services 4.06 The Government is about to appoint consultants for supervision of construction and detailed engineering, including final soil investigations, hydrographic and other surveys (Annex 6). Specialist consultants will also be required for the technical assistance and the training program (Annex 1), including 82 man-months of expatriate consultants at an estimated cost of US$510,000 excluding travel and related expenses. - 12 - E. Procurement and Disbursement 4.07 The project would be executed under three civil engineering contracts, and two procurement contracts for mechanical equipment and tugs (Table 3). All contracts would be awarded on the basis of international competitive bidding in accordance with Bank Group guidelines. The Government intends to levy import duties on items procured for the project. Provision would be made to allow a 15% preference for local manufacturers of mechanical equipment and floating craft, in accordance with the Bank's guidelines. 4.08 The works are expected to be completed by the end of 1981, assuming effectiveness of the proposed loan by July 1977. The construction schedule is shown in Chart 16510. 4.09 Disbursement for the project civil works would be on the basis of 55% of total costs excluding import duties, representing the estimated foreign exchange component. This is based upon experience gained on civil works under the First Port Project, where all civil works contracts were won by Korean contractors. For procurement of mechanical equipment, tugboats, and consult- ing services disbursement would be on the basis of actual foreign exchange cost; if local consultants are employed disbursement would be on the basis of 80% of total costs. Korea does not have any regional preference agreements. Annual estimated project expenditure is shown in Table 4 and the estimated schedule of disbursements in Table 5. F. Ecology 4.10 None of the proposed works will affect the existing ecology of the harbor; any dredged material will be disposed of in a Government-approved location 10 km to sea. Any improvement to the external access roads will be designed following a proposed feasibility study, which will assess any likely environmental impact (para 5.04). V. ECONOMIC EVALUATION A. General 5.01 The current rapid industrialization in south east Korea is very dependent on imports for supplies of industrial goods and raw materials, and on export markets for its products. This large and fast-growing external trade moves largely through Busan port which, as already noted, is Korea's largest port. In addition, the port handles a substantial volume of container- ized goods originating in, or destined for, the Seoul area. Without the pro- posed project, all this traffic would suffer heavy penalties, in the form of higher transport costs, and south east Korea's economic development would be seriously retarded as a result. The full economic costs of such a course are incalculable, but certainly very substantial. As a conservative measure of these costs, the evaluation uses the cost of ship waiting time which would result in the absence of the proposed project. The project would also reduce transport costs on containerized cargo (paras 5.10-5.12). - 13 - 5.02 Total traffic through Busan port has grown from 13.3 million revenue tons in 1973 to 16.8 million tons in 1975, and is expected to reach about 19 million tons in 1976 (Table 6). Containerized cargo has grown even more rapid- ly, increasing from 0.9 million tons in 1973 to 2.7 million tons in 1975. In 1976 it is expected to exceed 3 million tons. This rapid growth in container- ized cargo has been achieved notwithstanding the present inadequate port facil- ities. Completion of the First Port Project in 1978 will permit the introduc- tion of direct services by mainline container ships (para 5.12), and will facilitate continued rapid growth of container traffic. The proposed project will be required by about 1981 to handle this expected traffic growth effi- ciently and, therefore, construction must start about January, 1978. 5.03 The proposed project would encourage the use of larger, more effi- cient ships; however, since it is uncertain whether the benefits of this would accrue to Korea, no benefit has been taken. The propo.,ed facilities would be substantially lower in capital cost than equivalent break-bulk facilities. Consultants for the project reviewed a number of alternative sites in the vicinity of the present port of Busan and a number in the vicinity of Masan, and concluded that the proposed site is the lowest cost alternative. B. Landward Port Access 5.04 The roads giving access to the port are congested. They pass through Busan's central business district, which lies to the west and north of the port. While traffic generated by the proposed project will not itself contribute significantly to the problem, the growth of general city traffic is likely to result in steadily increasing transport costs on all goods moving in and out of the port and, ultimately, could limit the port's capacity unless appro- priate steps are taken to improve the city's road network. In November, 1976, a Presidential instruction was issued to the MOC to construct a road from the port area to the Seoul/Busan expressway; construction is expected to be com- pleted by December 31, 1979. This will eliminate any congestion affecting traffic moving between the port and the Seoul area, and should help to relieve congestion in the central business district of Busan. In addition, the Govern- ment has agreed to undertake, by the end of 1979, a further study, satisfactory to the Bank, of city-wide transport and land use which will seek medium-term solutions to the city's congestion and assess their feasibility. The Govern- ment has agreed to consult with the Bank on the study's findings and to imple- ment its agreed recommendations. C. Traffic Forecast 5.05 The traffic forecast is based on a detailed commodity-by-commodity projection, for the whole of Korea, of production and consumption patterns and resulting import and export flows and coastal movements. These traffic flows were allocated to the country's ports on a basis of the least transport cost, and take account of established patterns of trading. The forecast's underlying assumptions include an 8% annual growth in GNP from 1977-81, a 6.5% annual growth in real per capita income, and an 11% overall annual growth in exports between 1973 and 1981. Projections for each major commodity group take account of past trends, current official plans and anticipated changes in the outlook for the supply of materials and the demand for the final products. - 14 - 5.06 Total port traffic is forecast to grow from an estimated 19.1 mil- lion revenue tons in 1976 to 31.2 million tons in 1986, an average annual growth rate of 5% (Table 6). General cargo, including containerized cargo, is forecast at a 4-1/2% annual growth rate, increasing from 8.1 million tons in 1976 to 12.6 million tons in 1986. Full details of the forecast are con- tained in Annex 7. 5.07 The proportion of general cargo which is expected to be contain- erized is forecast to increase from the present 44% for imports and 40% for exports to 60% for imports and 52% for exports by 1984. The higher figure for imports reflects the imbalance between imports and exports which provides an inducement to containerize as high a proportion of imports as possible rather than to ship in empty containers. The number of containers is forecast on the basis of the current average revenue tons per container. Throughout the forecast period it is expected that a substantial proportion of Seoul container traffic will continue to move through Busan. However, as the volume increases, it will become economic to make an increasing number of shipments through Incheon. 5.08 The principal risk in the forecast relates to the volume of contain- erized cargo, since the past very rapid growth provides no guide as to future traffic trends. If the proportion of containerized general cargo is less than forecast, the need for additional break bulk berths will be brought forward, as will the need for an alternative site to the present port for future expansion. A higher forecast of container traffic would have no effect on the scope of the project which, as already noted, is the maximum size which could be constructed in the port of Busan. The effect of over-estimation of container traffic on project benefits is dealt with in para 5.14. D. Project Benefits and Risks 5.09 Without the proposed project, it would be desirable to route all Seoul container traffic via Incheon. Other container traffic together with break bulk and bulk cargo (about 80% of total port traffic) would continue to move through Busan. Such a rerouting of Seoul containers would require some additional investment at Incheon in container handling equipment and would inevitably lead to ship waiting time at the entrance to the port due to de- lays in passage through the locks. The calculation of project benefits does not include allowance for either of these factors (para 5.10). Even if the shipping companies elected to ship all Seoul containers through Incheon severe congestion would still develop in Busan without the project. Berth occupancy would increase steadily to 85% in 1982 and, by 1985, the port would be satu- rated. This assumes an increase in productivity of break bulk general cargo handling from the present 850 metric tons per meter per year to the high per- formance standard of 1,000 tons per meter, and congestion would be increased by any failure to achieve this higher productivity. Ship waiting time would increase correspondingly and, by 1985, would reach about 2,800 ship days a year. The economic costs of the waiting time of Korean ships (excluding, that is, the cost of foreign ships) are estimated to increase from US$1.3 million in 1981 to US$9.7 million in 1985 and, thereafter, are assumed to stabilize at US$10 million a year (Table 7). It should be emphasized that there are additional economic costs of congestion at Busan in terms of the retarded - 15 - economic development of the region, which have not been estimated but would probably continue to rise after 1985. 5.10 If Seoul container traffic were directed through Incheon rather than Busan, the cost of ocean freight plus road transport between Incheon and Seoul would be about US$12 per container more than the cost of ocean freight to or from Busan plus road transport between Busan and Seoul. The extra cost would amount to about US$1.8 million in 1981 rising to US$2.3 million in 1985 and has been taken as a benefit of the project. These figures are based on the relatively high volume of 400 containers in and out per vessel, and would in- crease if fewer containers per vessel are handled. No allowance has been made for the inevitable ship waiting time which would occur as a result of delays in passage of vessels through the locks at Incheon. If Seoul container traffic were routed through Busan some extra ship waiting time would also result, even with the proposed project; however, this would be unlikely to exceed the ship waiting time which would occur at Incheon if the traffic were routed that way. 5.11 The proposed container freight station at Busan would reduce the number of containers which would have to be transported to and from container yards outside the port from 70% of the total, following completion of the First Port Project, to 40%. This saving of transportation and double handling costs on 30% of the container volume is estimated at US$48 per container, or about US$4 million in 1981. The 40% of containers which would continue to move outside the port comprises largely Seoul container traffic. 5.12 At present, because of the inadequate facilities, there are no direct mainline container shipping services to Basan, and containers are transferred between mainline container ships and feeder vessels at a Japanese port, at a cost of US$210 per container, and are then transported in the feeder vessels to and from Korea. The cost of transshipment at the Japanese port, and transport between there and Korea is at present included in the rates charged by the mainline container shipping companies, who quote rates on a "FOB Korean port" basis (or "CIF Korean port" in the case of shipments to Korea). Completion of the First Port Project will permit the introduc- tion of direct mainline container services to Busan and will thus eliminate the Japanese transfer cost on about 25% of Busan's 1981 container traffic. The proposed project would permit a further increase in the proportion of direct container shipments and the Japanese transfer cost is expected to be eliminated on all but 25% of Korea's container traffic. The benefit of this will accrue initially to the foreign shipowner and, therefore, it has not been included in the project benefits. However, in the long term, it can be expected to have a favorable influence on container shipping rates to Korea. 5.13 The proposed facilities are designed to serve mainline container ships; if they had been designed for smaller ships, such as semi-container vessels or the present feeder vessels, a smaller project at a lower cost would have sufficed. Based on the experience of such ports as Singapore and Port Klang, it is believed that competition among container shipping companies and growing congestion in Japanese ports will assure the rapid institution of mainline container services direct to Busan. The Government has agreed to continue to permit foreign vessels to serve Korean ports in accordance with - 16 - the provisions of Article II (2) of the Merchant Marine Promotion Law. 1/ In addition, it plans to charter, by 1981, a substantial number of container ships and to operate them between Korean ports and ports in the United States and Europe. It is reasonably certain, therefore, that the full benefits of the project will be derived. The plans for Korean container ships and the Government's undertakings regarding port charges (paras 6.03(d) and 6.17) provide assurance that a reasonable proportion of the project's benefits will be retained in the Korean economy. 5.14 In the unlikely event that the proportion of traffic which is con- tainerized has been over-estimated, the benefits mentioned in paras 5.10 and 5.11 would be reduced. However, the reduction would be partially offset by the benefits from the project through the reduction of ship waiting time which would otherwise be increased because the higher proportion of break bulk cargo would reduce average cargo-handling productivity and thus increase port con- gestion. The net effect on project benefits would be a maximum reduction of 15% (para 5.16). E. Economic Return, Sensitivity Analysis and Risks 5.15 The foregoing benefits yield an economic return of 17% on the pro- posed project. The first year return at 8% is low but considered adequate having regard to the fact that the penalties, in the form of higher ship waiting time which would be incurred if Busan port traffic has been under- estimated, are substantially greater than the penalties in the form of surplus port capacity, which would be incurred if port traffic has been overestimated. Delay in implementing the project could have very serious consequences for the Korean economy. 5.16 The 15% reduction in project benefits (para 5.14), resulting from a lower proportion of container traffic than forecast would reduce the return to 14%. VI. FINANCIAL EVALUATION A. General 6.01 BDMPA is expected to be a division of KMPA, maintaining separate accounts, but in the financial forecasts, it has been treated as if it were a financially autonomous unit, and therefore its balance sheets show the relevant portions of Loan 917-KO and the proposed Second Port loan as if they were liabilities of BDMPA. The Government has agreed that, upon the granting of increased financial autonomy to KMPA on January 1, 1979, it will assume loans to the Government in the same amounts and on terms similar to those of Loan 917-KO and the proposed Second Port loan. No financial forecast has been provided for KMPA because the necessary data will not exist until commercial accounting has been established. 1/ Law No. 1985 dated February 28, 1967 - Article 11 (Usage of Korean Flag). - 17 - B. KMPA's Accounting and Costing Systems, Rates and Charges 6.02 Consultants financed under Loan 917-KO (Booz, Allen & Hamilton - US) have designed new accounting, costing and management information systems for KMPA, which plans to implement the systems in the near future with the aid of technical assistance, also financed under that Loan, and in accord- ance with agreed terms of reference. 6.03 The adequacy of port tariffs varies from port to port. While in some ports they are clearly inadequate, in Busan they are, at present, not cost-based and charges for containerized traffic are low. The Government has agreed to; (a) establish in Busan not later than January 1, 1979, a cost- based tariff satisfactory to the Borrower and the Bank; (b) review tariffs at other ports within KMPA's jurisdiction and, as an interim measure, with a view to eventually establishing cost-based tariffs, to establish, by Jan- uary 1, 1979, tariffs which will yield revenues reason- ably in line with total costs at Incheon, Mugho, Yeosu and Pohang, and at other major ports later, in agreement with the Bank; (c) establish at Busan, by May 1, 1978, a uniform tariff for each 20 ft equivalent container unit handled in the port; and, to this end, the Borrower will undertake a study (Annex 1) of the level of container charges at Incheon and Busan; and (d) establish at Busan, before July 1, 1978, a charge to each TOC employed in the port, which will recover the port's costs of servicing and maintaining the pier and equipment used by the TOC together with depreciation, and a return on capital (para 6.12). C. KMPA's Asset Values and Depreciation 6.04 The present port assets are old and in poor condition. There are no records of the original cost of many items. In 1975, the Government ap- pointed a Working Party which revalued all existing assets in use throughout the country (Annex 8). These valuations, which are reasonable, are used in the current estimates. 6.05 The depreciation provisions appear to be low, particularly in the case of ports other than Busan. The Government has agreed to adopt by Jan- uary 1, 1982, realistic depreciation rates for KMPA's port assets. Until 1982 the injection of newly acquired fixed assets far exceeding the value of Busan's existing old assets will minimize the need for revaluation to take account of inflation. Consideration should then be given to this problem. However, it is considered premature to address the issue at this time in view of the more urgent matters facing KMPA. - 18 - D. BDMPA's Receivables, Payables and Stores 6.06 Under the Government budgetary system (Annex 3) there is no meaning- ful cash balance, and accounts receivable are not kept. The figure of Won 11 million shown in the 1975 balance sheet represents wharfage and demurrage which had already been invoiced but not paid at the year end; the port charges due, but not invoiced, at the year end are not recorded or known. Similarly, no record of accounts payable is maintained under the cash budgetary system, the amount of Won 691 million shown in the balance sheet as at December 31, 1975 representing only major items outstanding for contractors' and consul- tants' accounts awaiting IBRD loan disbursements, and interest and commitment charges payable to the Bank on February 1, 1976. No stores accounts are kept, purchases being regarded as current expenditure regardless of the period in which the stores concerned were actually used. In general, port operations are so conducted that accounts receivable and payable are very low in relation to turnover, and few consumable stores are kept on hand. E. Financial Staffing 6.07 There are no qualified accountants in BDMPA, nor any accounting staff familiar with double-entry bookkeeping. Furthermore, the level of salaries which KMPA is at present authorized to pay makes it difficult to attract and retain suitably qualified accounting staff, since they can earn far more in the private sector. In future, the payment of special allowances or employ- ment under contract, to which the Government has agreed, should minimize this problem. However, it is essential that KMPA acquire, or develop through a training program, sufficient qualified accountants and the proposed project provides consultancy assistance to set up training courses for accountants. F. BDMPA's Past and Current Earnings and Current Financial Position 6.08 BDMPA's revenue and expenditure accounts and balance sheets as pre- sented for 1973-75 are according to the best available data and constitute an adequately reliable basis for appraisal purposes. 6.09 Comparable gross and net earnings figures for Busan are available only on a cash basis for the three years 1973, 1974 and 1975. The true figures are unlikely to differ significantly from the cash figures. 6.10 Cash revenues, cash operating costs, depreciation and interest charges on an accrued basis for the three years 1973-75 are shown in Table 8. In 1975, net operating revenue was Won 1.3 billion representing a modest re- turn of 6% on average net fixed assets in use, and the operating ratio was a satisfactory 42. Under the Government budgetary system neither current nor liquidity ratios would be meaningful because there is no cash balance as such. 6.11 The development of port charges and net revenue over the period 1973-76 has been reasonable in relation to the book value of port assets. In part, this improvement resulted from the tariff increase established in 1974 as a condition of Loan 917-KO. - 19 - G. Establishment of Terminal Operating Companies (TOCs) 6.12 At present, the ports do not charge the cargo-handling companies for the use of port assets. This is not acceptable and when, in 1978, TOCs are appointed with exclusive right to operate at individual piers, BDMPA will establish charges to the TOCs which are related to the value of the port's assets used by each. 6.13 Accordingly, BDMPA's projected profit and loss account shows revenue derived from such charges to the TOCs. Estimates of operating and maintenance costs of the equipment provided under Loan 917-KO and to be pro- vided under the proposed project are included in forecast operating expenses. 6.14 In about 1982, when BDMPA assumes responsibility for all cargo- handling functions it will incur some additional costs and revenues belonging, until that time, to the TOCs. No information is available on these costs and, for this reason and because the takeover lies essentially outside the forecast period, no attempt has been made to forecast the effect of such an extension of responsibility. H. BDMPA's Future Earnings and Finances 6.15 Financial forecasts for BDMPA for 1976-82 together with actual fig- ures for 1975 are shown in Tables 9, 10 and 11, these being respectively profit and loss accounts, balance sheets and cash flow statements. Inflation has been taken into account in forecasting working expenses. Major tariffs were increased by 25% in March 1977. It is assumed that tariff charges will be further increased in line with the assumed increases in the general price level in Korea. Furthermore, the forecasts assume that specific tariff increases will be made, in particular, for bulk handling and container activ- ities to recoup the additional expenditure incurred as a result of the capital expenditure program (para 6.17). All assumptions used in the financial forecasts are detailed in Annex 9. 6.16 Completion in 1978 of the First Port Project will change the finan- cial picture dramatically. Operating costs in 1978, will be more than four times the 1977 level, due largely to increased depreciation. Increased charges for maintenance due to the costs of running the new bulk handling equipment, and for port administration, due to the increased number and qua- lity of staff, will also contribute to the higher operating costs. Depre- ciation charges, which remain very low through 1977, will suddenly increase, in 1978, about seven times. Interest charges on the IBRD and Saudi Fund for Development loans relating to Loan 917-KO will have reached their peak, and will be running at a level nearly four times as high as the charges in 1976. 6.17 To provide for these developments, charges against TOCs and ship- ping companies equivalent to US$58 per container have been assumed to occur on July 1, 1978, rising to US$68 on July 1, 1981. In practice such charges will be imposed selectively with regard to the cost of wharf facilities and mechan- ical equipment used for each type of cargo i.e. bulk cargo, containers and break bulk. Studies financed under Loan 917-KO have indicated that increases - 20 - in the Busan port dues and cargo tariffs on the scale called for could reason- ably be imposed. In relation to the efficiency of the port, and the present absence of delays to ships seeking berths, existing charges (particularly for containers) are low. The total charges for clearing a container in or out of the port amount at present to about US$20 per movement, of which roughly half goes to thie stevedores. In other parts of the world the comparable charge can run from US$100 to as much as US$180. The estimrniel i:-:al revenue from charges to be levied against TOCs has been asse,.,3;l 7-ala: [; i) the fixed assets likely to be used in such operations. 6.18 BDMPA's operating ratios are exceptionally low in 1976 and 1977, before the completion of the First Port Project; thereafter the ratios range between 44 and 48, which is satisfactory. Tirnes inter-si- :' itraJ.l iS lowest in 1978 at 1.5x and is satisfactory during the oi:,her forecast years. Debt service coverage is lowest in 1931, $heL it 5lls ,c l.9; bit it recovers to 1.8x in 1982 because of increasing revenues and falling interest payments. 6.19 BDMPA's estimated balance sheet data for the years 1976-82 are shown in Table 10. The debt/equity ratio rises to only 53/47 (in 1981) and improves to 49/51 in 1982. Current liquid ratios range between 1.1 and 1.6 during the project construction period, which is satisfactory. 6.20 The forecasts result in net operating revenue representing between 7.6% and 7.9% p.a. on BDMPA's average net fixed assets in use during the period 1978 to 1982 inclusive i.e., after the completion of the First Port Project and before total net asset values start declining after the completion (if the Second Port Project. The Government has agreed that BDMPA be required to earn a return of not less than 7% in 1978 and subsequent years. This replaces the rate of return covenant of the Loan Agreement for Loan 917-KO (Section 4.05 (a) (iii)), which requires BDMPA to earn a return of not less than 6% on its net fixed assets in 1978 and subsequent years. Section 4.05 (a) (iv) of this Loan Agreement, which requires KPA (KMPA) to earn in 1978 and thereafter an annual rate of return to be agreed between the Borrower, the Bank and KPA (KMPA), has been reaffirmed. I. BDMPA's Cash Position and Financial Plan 6.21 Estimated cash flow data for the forecast period are set forth in Table 11. The cash position is made satisfactory by the inclusion of cash grants in the form of equity from the Government/KMPA totalling Won 9.9 billion during the years 1977/78. On this basis, the future cash position will be satisfactory, although BDMPA will not be able to start building up substantial cash funds until after 1981 unless tariffs or charges to TOCs are increased more than in the forecasts in Table 9. The disposal of the accumu- lated cash funds arising from then onwards will be a matter for the Government and KMPA to decide in the light of its overall corporate position from time to time. Based on all assumptions referred to herein, the future cash positWo will be satisfactory. The financial plan (Table 12) based on cash flow estimates indicates that for the perio(d 1975-82, internally-generated funds would provide 25% of investment fund requirements, with Government/M4PA Jgrants accounting for about 14%, and long-term loans 61%. Thlese proportions are satisfactory. - 21 - 6.22 To ensure that an adequate financial position is maintained, the Government has agreed that (i) KMPA will not incur new debt on behalf of BDMPA if the net revenue falls below 1.5 times maximum debt service; (ii) the Gov- errment will provide or cause KMPA to provide to BDMPA such funds as BDMPA shall require over and above its internally-generated cash, from time to time, to enable it to implement its development program; and (iii) expenditures on capital works at BDMPA other than the First and Second Port Projects, will be limited to US$1.5 million p.a. after 1978 and until construction of the Second Project is completed. 6.23 The Government has confirmed that the port's assets, at present vested in the Government, net of the debts to be assumed, will be transferred to KMPA free of interest or charges thereon. J. Auditing and Insurance 6.24 From January 1, 1979, when KMPA's financial autonomy is increased, its accounts and financial statements, including those for BDMPA, will be audited annually by independent qualified auditors satisfactory to the Bank, in accordance with the requirements of Loan 917-KO. This has been reaffirmed. KMPA will employ qualified accountants to assist it in preparing commercial form financial statements from its budget accounts, for purposes of reporting to the Bank, and in implementing a commercial accounting system. 6.25 Under the conditions of Loan 917-KO, KMPA is required to take out, and maintain with responsible insurers, or to make other provision satisfac- tory to the Bank for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. This has been reaffirmed by the Government. VII. AGREEMENTS REACHED AND RECOMMENDATION 7.01 Agreement has been reached that the Government will: (a) establish an Inter-Ministerial Committee to review MOC's industrial port development proposals and will take what- ever other action is required to ensure that KMPA's views are taken into account before they are approved by EPB (para 3.06); (b) amend Law 928 to grant KMPA certain autonomous financial powers (para 3.07); (c) cause KMPA to implement measures to improve the efficiency of operations at all first class ports (para 3.09); (d) allow KMPA to fix the emoluments of its staff at appropriate levels (para 3.10); - 22 - (e) construct a road from the port area to the Seoul-Busan expressway by December 31, 1979; and undertake a study of city-wide transport and land use (para 5.04); (f) continue to allow foreign vessels to serve Korean ports (para 5.13); (g) as from January 1, 1979, cause KMPA to assume loans to the Government in the same amounts and on similar terms to those of Loan 917-KO and the proposed loan (para 6.01); (h) cause KMPA to establish (para 6.03); (i) at Busan, a cost-based tariff; (ii) at Incheon, Mugho, Yeosu and Pohang, tariffs yielding revenues reasonably in line with total costs; and extend this practice to other major ports later, in agreement with the Bank; (iii) at Busan, a uniform tariff for containers; and KMPA to undertake a study of the level of container charges; (iv) at Busan, a tariff of charges to each TOC (paras 6.03 and 6.12); (i) cause KMPA to adopt realistic asset depreciation rates by January 1, 1982 (para 6.05); (j) cause KIPA to (i) earni Li 1979 and thereafter, a return to be agreed with the Bank and (ii) enable BDMPA to earn a return of not less than 7% in 1978 and subsequent years (para 6.20); (k) not authorize KMPA to (i) incur debt on behalf of BDMPA if net revenue falls below 1.5 times maximum debt service; and (ii) make investments at Busan port in excess of US$1.5 million per annum during the project period (para 6.22); (1) provide or cause KMPA to provide any funds required by BDMPA over its internally-generated cash (para 6.22); (m) cause KMPA to have its accounts, and those of BDMPA, audited by independent auditors acceptable to the Bank (para 6.24); (n) cause KMPA to employ adequately qualifiel and experienced accountants (para 6.24); and (o) cause KMPA to maintain adequate insurance provisions (para 6.25). - 23 - 7.02 The proposed project is suitable for a Bank loan of US$67 million equivalent to the Government of Korea for a term of 17 years, including a grace period of 3-1/2 years. KMPA will assume a debt to the Government in the same amount and on similar terms on January 1, 1979, following the necessary legislative changes. ANNEX 1 Page 1 KOREA APPRAISAL OF SECOND PORT PROJECT Technical Assistance and Training Program 1. The First Port Project (Loan 917-KO) provided 220 man-months of consultants' time to assist the Government set up KMPA and to formulate and implement new operating and accounting procedures. The first phase of this work is now complete. A second phase, consisting of the implementation of the procedures formulated in the first phase, will commence shortly. Con- tinuing technical assistance and training is required, and the proposed pro- gram would provide 82 man-months of expatriate technical assistance to KMPA. It would cover three areas of port operations: cargo-handling; maintenance; and port planning. In addition, the Government will finance accounting train- ing, undertaken by Korean accountants with the assistance of foreign experts, and a study of container handling charges. Details of the proposals are given below. Cargo Handling 2. The present arrangements for handling containers in the port of Busan do not include stacking and retrieval or stuffing/unstuffing of con- tainers, and operation and maintenance of container cranes and container handling equipment such as straddle carriers. The new container wharf, being constructed under the First Port Project, is expected to come into operation in 1978 and, by then, KMPA staff should have a thorough understanding of the operation of such a modern facility, to enable them to supervise the work of the terminal operating company (TOC). By 1982, KMPA staff should be capable of taking over the operation of the container wharf from the TOC. 3. The proposed training program would include overseas training, at a port such as Singapore, in container handling operations; operational control methods, including computerized systems; breakbulk handling opera- tions; and security practices. It provides for: (a) five groups of three staff and two foremen in container handling operations for three months; (b) one group of three staff in operational control methods, including selection and use of computer equipment and software, for six months; (c) one group of three staff and two foremen in breakbulk handling, for three months; and (d) one group of three staff in security practices for three months. ANNEX 1 Page 2 4. Consultant services would be provided to review periodically container handling operations, following start-up of the Phase I facilities in July 1978, and to advise on improvements in operational methods, including computerization of the operational system. Maintenance 5. M4aintenance of port facilities, at present carried out by the Ministry of Construction (MOC), must be taken over by KMPA as soon as possi- ble to ensure that adequate priority and funds are assigned to such work. Furthermore, following start-up of the Phase I container facilities in July 1978, KMPA will become responsible for maintaining all the container handling equipment in Busan port; and, about a year later, it will become responsible for the handling of breakbulk general cargo and, therefore, for the maintenance of equipment for this purpose. 6. Expatriate assistance would be nD ovided to set up adequate mainte- nance facilities in each of the first class ports; to design a preventive maintenance program for cargo handling equipment, particularly the container handling equipment provided by this project and the First Port Project (Loan 917-KO); and to train staff adequately to act as maintenance inspectors. Port Planning 7. Port planning, as distinct from the designing of port facilities, virtually does not exist in Korea. The Government does not, at present, make projections of port traffic based on carefully collected and analyzed traffic statistics. It tends to rely on port users to alert it to the need for expan- sion of port facilities. Also, it does not analyze the economics of alterna- tive ways of meeting the demand for port facilities. While KMPA has well trained and capable port engineers, there is a general lack of planning exper- ience, and a lack of knowledge of related nca-engineering fields which are necessary for a good port planner. 8. Overseas training would be provided for two port engineers for six months each in techniques of port planning. In addition, expatriate assist- ance would be provided to set up the planning function, and to initiate plans for port facilities to meet the needs of Korea beyond 1985. Also, consulting services would be provided to develop a satisfactory collection system for operational statistics. Accounting Training 9. At present, KMPA does not have any qualified accountants nor any staff that understand double-entry bookkeeping. While the First Port Project provided funds for the design and implementation of a commercial accounting system, it is essential to ensure an adequate supply of staff who understand the fundamental principles of accounting if the system which has been designed is to be successfully implemented and maintained. It is therefore necessary ANNEX 1 Page 3 to introduce a suitable course in the Ministry of Transportation Training Center in Seoul which KMPA staff would attend. A local accounting firm will be used for the purpose of setting up and conducting such courses. The serv- ices of expatriate experts will also be required for the implementation of the accounting procedures designed under the First Port Project. Study of Container Handling Charges 10. The ongoing First Port Project and the proposed project will provide substantially improved facilities for container traffic and will, therefore, significantly reduce the costs of container shipping and handling companies. However, the new facilities will add substantially to the port's operating costs and, therefore, the port will have to adjust its tariff appropriately to cover these increased costs. 11. It is proposed that KMPA, using its own resources, undertake a study of the level of container charges which takes account of: (a) the port's container handling costs; (b) the present level of container charges at Japanese ports and at Incheon; and (c) the need to maintain a differential between container charges at Busan and those at Incheon which reflects the economic costs of using each port and encourages increased use of Incheon's under-utilized facilities. March, 1977 ANNEX 1 Table 1 KOREA APPRAISAL OF SECOND PORT PROJECT Technical Assistance and Training Program Cost Summary Local Cost Foreign Cost (Won'OOO) (US$) Cargo Handling Overseas Training Other reimbursable costs 14,000 300,000 Consulting Services for Review of Container Operations 6 man-months - 40,000 Other reimbursable costs 7,500 30,000 Maintenance Expatriate Assistance in Setting up Maintenance Facilities 48 man-months 10,000 300,000 Equipment - 300,000 Other reimbursable costs 12,500 30,000 Port Planning Overseas Training in Port Planning 7,500 30,000 Expatriate Assistance in Port Planning 16 man-months 10,000 100,000 Consulting Services for Operaticnal Statistics Information System 12 man-months 2,000 70,000 Training of Accountants Korean Consultancy assistance by qualified accountants 24 man-months 80,000 Study of Container Handling Charges 12 man-months 5,000 - Other reimbursable costs 1,500 TOTAL Won '000 150,000 US$ 1,200,000 March 1977 ANNEX 2 KOREA APPRAISAL OF SECOND PORT PROJECT Busan - Port Facilities Following Completion of First Port Project Name and Type Effective Available of Structure Length (m) Depth (m) Use Remarks A. Deep Water Berthage Pier No. 1 Open pier with fill between aprons. North 368 8.0 Public Being repaired Existing 95 m wide pier structure South 200 8.0 New Inter- and expanded being widened by-.a further 101 m national under the First reinforced-concrete deck supported Ferry Port Project on concrete piles. Terminal Pier No. 2 Open pier with fill between North 419 10.2 Public Being repaired aprons. South 365 10.2 under the First Port Project Pier No. 3 Stone block gravity North 470 9.0 Public Needs repairs to Caisson gravity South 450 9.0 deck, and improve- ment of lighting and water supply Pier No. 4 Caisson gravity North 603 9.0 203 m bulk Needs repairs to cement deck, and improve- handling ment of lighting 400 m public and water supply Stone block gravity South 550 9.0 Public Central Wharf Caisson and stone block gravity 645 9.0 Public Needs repairs to deck, and improve- ment of lighting and water supply ANNEX 2 Page 2 Bukbin Wharf Steel sheet pile bulkhead. New finger pier Two new finger piers, (30 m wide) New Coastal) Improvements added open type construction with North Pier Ferry ) under the First reinforced concrete deck on North 145 7.0 Terminal ) Port Project concrete piles, being added. South.135 7.0 for public) South Pier ) North 150 7.0 South 140 7.0 New Composite Pier (Pier No. 5) Reinforced concrete wharf Grain berths 336 12.5 Bulk grain ) Being constructed apron supported on concrete handling ) under the First piles; with sheet-piled only ) Port Project retaining wall. Container berths600 12.5 Exclusively Ro/Ro provision 59 12.5 for con- Pier No. 7 Hydraulic fill behind sheet North berths 245 10.0 Bulk hand- ) Being constructed piled retaining wall wharf. Two 90 m ores and ling of ) under the First Reinforced concrete deck on minerals export scrap metal Port Project concrete piled wharf apron berths steel bil-) upon which ore, coal and One 65 m scrap and lets, coal) scrap metal handling ore storage area and mineral cranes will be installed. Westberths 320 10.0 ores ) Concrete piled foundations One 135 m coal ) for coal stacker-reclaimer and ores import berth One 185 m steel billets and scrap import berths ANNEX 2 Page 3 B. Lighter Berths L/W 1 Gravity wall 160 2.0 Public Deck needs repairs L/W 2 Gravity wall 115 2.0 Public and Deck needs repairs Military L/W 3 Gravity wall 227 2.0 Military Fair L/W 4 Gravity wall 362 2.0 Public Deck needs repairs L/W 5 Gravity wall 298 2.0 Coal Corp. Deck needs repairs. Lighting and water supply needed L/W 6 Gravity wall 98 2.0 Coal Corp. Deck needs repairs L/W 7 Counterfort concrete wall 290 2.0 Public Deck needs repairs on concrete piles L/W 8 Gravity wall 502 2.0 KNR and Fair Military Custom's L/W Gravity wall 192 2.0 Customs Good Bukbin L/W Gravity wall 192 2.0 Military and Deck needs repairs Passenger South Harbor Wharf Gravity wall 716 2.0 Public Good Source: Bank Staff November 1976 ANNEX 3 Page 1 KOREA APPRAISAL OF SECOND PORT PROJECT The Government Budget System 1. Government-owned corporations such as KMPA are given an annual budget grant for expenditure, which is entirely divorced from income. The budget allots ceilings to expenditure under a large number of different headings; these headings are entirely different from those under which the Bank requires expenditure to be reported. For example, the salaries budget is set out in terms of establishment for the District Port Authority concerned, by Civil Service grade, and not in terms of the loca- tion and function of the personnel concerned. 2. Cash expenditure is posted to ledger accounts at the head of each of which the budget ceiling is recorded, so that progress against budget can be monitored. There is no cash book as such. The records are generally not kept in a form permitting expenditures at subsidiary ports to be determined without an ad hoc investigation, payment by payment. 3. At the end of the calendar year the books are not closed off; a 20-day period of grace is allowed within which expenditures may still be allocated to the budget of the year concerned. In theory, no doubt, such payments should only cover debts for goods and services which had already been incurred by the year end. Practice may well be different. 4. As with all budget systems where unspent balances are cancelled, there is a premium on getting the full amount spent if possible. Consumable stores are an excellent object for such expenditure, particularly if no stores records are kept and no stocks brought into account at the year end. Under the Korean system, it may or may not be possible to pay during the "period of grace" for items which should properly be chargeable to the budget of the following year; this will depend on the thoroughness of the Government auditors. 5. There are, no doubt, occasions when budget allocations may be fully spent, e.g., maintenance of buildings, and the system is too inflexi- ble to permit switching of underspent allocations from other sections to permit maintenance work to continue or payments to be made until the following budget year. 6. In KMPA financial reports, the absence of any accounts payable (except for a grossly understated item for interest and commitment charges) may perhaps be explained by the clearing of outstandings during the period of grace. At Busan, however, an analysis of contractors' and consultants' ANNEX 3 Page 2 invoices paid in the quarter following the 1975 year end (i.e., out of the 1976 capital budget) produced outstandings of nearly half a million Won. The absence of any value for consumable stores at the year end is also a matter which calls for examination. 7. KI4PA is expected to engage a qualified Korean professional accountant to analyze all payments for the 1975 budget from December 1, up to the end of the period of grace, and also at least the first two months of payments from the 1976 budget. 8. Pending the implementation of a commercial accounting system, the accountant would also set up a proper dual analysis system for cash payments. The books of account would be so constituted that invoices are automatically analyzed as they are paid, or when received, under the following headings: (i) by Government budget heading; (ii) by headings required for Bank reporting purposes, distinguishing between project ports, secondary ports, and navigational aids not directly related to either; (iii) by the Bank accounting periods to which they relate; and (iv) by the nature of the payments, consumable stores being separately noted so that at the end of an accounting period purchases can be scrutinized and enquiries made regarding any substantial quantities likely still to be in stock. December 1976 KOREA APPRAISAL OF SECOND PORT PROJECT KNPA Pro-Forma Special Account I. Profit and Loss Account II. Capital Account Revenues Expenditures Revenues Expenditures 1. Operating Revenues 1. Operating Expenditures Port dues Maintenance of port Surplus Port construction (work in Dockage facilities Sale of Fixed Assets progress) Anchorage Electricity and other Sale of Current Assets Acquisition of movable assets Wharfage utilities Medium and long-term Acquisition of fixed assets Storage charges Maintenance of equipment government loans Purchase of current assets Tuggage and vessels Foreign loans Repayment of medium and long- Charge for equipment Transportation expenses Inventory sales term government loans utilization General Administration Depreciation reserve Repayment of foreign loans Training and research Transfer from the Inventory purchases Government's Account Research and development Contingencies 2. Non-Operating Revenues 2. Other Expenditures License fees Depreciation costs Administration fees Interest Concession fees from TOCs Contingencies Interest Miscellaneous expenses Sales of discarded non -capital items 3. Net Profit TOTAL TOTAL TOTAL TOTAL 8- ANNEX 5 KOREA APPRAISAL OF SECOND PORT PROJECT Terminal Operating Company (TOC) Contract 1. Busan District Port Authority (BPDA) should contract, on terms satisfactory to the Borrower and the Bank, with a single terminal operating company (TOC) for the management of container-handling operations at the composite pier for a suitable period. 1/ 2. The contract should govern, inter-alia: (a) charges to made by KMPA for the use of port facilities and equipment; (b) the tariff of charges to be made by the TOC for its various services, including a uniform charge for each 20 ft equivalent container unit; (c) the facilities and equipment to be provided by KMPA; (d) responsibility for operating the terminal in an effi- cient manner for use by all KMPA's customers and for handling ships according to the directions of KMPA; (e) responsibility for maintenance of container and cargo handling equipment, including an agreed annual mainte- nance budget; and (f) the right of KMPA periodically to review the TOC's operating costs and adjust the KMPA and TOC charges accordingly. December 1976 1/ The period should not in the first instance exceed the period required to enable BDPA to obtain sufficient experience to enable it to take direct control of the TOC's operations. ANNEX b Page 1 KOREA APPRAISAL OF SECOND PORT PROJECT Project Details A. Dredging (Map No. 10382R3) 1. The dredging to be undertaken is to provide access to the proposed extension of the container berths provided under the First Port Project. Under the First Port Project, a channel and turning basin is being dredged to the container berths at the Composite Pier with a depth of 12.5 m. 1/ The proposed dredging will extend the turning space and alongside depth to service 3the ex- tension. The quantity to be dredged is estimated to be 1.5 million m . Final quantities will be determined following detailed hydrographic and other sur- veys during the preparation of detailed engineering by consultants. 2. Removal by dredging of a further 243,000 m of unsuitable soil and weak foundation material, from the area behind the face of the extended pier, will also be undertaken. Suitable fill requirsd for full reclamation of the project area, is estimated to be 3.2 million m . Final quantities will be determined following detailed soil investigations and other surveys during the preparation of detailed engineering by consultants. 3. Dredged material will be disposed of at selected dumping areas in deep water some 10 km out to sea. B. Container Berths Extension (Map No. 12506) 2 4. The reclaimed area2will total some 350,000 m , of which the wharf apron will comprise 15,000 m . There will be 700 m of container ship berths with 12.5 m water depth alongside, which will cater for the following types of container vessels: 1/ All water depths given are below LWOST. ANNEX 6 Page 2 Type of Ship Feeder Services Liner Services (200 TEU /a) (600 TEU) (1000 TEU) (2000 TEU) Length ) 90 180 210 265 Draft ) in meters 6 9 10 12 No. of Ship Berths /b 6 3 2+ /c 2 (allowing 25 m clear- ance between ships) /a TEU = Twenty-foot Equivalent Units /b The maximum number of ships of each size which could be berthed simul- taneously. In practice, some combination of the various size groups is likely. /c = 2 Liners plus 1 Feeder Service Vessel. 5. The proposed wharf extension will be similar in construction to that under the First Port Project, and will consist of a reinforced concrete open wharf apron 22 m wide, supported on precast concrete piles. A stone faced re- taining dike placed behind the wharf apron, together with precast prestressed sheet piles, will contain the fill. Selected fill material will be consoli- dated for the landward reclamation. Detailed soil borings over the project area will provide the necessary criteria for final design and detailed en- gineering. The extent of special drainage techniques required, together with surcharging, to ensure uniform and adequate consolidation for container stor- age will be determined following this work. Any surplus fill from surcharging will be removed to a triangular area north of the extension behind a sea wall, providing additional unsurfaced land for future use. The work will be under- taken by competent engineering consultants to be appointed by the Government and agreed to by the Bank. 6. The proposed wharf extension will create a rectangular water area at the mouth of a river which enters the harbor at the northeast corner of the proposed works. The Government proposes to dredge a settling basin at this location designed to trap most of the estimated annual 50,000 m of silt, sand and debris entering the harbor area, and reduce the required main- tenance dredging. The cost of providing the settling basin is included in the project costs. 7. The reclaimed area will be paved and will have adequate rail tracks and access roads. A container freight station (8,000 m ) for stuffing and unstuffing containers will be provided together with administration and Customs buildings, ancillary buildings and services. ANNEX 6 Page 3 8. Four 40-ton container gantry cranes will be provided on tracks con- tiguous with those presently laid under the First Port Project. All the con- tainer cranes will therefore be able to move anywhere over the total 1,300 m container berths. C. Equipment and Floating Craft 9. Container-handling equipment to be procured will be as follows: (a) 10 transtainers; (b) 24 tractors and 72 trailers; and (c) 10 truck scales 10. For the berthing of container ships two tugboats of 3,000 hp capa- city will be provided to augment the existing fleet. D. Rehabilitation Work 11. Rehabilitation works are proposed on Piers 3 and 4, the central wharf and lighter wharf No. 5. They consist largely of paving improvements, installation of electric lighting and water supply. When the new military pier (Pier 8), currently being built by the Government, is completed, the sections of Pier 3, the central wharf and Pier 4 presently in military use will be relinquished to BDMPA. December 1976 ANNEX 7 KOREA APPRAISAL OF SECOND PORT PROJECT Traffic Forecast 1. Available statistics of cargo movements through Busan port provide an unsatisfactory basis for projections. This is particularly true for move- ments of general cargo, the key commodity from the point of view of the pro- posed project. For example, inbound general cargo in 1974 rose 56% above 1973 to 3.5 million revenue tons, and outbound, at 3.8 million tons, was 52% higher (Table 6). In 1975, on the other hand, inbound general cargo fell 18% to 2.9 million tons while outbound rose a further 14% to 4.3 mil- lion tons. The average annual growth rate in the period 1973-76 was 14% for inbound general cargo and 28% for outbound general cargo. 2. Unidentified general cargo (designated "other general cargo" in Table 6) is forecast to grow from 2.1 million tons inbound in 1977 to 4.2 million tons in 1986, an 8% annual growth, which is in line with GNP growth; and from 3.7 million tons outbound in 1977 to 4.9 million tons in 1986, a 3% annual growth. The discrepancy between this 3% growth and the 11% overall annual growth in exports is explained largely by the fact that the greater part of the expected growth in exports will be handled at ports other than Busan. 3. The principal identified types of general cargo are textiles, machinery and metal products, and plywood. Inbound and outbound textiles are forecast to increase at about 5% p. a., while machinery and metal products are projected at about 3% p.a. inbound and about 12% outbound. The latter figure reflects the development of export-oriented industry in southeast Korea, par- ticularly at the large industrial complex of Changweon. Plywood exports are expected to reach about one million tons p.a. by 1979 and remain fairly stable thereafter, as a result of growing competition in world markets from timber- producing countries. 4. Other identified types of general cargo are fertilizer, wood pulp and dry chemicals. Fertilizer imports are expected to be phased out by 1980 as a result of growing domestic production. Wood pulp imports are expected to decline between 1978 and 1984 as a result of the start-up of a chemical wood pulp plant at Onsan in 1978. Similarly, imports of dry chemicals are expected to increase only slowly through 1981, and then to decline as a result of increasing domestic production. December 1976 ANNEX 8 KOREA APPRAISAL OF SECOND PORT PROJECT Valuation of Existing Assets 1. A KMPA working party revalued the existing assets at Busan as at December 31, 1974 on the basis of the then current land values and construc- tion costs with appropriate allowances for age and condition. The valuations appear to be reasonable, and have been accepted pending a report by profes- sional accountants. Depreciation 2. The current depreciation charges on the existing port assets are probably too low owing to the application by KMPA accountants of invalid principles in making the necessary calculations. The Bank has requested that the basis of the charges should be investigated by Korean professional accountants, but the KMPA figures have been used for the purposes of the present financial estimates. When the First Port Project is completed in 1978 the charges for depreciation of the assets now in use will be dwarfed by depreciation charges on the new ones, and it would make little difference to the estimates if present charges were increased by 50% or even doubled. 3. Depreciation charges on the new assets in the First and Second Port Projects have been based on the following amortization rates: Civil works on piers and wharves 3% p.a. on cost Bulk handling equipment 10% p.a. on cost Container-handling equipment 10% p.a. on cost Container chassis 15% p.a. on cost Tugboats 5% p.a. on cost Pier No. 3 (transferred 5% p.a. on cost estimated from military use) value in 1978. 4. The rate of 3% used for the civil works is a composite one based on 2 1/2% for the main structure and higher rates for items such as paving and sheds with shorter lives than the piers and wharves themselves. December 1976 ANNEX 9 Page 1 KOREA APPRAISAL OF SECOND PORT PROJECT Assumptions Used in Financial Forecasts General 1. It has been assumed that KMPA's financial autonomy under Law 928 will be increased on January 1, 1979, and that the equity of the BDMPA will be held by it on behalf of the Government. 2. It has further been assumed that the Government will provide KMPA with cash resources sufficient to enable it to make cash grants to BDMPA equal to its cash deficit in 1977 and 1978. These grants, which include adequate cash working capital as at January 1, 1979, are treated as equity contribu- tions to BDMPA. 3. In the estimates, BDMPA cash funds are shown as accumulating from year to year; the disposal of the cash funds in practice will be a policy matter to be decided by KMPA from time to time in the light of the needs of the Authority as a whole and any eventual requirement for the payment of dividend or interest on Government-owned capital. Transfer of Assets from Work in Progress 4. It has been assumed that assets covered by the First and Second Port Projects will come into use as shown below; the estimated book costs of the relevant assets have been transferred from work in progress to "other fixed assets" accordingly. First Port Project Date of First Use Pier No. 1 January 1, 1978 Coastal Ferry January 1, 1978 Composite Pier January 1, 1978 Pier No. 2 July 1, 1978 Pier No. 7 July 1, 1978 Second Port Project Tugboats July 1, 1978 Rehabilitation of Pier 1 July 1, 1980 Container Terminal and Steel Scrap Wharves January 1, 1981 ANNEX 9 Page 2 Government-owned Assets 5. It has been assumed that Pier No. 3 (at present in military use by the Government pending completion of a new military wharf) will be transferred to BDMPA on January 1, 1978. This pier was valued at Won 2,930 million in 1972: its value at date of transfer is taken as Won 6,000 million in the light of movements in the IMF consumer prices index for Korea up to the end of 1975 and the rates of inflation assumed throughout the estimates from 1975 onward. The sum in question was credited to the Government's equity in BDMPA. Monetary Inflation 6. It has been assumed throughout the estimates that the local currency price in Won of goods in general will increase according to the scale shown below: Price Index Year Price Increase (1976 = 100) 1977 12% 112 1978 12% 125 1979 12% 140 1980 10% 154 1981 10% 170 1982 10% 187 1983 10% 207 Loans from IBRD and Saudi Fund for Development 7. It has been assumed that for accounting purposes disbursements from the IBRD and Saudi Funds loans made for Busan assets or consultancy services financed under the First or Second Port projects are liabilities of BDMPA subject to the same terms as those applicable to the Government. Disbursements for general consultancy services concerning all KMPA ports have been excluded as being a direct liability of KMPA Headquarters, as have disbursements for assets and services connected with Mugho. Revenue Forecasts 8. The revenue forecasts for 1976 are based on the cash revenues re- ceived during the first nine months and the increase in port traffic expected during the last quarter; port charges were increased in November 1975, and again in March 1977. Forecasts for the years 1978-82 inclusive are based on expected volumes of shipping and cargo passing through the ports and 1977 tariffs, increased by an overall 15% on July 1, 1978, and a further 20% on July 1, 1981, to offset cost increases arising from price inflation. Ship- based tariffs were applied to estimates of Gross Registered Tonnage (GRT) made in the light of the traffic recorded through the port in 1973, 1974 and 1975, ANNEX 9 Page 3 and of the cash revenues from ship charges in 1976. Cargo-based revenues were based on the forecast volumes of cargoes of various types, and the port tariffs currently in force. The revenues from tuggage and the use of cranes, which are time-based, were assumed to increase in proportion to the GRT of shipping using the port, as were miscellaneous revenues. 9. In order to forecast cash receipts for port revenues, estimates had to be made of the charges due but uncollected at each year-end. KMPA has agreed to have this matter investigated by a qualified accountant since no accruals are at present made and no factual basis for making estimates is available. The conservative assumption was made for purposes of the pe-±sent forecasts that 3 1/2 days revenue is outstanding on transit shed and open cargo area charges, 3 days on dockage, 1 1/2 days on other ship-based dues, and 1/2 day on wharfage. Applied to the detailed revenue estimates for 1976 and 1985, these assumptions gave outstandings in each case of 1/2 of 1% of annual revenue; this percentage was thereafter used throughout in esti- mating revenue outstandings. Year end accruals in respect of charges against TOC's are assumed to approximate to one month's revenue. 10. To enable BDMPA to achieve a reasonable rate of return on the use of the assets provided by the projects, it has been assumed that a charge against TOCs will be levied on July 1, 1978, equivalent to US$58 per con- tainer, rising to US$68 on July 1, 1981. This charge is sufficient to recoup BDMPA's asset maintenance, depreciation and interest charges and provide an adequate return on the assets in use. In practice, the charge will be imposed selectively with regard to the cost of wharf facilities and mechanical equip- ment used for each type of cargo, i.e., bulk, containers and break bulk. 11. The revenue estimates presented in the Profit and Loss Accounts (Table 9) therefore, set out the additional revenues required to bring in an adequate cash flow without further Government assistance beyond 1978, and to provide adequate coverage of the debt service and repayments from net revenues, realistic depreciation charges, and an overall net operating return of at least 7% p.a. on net fixed assets in use from January 1, 1978 onwards. Operating Costs 12. In estimating annual operating costs for the years 1977-82, separate estimates were made at 1976 prices for the labor content and for brought-in supplies and services. The resulting estimates were then increased by apply- ing separate factors for the expected development of wage rates and general prices respectively. 13. The general price indices used provide for a 12% increase in Won prices in 1977 over 1976; 12% increases in 1978 and 1979; and increases at the rate of 10% p.a., thereafter. 14. Wage rate indices were constructed by assuming a general increase in real wages at a rate of 4 1/2% p.a., (a rate which compares with an aver- age annual rate of increase of 4.9% between the first quarters of 1972 and ANNEX 9 Page 4 1975 according to statistics for South Korea published by the IMF). Because KMPA staff wages and salaries are based on the scales applying to Government employees, they are very low by comparison with those current in private employment. It is understood that it is the policy of the Korean Government to close this differential substantially in the course of the next few years. It has been assumed, therefore, that KMPA staff will receive special additions of 7 1/2% p.a. to their wages in each of the years 1977-80 inclusive, over and above the 4 1/2% expected general increase in real wages. 15. It has been assumed that, from 1977 onwards, the provision of navi- gational aids for the port will be undertaken by KMPA instead of BDMPA. 16. Maintenance costs are at present very low for a port as extensive as Busan. Repairs and rehabilitation were neglected until major reconstruc- tion became necessary. When the new and rehabilitated assets covered by the First Port Project become operational a major increase in maintenance activity will be needed, with a second large increase later when the Second Port Proj- ect is completed. An important part of both projects consists of modern bulk- cargo handling and container handling equipment, and it is essential that specialized repair and maintenance services should be set up for the very expensive equipment concerned. It has been assumed that by 1982 a labor force of 130 men will be required on maintenance work, and that at 1975 prices brought-in supplies and services will cost 200% of the wage and salary bill. The resulting overall cost estimates were tested against the rule-of-thumb that good maintenance can cost up to 1 1/2% of the capital cost of civil works and 2 1/2% of the cost of mechanical equipment; by this criterion the cost estimates are still rather low, though they probably represent the maximum effort which will be within the technical and administrative competence of the BDMPA until there has been an extensive training program. 17. Administration costs in real terms will also have to increase very substantially over the next five years if the new port facilities are to be run in an efficient manner. Provision has been made in the estimates for a counterpart staff of 75 employees to control the cargo handling activity from 1978 onwards, when the assets in the First Port Project become operational and the present stevedoring companies are merged in a single corporation working under the operational control of the BDMPA. By 1978 the financial and accounting staff will have to be expanded by at least 20 employees. Senior members of the accounting staff will have to be more highly qualified than any at present available if the quality of financial and management accounting is to be raised to an adequate level, and better paid than existing staff. The provision of continuous data and cost accounts by profit center is essential for both efficiency and the establishment of sound cost-based revenue tariffs. 18. It has been assumed in the estimates that from 1980 onward a staff of 20 will be required to man the computer which is planned for container control. Allowance has also been made for successive increases of 10% in the general administrative staff at BDPA Headquarters in 1979 and 1981. March 1977 KOREA APPRAISAL OF SECOND PORT PROJECT Busan Port Capital Investment Program 1976-82 (USS '000) Expenditure 1976-81 Prior to 76 1976 1977 1978 1979 1980 1981 Total 1982 First Port Project 16,400 43,100 78,300 27,400 2,100 - - 150,900 - Second Port Project - - 2,000 15,200 23,000 36,300 35,400 111,900 - Minor Capital Expenditures - - 1,000 2,000 1,000 1,000 1,500 6,500 2,000 Total 16,400 43,100 81,300 44,600 26,100 37,300 36,900 269,300 2,000 Source: Bank Staff March 1977. 1> H TABLE 2 KOREA APPRAISAL OF SECOND PORT PROJECT Detailed Project Cost Estimates Estimated Costs Won Million uS$'000 Local Foreign Total Local Foreign Total A. Civil Works 1. Container Berth Extension (i) Dredging approach to the extelded container pier, and disposal of 1.5 million m of dredged material 10 km to sea; and dredging to 12.5 m at the pier face. 486 619 1,105 1,000 1,280 2,280 (ii) 700 m container berth extension; providing an area of 350,000 m2, complete with paving, drainage, fencing, crane rails, rail sidings, freight station, buildings, ancillary facilities, etc. 8,460 10,350 18,810 17,440 21,340 38,780 Subtotal 8,946 10,969 19,915 18,440 22,620 41,060 2. Rehabilitation Work (i) Piers 3 and 4 598 731 1,329 1,230 1,510 2,740 (ii) Central Wharf 216 266 482 450 550 1,000 (iii) Lighter Wharf No. 5 144 176 320 300 360 660 Subtotal 958 1,173 2,131 1,980 2,420 4,400 Total Civil Works 9,904 12,142 22,046 20,420 25,040 45,460 B. Mechanical Equipment and Floating Craft 1. Container Handling (i) 10 truck scales 9 70 79 20 140 160 (ii) 4-40 ton container cranes 345 2,797 3,142 710 5,770 6,480 (iii) 10-40 ton transtainers 369 2,983 3,352 760 6,150 6,910 (iv) tractors and trailers for 20 ft and 40 ft containers 68 560 628 140 1,160 1,300 2. 2-3,000 hp tugboats 263 2,126 2,389 540 4,380 4,920 Total Mechanical Equipment and Floating Craft 1,054 8,536 9,590 2,170 17,600 19,770 C. Engineering Consultant Services 1. Preparation of detailed engineering work up to award of contracts. (Preparation of detailed designs, specifi- cations, bid documents for all civil works, equipment and floating craft, including inspection services). 339 1,140 1,479 700 2,350 3,050 2. Supervision of civil works construction, fleating craft construction, equipment installation and tests after delivery and installation. 242 800 1,042 500 1,650 2,150 Total Engineering Consultant Services 581 1,940 2,521 1,200 4,000 5,200 D. Technical Assistance and Training 150 582 732 310 1,200 1,510 Base Cost Estimate 11,689 23,200 34,889 24,100 47,840 71,940 Physical Contingencies 1,485 1,821 3,306 3,060 3,750 6,810 Price Contingencies 5,060 8,928 13,988 10,435 18,410 28,845 Total 18,234 33,949 52,183 37,595 70,000 107,595 E. Add Customs Duties on "B" 2,100 - 2,100 4,330 - 4,330 PROJECT GRAND TOTALS 20,334 33,949 54,283 41,925 70,000 111,925 Source: Government, Consultants and Bank Staff March 1977 TABLE 3 KOREA APPRAISAL OF SECOND PORT PROJECT Proposed Grouping of Contracts 1. Civil Engineering Contracts A. Dredging B. Pier 6 - Container Berth Extension - Rough Grading C. Pier 6 - Container Berth Extension - Final Works 2. Mechanical Procurement Contract - Container Cranes and Container handling equipment- 3. Floating Craft Procurement Contract - Tugboats 1/ This contract will be based on the equipment described in the project but bidders will be allowed to propose alternative methods of handling containers in the stacking area. TABLE 4 KOREA APPRAISAL OF SECOND PORT PROJECT Annual Estimated Project Expenditure Calendar Year Expenditure in Expenditure in Foreign Currency Local Currency (US$'ON" (Won million) 1977 2,200 340 1978 10,000 2,888 1979 13,400 4,948 1980 24,500 6,054 1981 19,900 6,104 TOTALS 70,000 20,334 Source: Bank Staff March 1977. TABLE 5 KOREA APPRAISAL OF SECOND PORT PROJECT Estimated Disbursement Schedule (US$' 000) Cumulative Bank Fiscal Year Quarter Amount Disbursed Annual Total 1977 3 _ 4 700 700 700 1978 1 750 2 750 3 1,000 4 2,500 5,000 5,700 1979 1 3,200 2 3,300 3 3,300 4 3,300 13,100 18,,800 1980 1 3,400 2 3,400 3 4,500 4 6,000 17,300 36,100 1981 1 7,500 2 6,500 3 6,200 4 5,500 25,700 61,800 1982 1 4,800 2 400 5,200 67,000 Source: Bank Staff March 1977. KOREA TABLE 6 APPRAISAL OF SECOND PORT PROJECT Busan Port Traffic - 1973.d2 ( 000 Revenue Tans) Actual Est. -ro-ec----- 1973 1974 1975 19E6 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 lINsOuD GCa-i 1,085 702 977 1,002 1,0A2 1,018 1,127 1,172 1,219 1,268 1,318 1,371 1,426 1,483 ITron, Steel & Scap 1,040 869 910 1,358 1,345 1,332 1,319 1,305 1,292 1,324 1,357 1,391 1,426 1,461 Coal cr 425 714 925 978 1,030 1,084 1,142 1,202 1,266 1,306 1,348 1,391 1,436 1,482 Tiker- 1,965 1,397 2,120 2,313 2,406 2 502 2,602 2,706 2,814 2,828 2.842 2,856 2.871 2,885 Cenent 590 702 1,137 1,131 1,236 1,351 1,477 1,614 1,764 1,866 1,975 2,089 2,210 2,338 Other DryBullk 17 14 12S 103 95 87 80 80 80 80 80 80 80 80 Total Dry Bulk 5,242 4,524 6,194 6,886 7,154 7,440 7,747 8,079 8,435 8,672 8,920 9,178 -9ZZV 9,729 Crude Perroleum- 2/ 250 377 297 234 250 268 287 307 328 351 376 402 430 460 Petroleut Products - 1,853 1,795 1,555 2,119 2,373 2,658 2,977 3,334 3,734 4,183 4,684 5,247 5,876 6,581 Other Bulk Liquids l54 246 213 179 207 234 260 287 315 327 339 351 363 455 Total Bulk Liquids 2,257 ,418 2,065 2,532 2,83 160 3,1524 3,928 4,377 4861 5,399 6,000 ,669 796 F-rtili-en - 51 165 42 32 24 16 8 - - - - - W-od Pulp 160 146 173 199 179 159 139 119 100 110 125 135 145 160 Tentiles 200 180 208 235 248 261 273 286 299 314 330 345 360 375 Macbhi-o and Metal Products 285 227 281 334 347 359 372 384 397 409 420 430 445 460 Dry Chenicalr 348 258 258 257 260 262 265 267 270 250 230 210 190 165 (ther General Cargo 1.283 2.681 1,820 _956 2,112 2,281 2, 2,661 2,874 3,104 3,352 3,620 3,910 4,223 TctsI G-n-crl Cargo 2,276 3,543 2,905 3,023 3,178 3,346 3,529 3,723 3,940 4,187 4,457 4740 5,050 5383 TOTAL IMPORTS 9,775 10,485 11,164 12,441 13,162 13,946 14,800 15,732 16,752 17,720 18,776 19,920 21,168 22,608 Fercentage of Guenral Cargo Containerized 23.47 30.57, 36.87, 43.8% 45.0% 47.0% 50.0% 52.0% 54.07% 56.0% 58.07 60.0% 60.07, 60.0% Coatainer-e-d G-eeral Cargo ('000 tans) 533 1,080 1,068 1,323 1,430 1,573 1,765 1,937 2,128 2,345 2,585 2,844 3,030 3,230 To.n p-r Co-taioer n.a. 18.0 18.9 19.1 19.0 19.0 19.0 19.0 19.0 19.0 19.0 19.0 19.0 19.0 Nuober of Containers (Full) 0.0. 59,932 56,544 69,234 75,263 82,769 92,895 101,947 112,000 123,421 136,053 149,684 159.474 170,000 Numbbr of Co-taioers (Etmpty) . 23 000 25,739 3b876 6 36884 33_ 10 33_834 35 657 37,016 37,303 36,894 35,929 32,078 27,579 TOTAL CONTATNERS 45,095 82,932 82,283 108,000 112,147 116,379 126,729 137,604 149,016 160,724 172,947 185,613 191,552 197,579 OItTBO17NlD Comnto 365 380 558 621 579 200 200 200 200 200 200 200 200 200 Orr- aod Minerals 255 341 358 318 328 337 347 358 369 380 391 403 415 427 Scrap Metal and Steol 375 467 425 579 616 655 697 742 790 781 773 764 756 747 Other Dry Bulk 8 4 1- - - - - - - - - Total Dry Bulk 2/ 1,003 1,192 1,342 1,518 1,523 1,092 1,244 1,300 1,359 1,361 1,364 1,367 1,371 1,374 PrtroIcon Products 50 52 18 15 10 5 - - - - - _ _ - Total Liquid Bulk 50 52 18 15 10 5 - Plywood 645 442 656 948 967 986 1,006 1,026 1,047 1,050 1,050 1,050 1,050 1,030 Tertiles 265 249 279 309 327 345 364 382 400 422 445 467 490 512 Mets1 Products and Moobluery 150 185 210 234 285 336 387 438 489 545 601 655 711 767 Othor General Cargo 1,437 2,918 3,190 3_639 3_748 3,861 3,976 4_096 4,219 ;,345 4.476 4610 4.74 4.891 Total General Cargo 2,497 3,794 4,335 5,130 5,327 5,528 5,733 5,942 6,155 6,362 6,572 6,782 6,999 7,220 TOTAL OUTBOUND 3,550 5,038 5,695 6,663 6,860 6,725 6,977 7,242 7,514 7,723 7,936 8,149 8,370 8,594 Percentage of Generel Cargo Containerized 16.17. 45.5% 38.4% 40.07, 40.0% 50.0%h 42.03, 44.0% 46.1% 48.0%^ 50.0% S2.05h 30.0% 52.02f1 Co-tainerized General Cargo ('000 taos) 409 1,725 1,665 2,052 2,131 2,211 2,408 2,614 2,831 3,054 3,286 3,527 3,639 3,754 Revenue Ton per Container n.a. 21.8 18.3 19.0 19.0 19.0 09.0 19.0 19.0 19.0 19.0 19.0 19.0 19.0 Number of Containers (Fu11) na. 72,118 88,509 108,000 112.147 116,379 126,729 137,604 149,016 160,724 172,947 185,613 191,552 197,579 Number of Cootainera (Empty) n.a. 7000 2336 - TOTAL CONTAINERS 37,110 79,118 90,845 108,000 112,147 116,379 126,729 137,604 149,016 160,725 172,947 185,613 191,552 197,579 1/ Haudled in the strean 2/ Handled over private part facilities Source MPA Tr-ns-Asia Group Bask Staff Augnst 1976 KOREA APPRAISAL OF SECOND PORT PROJECT Economic Costs and Benefits (US$'000) E c o n o m i c Benefi tts Economic Ship Container Yard 2/ Transport Cost 3/ Year Cost Waiting Time-/ Cost Eliminated- On Incheon Containers- Total 1977 1,300 1978 9,900 1979 14,800 1980 23,500 1981 19,700 1,278 4,292 1,818 7,388 1982 1,666 4,629 1,961 8,256 1983 2,328 4,981 2,110 9,419 1984 3,490 5,346 2,264 11,100 1985 9,716 5,517 2,337 17,570 1986 10,000 5,690 2,410 18,100 1987 10,000 5,861 2,482 18,343 1988 10,000 6,036 2,557 18,593 1989 10,000 6,218 2,633 18,851 1990 10,000 6,404 2,712 19,116 1991 10,000 6,596 2,794 19,390 1992 10,000 6,794 2,878 19,672 1993 10,000 6,998 2,964 19,962 1994 10,000 7,208 3,053 20,261 1995 10,000 7,424 3,145 20,569 1996 10,000 7,647 3,239 20,886 1997 10,000 7,876 3,336 21,212 1998 10,000 8,112 3,436 21,548 1999 10,000 8,356 3,539 21,895 2000 10,000 8,607 3,645 22,252 Total Economic Cost 69,200 Return 17% Items Omitted - Price Contingencies 28,800 - Taxes and Duty 12,400 1/ Taken at US$3,500 per ship-day. - Technical Assistance 1,530 2/ Cost of transporting containers to container yards and double-handling. Taken at US$48 per container. Total Project Cost 111,900 3/ Additional cost of transport on Seoul containers routed via Incheon. - Taken at US$12.20 per container. r m Source: Bank Staff < March 1977 TABLE 8 KOREA APPRAISAL OF SECOND PORT PROJECT Port of Busan - Cash Revenue and Expenditure 1973-75 (Won Millions) 1973 1974 1975 1. Operating Revenues (Cash Basis) Port Dues 373 289 240 Anchorage - - 42 Light Dues 106 82 71 Tuggage 191 228 216 Dockage 172 553 653 Wharfage - 551 700 Transit Shed Charges 81 83 50 Open Cargo Area Charges 119 118 132 Floating Cranes 45 39 41 Rental of Facilities 41 6 6 Water Supply 2 2 2 Miscellaneous Revenue 73 56 75 Total Operating Revenues 1,203 29007 2,228 2. Operating Expenses (Cash Basis) Navigational Aids 14 151 186 Maintenance 139 212 160 Port Administration & Miscellaneous 163 128 156 316 491 502 Depreciation 640 519 433 Total Operating Expenses 956 1,010 935 3. Net Operating Cash Revenue 247 997 1,293 Interest & Commitment Charges 144 334 394 (Accrued Basis) Net Income 103 663 899 Operating Ratio 79 50 42 Operating Return on Average Net Fixed Assets In Use 4.5% 4.7% 6.0% Source: Bank Staff October 1976 TABLE 9 KOREA APPRAISAL OF SECOND PORT PROJECT Port of Busan - Profit and Loss Account 1975-82 (Won Millions) (Actual) (Est)------------------- (Forecast) ---------------- 1975 1976 1977 1978 1979 1980 1981 1982 Operating Revenues Port Dues 240 555 672 738 782 829 886 930 Anchorage 42 674 818 880 915 952 1,000 1,040 Light Dues 71 - - - - - - - Tuggage 216 220 254 279 295 310 331 348 Dockage 653 716 993 1,074 1,117 1,173 1,231 1,292 Wharfage 700 1,218 1,474 1,585 1,680 1,764 1,870 1,982 Transit Sheds 50 50 52 54 57 60 65 68 Open Cargo Areas 132 180 189 196 210 220 233 245 Floating Cranes 41 50 60 63 67 71 75 79 Rental of Facilities 6 30 30 30 30 30 30 30 Water Supplies 2 6 7 8 8 9 9 10 Sundry Income 75 150 159 168 178 188 200 210 Total Operating Revenues 2,228 3,849 4,708 5,075 5,339 5,606 5,930 6,234 Tariff Increases: assuming overall 15% July 1, 1978 and 20% July 1,1981 380 801 841 1,572 2,369 Revenue from Terminal Operating Companies 3,274 7,130 7,741 9.106 10.601 Total Operating Revenues 2,228 3,849 4,708 8,729 13,270 14,188 16,608 19,204 Operating Expenses Navigational Aids 186 - _ - - - - - Maintenance 160 224 240 531 664 885 996 1,040 Port Administration 156 102 193 319 337 368 387 387 Total Working Expenses 502 86 33 850 1,001 1,253 1,383 1,427 Add Allowances for Price Inflation - 52 212 400 677 968 1.241 Adjusted Total Working Expenses 502 386 485 1,062 1,401 1,930 2,351 2,668 Depreciation 433 443 448 2,957 4,492 4,849 5,225 5,930 Total Operating Expenses 935 829 933 4,019 5,893 6,779 7,576 8,598 Net Operating Revenue 1,293 3,020 3,775 4,710 7,377 7,409 9,032 10,606 Interest and Commitment Charges - Long Term Debt 294 832 2 056 3,158 3,77 4,363 4,740 4,559 Net IncOme - 899 2,188 1,719 1,552 3,602 3,046 4,292 6,047 Ratios Operating Ratio 42 21 20 46 44 48 46 45 Times Interest Earned 3.3 3.6 1.8 1.5 1.9 1.7 1.9 2.3 Debts Service Coverage 4.4 4.1 2.0 2.1 2.6 1.9 1.5 1.8 Rate of Return on Average Net Fixed Assets in Use 6.1 14.4 18.2 7.8 7.6 7.7 7.8 7.9 Source: Busan Port and Bank Staff March 1977. TABLE 10 KOREA APPRAISAL OF SECOND PORT PROJECT Port of Busan - Balance Sheet at December 31, 1975-82 (Won millions) (Actual) (Est.) ------------------ (Forecast) -------------------- 1975 1976 1977 1978 1979 1980 1981 1982 ASSETS Current Assets Cash nil nil nil 1,600 3,329 2,806 3,383 4,533 Accounts Receivable 11 18 37 656 674 694 912 930 Stores nil 11 13 31 43 58 74 82 Total Current Assets 11 29 50 2,287 4,046 3,558 4,369 5,545 Fixed Assets Gross Value Land (as revalued Dec. 12, 1974) 7,916 7,916 7,916 7,916 7,916 7,916 7,916 7,916 Gross Value Other Fixed Assets (at valuation Dec. 31, 1974 plus additional at cost) 13,676 13,676 14,161 95,347 96,414 100,613 i46,078 151,048 Accumulated Depreciation 433 876 1,324 4,281 8,773 13,622 18,847 24,777 Net Value Other Assets in Use 13,243 12,800 12,837 91,066 87,641 86,991 127,231 126,271 Total Net Fixed Assets in Use 21,159 20,716 20,753 98,982 95,557 94,907 135,147 134,187 Work-in-Progress 11,758 28,675 60,021 4 17,0 29,918 - - Total Fixed Assets 32,917 49,391 80,774 103,851 112,558 124,825 135,147 134,187 TOTAL ASSETS 32,928 49,420 80,824 106,138 116,604 128,383 139,516 139,732 LIABILITIES AND EQUITY Current Liabilities Accounts Payable: Capital Goods 464 1,257 2,181 1,017 1,270 1,983 2,423 81 Port Operations - 15 16 32 42 56 69 78 Interest on Loans 227 524 1,185 1,680 1,951 2,266 2,407 2,309 Total Current Liabilities 691 1,796 3,382 2,729 3,263 4,305 4,899 2,468 Loans Outstanding IBRD-First Port Project 3,895 11,680 26,176 32,684 32,636 31,752 30,802 29,784 IBRD-Second Port Project - - 627 4,180 10,493 20,204 28,538 27,293 Saudi Fund for Development-First Port Project - 2,431 10,160 13,838 13,903 12,767 11,630 10,493 Total Loans 3,895 14,111 36,963 50,702 57,032 64,723 70,970 67,570 Equity Capital at January 1, 1975 22,936 22,936 22,936 22,936 22,936 22,936 22,936 22,936 Accumulated Retained Earnings 899 3,087 4,805 6,358 9,960 13,006 17,298 23,345 Accumulated Government Cash Grants 4,507 7,490 12,737 17,413 17,413 17,413 17,413 17,413 Assets brought in by Government ___ _ 6,000 6,000 6,000 Total Equity at End of Year 28,342 33,513 40,479 52,707 56,309 59,355 63,647 69,694 TOTAL LIABILITIES AND EQUITY 32,928 49,420 80,824 106,138 116,604 128,383 139,516 139,732 Current/Liquid Ratio -/ N/A N/A N/A 1.1 1.6 1.2 1.3 2.2 Debt/Equity Ratio 12/88 30/70 48/52 49/51 50/50 52/48 53/47 49/51 1/ Excluding 63% of capital goods accounts payable, this proportion being payable from loan funds. Source: Busan Port and Bank Staff March 1977, KOREA TABLE 11 APPRAISAL OF SECOND PORT PROJECT .ort of Busan - Cash Flows for the Years 1975-1982 (Won Millions) Actual (Est.) ----------------- Forecast ------------------- Total 1975 1976 1977 1978 1979 1980 1981 1982 1975-82 I. Cash Requirements 1. Capital Investments (i) First Port Project 9,403 18,917 31,380 10,670 582 - - - 70,952 (ii) Second Port Project - - 966 7,394 11,132 17,6i 13X,820 3,eoo 53,943 (iii) Other 345 - 485 970 485 485 727 970 4.467 Total Investments 9,748 18,917 32,831 19,034 12,199 18.116 14,547 3,970 129,362 2. Debt Service (i) Interest and Commitment 394 832 2,056 3,158 3,775 4,363 4,740 4,559 23,877 Charges (ii) Repayments _ - _ 390 821 2,020 4,490 _4L6Q L2_281 Total Debt Service 394 832 2,056 3,548 4.596 6,383 9,230 9,119 36,158 3. Increase in Working Capital (680) (3,087) (2,565) 2,290 496 (2,007) 640 3,457 (1L456) (Decrease) 4. Total Cash Required 9,462 16,_662 32.322 24,872 17291 22,492 24,417 16.546 J6h,064 II. Cash Available 1. Internally Generated: (i) Net Operating Revenue 1,293 3,020 3,775 4,710 7,377 7,409 9,032 10,606 47,222 (ii) Depreciation 433 443 448 2,957 4,492 4,849 5,225 5,930 24,7;7 Total 1,726 3,463 4-223 7,667 11,869 12,258 14,257 16,536 71,999 2. Government Grants: 4,507 2,983 5,247 4,676 - - - - 17,413 (Deficit on Cash Account) 3. Loans: (i) IBRD 3,229 7,785 15,123 10,451 7,086 9,711 10,737 1,160 65,282 (ii) Saudi Fund for Development - 2,431 7,729 _3,678 65 - - - 13.90.3 Total Loans 3,229 10,216 22.852 14.129 7,151 9.711 10,737 1,160 79.185 4. Cash at Beginning of Year nil nil nil nil 1,600 3,329 2,806 3.383 - 5. Total Cash Available 9,462 16,662 32,322 26,472 20,620 25,298 27,800 21,079 168,597 6. Cash at 8nd of Year nil nil nil 1,600 3,329 2,806 3,383 4,533 4,533 7. Increase (decrease) in Cash nil nil nil 1,600 1,729 (523) 577 1,150 - During Period Source: Bank Staff M.arch t977. TABLE 12 KOREA APPRAISAL OF SECOND PORT PROJECT Summary Cash Flow Data; Financial Plan 1975-82 (Won Millions) Capital Investments 129,362 100 Internally Generated Cash 71,999 Less Debt Service 36.158 Increase of Working Capital 3,077 39.235 Internal Cash - Available for Port Investment 32,764 25 Loans 79,185 61 Government Grants t7,413 14 129,362 100 Source: Bank Staff March 1977. KOR EA SECOND PORT PROJECT Design and Construction Schedule YEAR 1977 1978 1979 1980 1981 1982 PROJECT-1-i m QUARTER 1 2 3 4 1 2 34 1 2 3 4 4| 1 2 3 43I | 2 3 4 BUSAN 1. Design, Construction Supervision, Major Port Equipment Inspection and Installation II. Port Construction: 1. Dredging m 2. Reclamation 3. Container Berth Construction m MEEK 4. Rehabilitation Works * ME* Ill. Procurement of Equipment and Tugs: 1. Tugboats * 2. Container Handling Equipment _gg*g LEGEND: ^ i Engineering Services: Detailed Engineering, Design, and Services to Contract Award Stage 6~~^ Engineering Services: Construction Supervision and Equipment Inspection Services Until Completion of the Project Construction Period and Period for Procurement and Installation of Equipment and Tugboats * * * fl Guarantee Period (Period to make good defective work) World Bank-16510 KOREA APPRAISAL OF SECOND PORT PROJECT KOREA MARITIME AND PORT AUTHORITY ORGANIZATION CHART | DIRECTOR GENERAL PUBLIC INFORMATION OVERSEAS RESIDENT OFFICER OfFICER |LONDON. NEW YORK DEPUTY DIRECTOR GENERAL 1H3t PLANNING & MANAGEMENT DIRECTOR, MARINE TRANSPORT DIRECTOR. HARBOR CONSTRUC- DIRECTOR, BUSAN DISTRICT DIRECTOR, INCHEON DISTRICT OFFICER BUREAU TION BUREAU E PORT AUTHORITY PORT AUTHORITY PLANNING & BUDGET L COASTAL SHIPPING DIV. PLANNING DIV, - (OFF,CE.R _ GENERAL SERVICES DIV. DEPUTY DIRECTOR OCEAN-GOING SHIPPING DIV. CONSTRUCTION DIV. ADMINISTRATION MANAGE- 'AENT OFFICER VESSEL DIV. DREDGING DIV. _ GENERAL SERVICES DIV. LEGAL AFFAIRS OFFICER OFFICER & CREW DIV. EOUiPMENT DIV. DIRECTOR, MARINE AFFAIRS BUPEAU - MARINE AFFAIRS DIV. ECONOMIC COOPERATION OFFICER DIRECTOR, PORT MANAGE- - VESSEL DIV. MENT & OPERATION BUREAU MARINE AFFAIRS DIV. EL.ECTRO0NIC PROCESSING -SEAMEN AFFAIRS DIV. OFF IC ER . _ VESSEL DIV. _ PORT AN ENT DIV. PORT AFFAIRS DIV. -SEAMEN AFFAIRS DIV. GENERAL SERVICES DIV. PORT OPERATION DIV. - FINANCIAL ACCOUNTING DIV. FINANCIAL MANAGEMENT DIV. * DIRECTOR, COMMUNICATION & SECURITY DIVO -ACCOUNTING DIV. * l 3BUREAU - NAVIGATION AIDS DIV L ~~~~~~~~-ADMINISTRATION DIV 11 INSPECTION OFfICER C OMMUNICATION 6 SECURITY . _PORT OPERATION DIV. _AMNSRTO I DIV. J.CONSTRUCTION DIV FINANCIAL ACCOUNTING DIV. - PLANNING h SURVEY DIV, MERGENCY PLANNING COMMUNICATION & NCHEON PORT CONSTRUCTION OFFICER ~~~~~~~~~~~~~ ~~~~~~~~~~~SECURITY DIV. OFFICE r DIRECTOR. CONSTRUCTION _ LOCK-GATE OPERATION OF-ICE B , , _ 3UREAU GUNSAN PORT CONSTRUCTION OFFICE M-| AUGHO DISTRICT PORT ULSAN D AU OITSTRICT FORT | F ADMINISTRATION DIV. MOGPO PORT CONSTRUCTION AUTHORITY * 7 AUTHORITY ~~~~~OFFICE CONSTRUCTION OIV. T_ SOGCHO PORr CON5TRUC- ,YEOSU PORT CONSTRUCTION |TON OFFICE O C G PLANNING & SURVEY DIV. OFFICE ION OFFICE * ~~~GUNSAN DISTRICT PORT SOGCHO OFFICE, MUGHO OPA AUTHORITYDIRECTOR. SUSAN PORT CONSTRUCTION OFFICE ISTPORT I. ALO RJTY J , ANGHANG OFFICE, GDPA r ADMINISTRATION DIV. CONSTRUCTION DIV. hI, MASAN DISTCRI, T |P*ORTMOGPO DISTRICT PORTL CONSTRUCTION DIV. 2nd L ASANGMU DISTIC T, PO RT * MOGPO DISTRICT PORT AUTHORITY AUTHORITY AREONTIO OFOCE, MDPAFICE M J ~~~~~~POHANG DISTRICT PORT 0 OHANG PORT CONSTR JCTION| CO FUF IFCC EC . JEJU DISTRICT PORT AUTHORITY L SEOGVIPO OFFICE, JOPA World Sann-16452 lBRD 11700R -r / 1260 ~~~~~~~~~~~~ ~~~~27' 1220-s NOVEMBER 197 / j '. ~~~~~~ ~~~~NORTH KOREA/qso' C H N A QtciI it-C> ~ ~ ~ ~ ~ ~ ~ ~ r~~~~wov-~~~~~~~~V I ~-tEast Se a RERUIJlLlO . / *N- 1, SPenn/Ac oce~an *npy otoe,e, ~r ocrooceby so- - BaE Mnoo,afSoe Ye/law - $ a a * ~~~~~~~~ V tD~~~~rwan6 Ilyeoooong4 … --~~~~~~~ Onyang Fee,.', ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ p~3- w 12 ------~~~ ) C Ceeoo3 Fosn XQR E A t. Gongj~~~~~~~~~~~~~~~~HY TRANSPORTATION NETWOftK ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ / / V~~~~~P EqOTWO NAliONAL IROIIWAYS -- a Dorir ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ .V. EXPRESSWAY 0002151 tAIlS TOad nice' .-j VeOFOAOOY,h - RATICIIAI. RISIIWAYS WAVEd C 4; 320~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ f -j~ i--NTOA ERIOAL UN'AED A.re''..- BIr, ~ 0~ at~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~9 pOJT HIIIAY NATCONAI'RUOToN*ANOEJWNVE,RT GFIERJC OS 51.N ' -' / i-- I0OWTWfAVSI HRARJC y "I'. A - ... A.. FEASHYS,TD AIl ® PNOV1PJCIE CAPITALS 4; PORTS - -I-Fft PGjF4 PA -AFY,~i - /*. It 40 sp ' N KILOMETERS ~~~~~~~~~~~ I p ~~~.j 320 06' Aj> 127r fv SnOres <3 w~~~~~~~12 IBRD 10382R3 KOREA SECOND PORT PROJECT BUSAN HARBOR LOAN 917-05 2;d STAGE EXISTING CONSTRUCTION CONSTRUCTION PIERS OR SHIPWHARVES WAREHOUSES \ TRANSIT SHEDS RAILWAYS ROADS BUILDINGS CRANE TRACKS t f2 DREDGING AREAS BUSANJ/N KU REHAB ILTATNWOK 0 250 500 1000 1500 PLYWOOD f~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~E CON TRIJC7," - / O - -: . r vC Ooter Ha1Br4 r MIL f ' <~~~~~~~~~~~~~~~~~~~~~~~~~~~~E4An, ' ffiI A;SiX,el,, _ _ _ . / -i -t \ t > > Xn4U Kh9 Jmm i> T gI^z7er X ~~~~~~~i w -3 5 = 0 as!~~~~~~~A *terber f ( YFONt f)S)> KU ° > .~~~~~UI -'t D \ / h XKOREA r n K ,:2P ~ ~ ~ ~ ~ ~ ~~4 //BU ^ ;SAN HRARO The houndoniso shown on thin 0109 do not SP/ AREA, ,9 imnply ndo,semenl or oscpianoc by the/ 0 Worldhook and O ftstdiaeoe./ ///~~~~~~~~~~~~~OTIE PIE EXTENSION, "', > // /4W //40 S r / / / /gCONTAINER PIER EXTENSION //,/g2/ / > / ,/^g C~~~~~~~~~~~~~~~~~~~~~~~ONTAINERI PIER CRANES / / / / / / /e w t/t X ~~~~~~~~~~~~~~~~~~~~~~~~~~LlGarTOWEflS // / flZ// / 0° / / inS //.1> , ~~~~~~~~~~~~~~~~~~~~~~~UNDER 'LOACN 917-KOIF IflST PORT PRlOJECTX , a S, / //, t S Q ~~~~~~~~~~~~~~~~~~~~~~RAILWAYS %< \~~~~~~~~~~~~~~~~~~~~~~~~~~~1 // KtoefR \~~~~~~~~~~~~~~~~~~~~~ / / .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 . ..~~~~~~~~~~~~~~~~~~~~s 00~~~'K$ 20 S C