Document of The WorldBank R 116

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 2903-PAN

PANAMA Public Disclosure Authorized STAFF APPRAISAL REPORT

COLON URBAN DEVELOPMENT PROJECT

Public Disclosure Authorized May 20, 1980 Public Disclosure Authorized Projects Department Latin America and the Caribbean Regional Office

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. CURRENCY EQUIVALENTS

Currency Unit: US$

WEIGHTS AND MEASURES

Metric System

GOVERNMIENTOF PANAMA

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS AND ACRONYMS

IDAAN - National Water Supply and Sewerage Agency

INTEL - National Telecommunications Agency

IRHE - National Power Company

USAID - United States Agency for International Development

LIBOR - London Inter-Bank Offered Rate

SENAFORP - The National Professional Development Service FOR OFFICIAL USE ONLY

PANAMA

COLON URBAN DEVELOPMENT PROJECT

Table of Contents

Page No.

I. SECTOR BACKGROUND ...... 1

A. Country Background ...... 1 B. The Metropolitan Region ...... 2 C. Previous Efforts to Improve Low-Income Housing ... 5

II. THE PROJECT CONCEPT ...... 6

A. Background ...... 6 B. Design Objectives and Summary Description...... 8 C. The Employment Strategy ...... 10 D. The Resource Mobilization Strategy ...... 12

III. DETAILED FEATURES OF THE PROJECT ...... 14

A. The Urban Employment Sub-Project ...... 14 B. The Urban Renewal Sub-Project ...... 16 C. The Housing and Social Services Sub-Project ...... 17 D. The Regional Infrastructure Sub-Project ...... 19 E. The Technical Assistance Sub-Project ...... 21 F. Beneficiaries and Risks ...... 23

IV. COST ESTIMATES, FINANCIAL ARRANGEMENTS, AND LOAN ADMINISTRATION ...... 25

A. Cost Estimates ...... 25 B. Financing Arrangements ...... 25 C. Cost Recovery and Affordability ...... 27 D. Procurement and Disbursements ...... 29

V. COORDINATION, ORGANIZATION AND IMPLEMENTATION ...... 32

A. Coordination, Programming, and Engineering ...... 32 B. Organization ...... 33 C. Implementation Procedures - Co-financed Components 35 D. Implementation Procedures - Bank Financed Components 36 E. Monitoring ...... 38

This report is based on the findings of an appraisal mission that visited Panama in December 1979. The mission consisted of R.C. Wildeman (Mission Leader), E. Canessa, M. Etcheverry, G.C. Guarda, A. Sant'Anna (LCPUR), A. Alberti, H. Jones, W. Matthey, Z. Shalizi, M. Staab, R. Vinekar (other Bank staff), R. Palange and R. Sarly (Consultants).

This document has a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwise be disclosedwithout WorldBank authorization. Table of Contents (Continued)

Page No.

VI. FINANCIAL ANALYSIS ...... 38

A. Introduction ...... 38 B. The National Port Authority ...... 39 C. The Colon Free Zone ...... 40 D. The Caja de Ahorros ...... 44

VII. ECONOMIC AND SOCIAL JUSTIFICATION ...... 45

VIII. AGREEMENTS REACHED AND RECOMMENDATIONS MADE ...... 49

ANNEXES

Annex 1: Cost Estimates and Engineering Standards Annex 2: Implementation Schedule Annex 3: Organization Charts Annex 4: Detailed Financial Projections Annex 5: Economic Data Annex 6: Selected Documents and Data Available in the Project File

PHOTOGRAPHS

MAPS

14676: Panama - Administrative and Planning Divisions 14677: Colon Sub-Region 14678: Project Locations 14679: Zona Libre - Commercial Area 14680: Manzanillo Island 14681: Puerto Escondido Housing Site I. SECTOR BACKGROUND

A. Country Background

Geographic and Administrative Characteristics

1.01 Geographic location and spatial configuration have been Panama's main natural resources. This is due to the importance of the interoceanic links provided by the isthmus in different periods of Panama's history and the dependence of the country's economy on international trade. Urban development, in particular, has been strongly influenced by the canal and the commercial-industrial activities it has generated in Panama City and Colon. The waterway, which began operating in 1914, handles approximately 13,000 ocean-going vessels per year. The canal is the largest single source of employment in Panama, providing jobs for about 17,000 people.

1.02 The country is divided into nine provinces and 66 municipalities, which are further subdivided into 505 electoral districts. The provinces are administrative subdivisions headed by a governor appointed by the Minister of Government and Justice, whose main function is to serve as the operating arm of the Central Government in the province. The administration of the cities and towns is the joint responsibility of a mayor appointed by the Minister of Government and Justice and a Municipal Council formed by members of the electoral district. Most taxes, including property and local improve- ment levies, are collected at the national level by the Ministry of Finance. All public services such as water and sewerage, power, telecommunications, and fire and police protection are provided by national agencies, financed either through tariff charges or Government transfers. This explains the absence of eiaborate local government machinery.

1.03 For planning purposes, Panama has been divided by the Ministry of Planning and Economic Policy into four development regions: the Eastern Region; the Western Region; the Central Region; and the Metropolitan Region, which includes the Sub-regions of Colon and Panama City. These Regions are shown in Map 14676.

Socio-Economic Characteristics

1.04 The 1979 population of Panama was estimated at 1.8 million, reflecting a deceleration in the average annual population growth rate from 2.9% in the period 1960-70 to 2.7% since 1970. About 51% of the population, or 900,000 people, live in urban areas and the remaining 49% in rural areas (communities of less than 1500 people). The urban structure of Panama exhibits a striking degree of primacy, with the urban population heavily concentrated in the vicinity of Panama City; more than 68% of the urban population, or 614,000 people are concentrated in greater Panama City. Colon, the second most important city, is located on the Atlantic Coast of the Isthmus adjacent to the entrance to the Panama Canal. These two cities and their environs form the trans-isthmic Metropolitan Region. The urban population in this area is growing at an annual rate of 3.5%, somewhat higher than the national rate of 2.7%. This reflects continued rural out-migration and interregional migratory flows.

1.05 The economy of Panama relies heavily on a diversified range of commercial, financial and administrative functions performed by the Metro- politan Region. These are strongly concentrated in Panama City, which is the - 2 - only urban center of national significance. Its position as the national seat of government and the principal social, educational and cultural center is seen in the relative importance of employment in the service sector. Panama City is also a major center for commercial and financial activities in Latin America. This role arises from the locational advantages in domestic and international trade and finance conferred by the Canal, reinforced by liberal commercial and banking regulations, of duty free zones in Colon and Panama City, and the existence of an international offshore financial community.

1.06 These advantages brought economic growth as world trade expanded in the 1950s and 1960s, and stimulated a private construction boom in high income apartments and office buildings, financed to a considerable extent by international borrowing channelled through the commercial banks. Rapid economic growth, which averaged 8% in 1959-1971, slowed in the early 1970's and the economy has been in recession since 1975 following, inter alia, the effect of oil price increases, the contraction of bank credit to the private sector in real terms and the collapse of the construction boom.

B. The Metropolitan Region

Spatial Characteristics and Development Potential

1.07 The Metropolitan Region is expected to continue to play a predominant role in the economy. In 1978, for example, economic activity was slightly more concentrated in the provinces of Panama and Colon than in 1970 (72% vs. 68%), even though these two provinces had only half the country's population. The share of the Metropolitan Region in the output of non-agricultural sectors was even higher: 76% in manufacturing, 85% in construction, 95% in transport, 90% in warehousing and communications, 84% in commerce, and 95% in finance.

1.08 The increasing concentration of economic activity in the Metro- politan Region has coincided with a growing imbalance in the spatial distri- bution of economic activity within the Region itself. The structure of urban economic activity and population in the 1970s reflects the dispropor- tionate growth of Panama City in the 1950s and 1960s relative to Colon City. In addition to these two major urban centers, two spines of economic activity and population density have developed during the 1970s in the Trans-Isthmic Corridor (along the Boyd-Roosevelt highway) between Panama City and Greater Colon, and in the Pacific corridor (along the Pan American Highway) between La Chorrera and Tocumen. Within this structure, Panama City is the transportation hub to all other Regions, while Colon's importance derives from its gateway role at the Atlantic entrance to the Panama Canal, and is the only urban center of significance on the Atlantic coast of the country. However, the spatial expansion of these cities and the development of their hinterland has been grossly distorted by the intrusion of the former Canal Zone. The Metro- politan Region is shown in Map 14676.

1.09 The recently concluded Canal Treaty, under which designated areas of the present Canal Zone reverted to Panama, offers the possibility of re-shaping existing spatial structures, notably in Panama City and Colon. Substantial areas of these cities where urban expansion previously had been blocked by the existence of the Zone, diverting settlement around and beyond this physical obstacle, can now be re-integrated and their future development established. The property that reverted to Panama in these - 3 -

two cities includes the ports of Balboa and Cristobal, the Albrook and France Field Airports which would be suitable for commercial-light industrial use, and several areas of Canal Zone housing, such as Curundu Heights in Panama City and Rainbow City in Colon. The former Canal Zone properties have already been designated as part of the national patrimony. Hence, urban development policy must now define the guidelines and detailed planning proposals for these areas and determine, inter alia, land use patterns, zoning, traffic flows and the type of land tenure regulations to be adopted. The question of access to these new areas, whether scheduled for residential or commercial-industrial use, also raises complex issues of welfare and dis- tribution which have yet to be resolved.

1.10 However, it is equally obvious that detailed planning proposals can only be established in the light of a series of prior policy decisions at the highest level. That is, meaningful discussion of the alternative possible uses of the areas reverting to Panama requires a comprehensive review of the medium- and long-term growth strategies for the Metropolitan Region and the national economy. This exercise should seek to identify longer term dynamic comparative advantages of Panama's Metropolitan Region and relate the exploitation of these advantages to land use and locational priorities, particularly those that would facilitate the generation of surplus from urban activity. The reintegration of Canal Zone areas must, therefore, be considered initially in the context of macro-economic and sectoral policies designed to re-vitalize the economy of Colon and reverse the decline and stagnation of the past several years.

Transportation Network

1.11 The vehicular distance between Panama City and Colon is about 70 km. The only road link between the two cities is the Boyd-Roosevelt Highway. Traffic volumes on this road have increased steadily in recent years resulting in congestion during peak periods. Travel time between these two cities is about two hours. The volume of traffic over the road is now estimated at about 12,000 average daily trips. About 66% of this total are automobiles, 31% are commercial trucks and the remaining 3% are buses.

1.12 In addition to regularly scheduled buses, trains provide passenger service between Panama City and Colon, carrying an average of 2,000 passengers a day. One scheduled freight train operates daily between the ports of Cristobal and Balboa. Tocumen International Airport, located on the outskirts of Panama City, is served by 25 international passenger and freight airlines. Non-scheduled flights bringing or taking Free Zone freight get virtually automatic landing rights, either at Tocumen or Colon's much smaller France Field Airport. About 75% of the import and export cargo of the country is handled by the canal ports of Cristobal and Balboa located respectively on the Atlantic and Pacific side of the isthmus. Elsewhere in the country there are smaller ports used primarily for the export of agricultural products and transhipment of petroleum.

Employment and Income

1.13 Evaluation of trends in unemployment in the Metropolitan Region is complicated by fluctuations in the size of the labor force arising from short-run changes in the labor force participation (LFP) rate. This rate has fallen significantly from 62-63% in the early 1970's when the level of employ- merntcontinued to expand, to 54% in March 1977, reflecting the depressed -4- state of the urban labor market. Moreover, the level of employment has fallen in absolute terms since 1974. The observed rate of unemployment, although high at 9%, probably underestimates the true magnitude of the problem, since it does not take into account the high levels of underemployment and marginal employment. Unofficial reports indicate that the rate may be as high as 20%.

1.14 As a broad generalization, the proportion of the urban population living in absolute poverty is not very large. Nevertheless, a high proportion of the residents in the Metropolitan Region fall below the Bank's relative poverty level definition for Panama of average monthly family earnings of US$184. An estimated 33% of all families, or 216,000 people in the Metropo- litan Region are in the relative poverty category, which almost certainly includes the majority of families in the congested, decaying slum tenements and squatter settlements of Panama City and Colon. There is also evidence of marked inequality in income distribution. For example, households at or below the relative poverty definition receive only about 8% of the total income for the Metropolitan Region. Roughly 10% of all households live in absolute poverty with monthly incomes below US$75.

Access to Services

1.15 With the probable exception of small segments of the slum tenement and squatter population, there is no evidence that severe malnutrition is widespread nor of a chronic incidence of debilitating diseases. In fact, there are various indications of improving conditions of public health and sanitation over the last eight or ten years coincident with the increasing coverage of public health facilities and public investment in water and sewerage systems. For example, the death rate per 100,000 inhabitants from enteritis and other diarrheic diseases, frequently associated with impure water and aggravated by malnutrition, has declined from 38.8 to 25.6 in the period 1971-75. Similarly, in the Metropolitan Region, over 90% of all live births in 1975 occurred in the presence of a physician. About 95% of the population has access to public potable water supply and 72% to public sewerage systems.

1.16 This extensive and increasing coverage, together with the concomitant expansion of access to public services, probably explains the decline in infant mortality rates and increase in average life expectancy. Of course, this does not imply that access to public services is sufficiently well distributed to ensure that all urban groups can benefit from a minimum acceptable degree of coverage. However, it provides convincing evidence that the issue is neither one of an absolute lack of access or of coverage, but rather one of extending, intensifying and improving the degree of provision. To support such an effort, fiscal resources will have to be increased.

Low Income Housing and Inner City Slums

1.17 Two basic types of sub-standard housing can be distinguished in both the central city and peripheral areas of Colon and Panama City; inner city slum tenements and spontaneous squatter settlements. The majority of slum tenements, specifically two-story wooden structures, were built before World War I to house migrant workers employed in the construction of the Panama Canal. Even at that time, these houses were regarded as temporary housing by virtue of the construction materials and their design; they were mainly single room units with communal sanitary facilities. Concentrations of these pre-WWI tenements occur in both cities. -5-

1.18 The inner city areas of slum tenements represent extreme cases of urban decay, despite their frequent proximity to high value residential and commercial property. The tenement buildings are often in an advanced state of disrepair and their structural weaknesses are plainly visible, including bulging outer walls temporarily buttressed by wooden supports and corrugated iron sheeting. In some cases, notably in the Barrio Norte area of Colon, interior walls, roofs, and even outer retaining walls have collapsed but occupation continues in those parts of the structure which still afford shelter. The physical deterioration is such that large numbers of tenement buildings have been condemned by public safety authorities. Rents in these tenements fall to zero if the building is condemned, attracting more poor households and aggravating overcrowding.

1.19 Recent areas surveyed by the Ministry of Housing, show over-crowded living space and congested basic sanitary facilities as a critical feature of the inadequate housing conditions of poor families. One-room households as a proportion of all households in the tenement areas are in excess of 75%. On average, there are approximately eight families per toilet and nine families per bath. More generally, the Ministry of Housing has used census data to estimate the size of the housing deficit in terms of such criteria as the number of families inhabiting tenements, squatter settlements, overcrowded housing and sub-standard housing. The data show a 1977 deficit of 185,000 units for the country as a whole, including 80,000 in the Metropolitan Region.

C. Previous Efforts to Improve Low-Income Housing

Housing Construction and Finance

1.20 The Ministry of Housing is endowed with wide powers in the formula- tion and execution of urban development programs and public housing schemes. The Ministry has established housing ccmmissions throughout the country to administer the rent control system which was introduced in the late 1940's. In addition to its activities in policy formation and urban planning, the Ministry of Housing also is heavily engaged in implementation. This dual function is readily apparent in the housing sector, where the Ministry of Housing establishes general policy guidelines, designs public housing projects and undertakes their execution, either by supervising private contractors or using its own construction equipment and personnel.

1.21 Since its creation in 1973, the Ministry of Housing has rapidly increased its housing construction from a level of 1,200 units in 1974 to 8,000 units in 1979. Almost all efforts, however, have been directed at housing construction--little or none at financial intermediation--with the net result that the financial position of the Banco Hipotecario Nacional, the credit arm of the Ministry of Housing has been severely eroded over the last few years. The existence of rent controls tends to discourage private initiative in the provision of low-income housing. The Government has agreed that the impact of controls should be studied and possible changes should be recommended (para. 3.27).

1.21 The Banco Hipotecario Nacional was established as a subordinate agency of the Ministry of Housing to undertake the financial management of the Ministry's activities and also promote the expansion of private housing finance. This expansion was to be achieved by strengthening the savings and loan system and, eventually, by creating a secondary mortgage market. Little progress has been made in this direction, despite recent loans for this purpose by USAID.

The Role of Women

1.23 Households in Colon are not, for the most part, organized around nuclear, legally constituted families headed by men. Thirty-two percent of the families in the city have women as heads of households. These women are, for the most part, young single mothers. Although many participate in the labor force, their rate of unemployment is significantly higher than that of men. When employed, their earnings average 43% below male earnings. Part of this earnings differential can be explained by the fact that women seldom have had access to Canal and Free Zone jobs - the best paid in the city - but, additionally, their relative lack of skills constitute a serious constraint. Child care responsibilities is the next most important factor limiting the earnings capacity of women heads of households. A large number of women in Colon receive benefits from the emergency welfare program, and a disproportionate number of them are among the very poor.

1.24 Women's access to housing in previous projects of the Ministry of Housing was limited not only by their lack of capacity to pay but, more often, by the institutional requirement which sets loan repayments through automatic payroll deductions. This requirement tended to exclude a great many working women who are either self-employed, or are domestic or informal sector workers. As a result, practically no women heads of households have in the past, applied for housing in Colon. Given this set of constraints an extremely large number of women heads of households are, in practice, excluded from new housing and employment.

II. THE PROJECT CONCEPT

A. Background

Origin

2.01 The heavy concentration of urban population in the vicinity of Panama City and Colon on the Atlantic side of the isthmus accounts for the decision to concentrate on the country's single, dominant Metropolitan Region. This decision is also dictated by the view that the magnitude and intensity of the problems firmly establish the Region as the principal focus of urban development policies. These problems are perhaps most apparent in Colon, where economic stagnation and poor investment climate is, in part, a result of the distorted spatial development patterns produced by the intrusion of the former Canal Zone, particularly the distinct enclave effect on Manzanillo Island. As shown in Map 14677, suburban expansion has been forced into areas beyond the jurisdiction of the former Canal Zone, which are a considerable distance from the city center and the main sources of employment.

2.02 Despite such initiatives by the Government as the construction of a free zone and an oil refinery, Colon failed to accompany the rapid growth of Panama from the 1950's until the early 1970's, while the migration of members of its business and professional classes to Panama City has diminished the community's capacity to reverse its secular decline. The political implications of Colon's depressed state and its objective conse- quences in terms of unemployment, poverty, delinquency and urban blight, allied to increasingly heated protests of official neglect and unequal treat- ment by the Government, have lent great urgency to the formulation of programs and projects for the city. The reversion to Panama of the former Canal Zone territory on the immediate outskirts of Colon provides the opportunity to promote the integrated development of the hitherto-isolated central core and its suburban hinterland, while creating the additional employment which is a precondition to any mitigation of the city's poverty.

The Setting

2.03 The people of Colon, descended mainly from migrant Caribbean workers employed in the construction of the Canal, have maintained separate ethnic and cultural traditions. This tendency has been accentuated by the physical isolation created by the former Canal Zone. Population densities average 294 inhabitants per hectare in central Colon and rise sharply to 1500 in the tenement districts. The central city had 67,800 in- habitants in 1970. It is estimated that the central city population has declined slightly as a result of suburbanization, and that as a result of outmigration the population of greater Colon has grown less rapidly than the average national net rate of reproduction.

2.04 The conditions described previously in slum tenements and squatter settlements (paras. 1.17-1.19) are accentuated in Colon. According to a 1975 estimate, 60% of all dwellings fall below acceptable structural standards, including slum tenements (10,449), improvised housing (871) and houses in areas inappropriate for residential purposes (279). This proportion would rise to 80% if overcrowding were taken into account. The bulk of the housing stock comprises slum tenement buildings in which households renting a single room form the major tenancy group. In fact, rental housing accounts for 88% of all dwellings in Colon. Rents in the slum tenements are low, with 45% below US$25 per month in 1978, and poor households with monthly incomes under US$165 devoted roughly 15% of their total expenditures to housing.

2.05 Since the immediate postwar period following the decline of defence- related contracts in the former Canal Zone, the economy of the city has continuously deteriorated. This is shown by the rates of unemployment, which were 18.7% in 1950, 21.5% in 1960 and 17.4% in 1970. Current unofficial estimates fall in the range of 25-35%. The proportion of unemployed persons without previous employment experience has risen from 6% in 1950, to 19% in 1960 and 30% in 1970.

The Concept

2.06 In great measure the success achieved in restoring urban economic growth and generating new sources of employment in Colon will determine the rate at which low income groups improve their housing conditions and access to urban services. In Colon, as in many other cities throughout the world, attainment of a certain minimum level of income which is sufficient to establish the household's capacity to meet mortgage repayments remains the sine qua non for access to low income housing programs. With this in mind, low income housing has been linked closely and explicitly with the development -8- of the city as an economic activity. This will be accompanied by an expansion of, and new type investment by the Colon Free Zone (paras. 2.12-2.14), to be financed entirely by private commercial banks (para. 2.16).

2.07 The low income groups of Colon are pre-eminently city dwellers with an urban culture. The project concept recognizes this, and is based on the premise that an improvement of their living conditions will be more effective by providing a progressive development of low income housing solutions within reasonable distance to employment under appropriate norms and standards, including a complete range of community facilities. So that low-income housing construction will have continuity, savings and home credit have been institutionalized where the Government's role will be in support of, and not in lieu of, private funding (paras. 2.17-2.21).

2.08 Explicit measures will be introduced to improve the competitive position of women. First, the broadening of income requirements (para. 2.18) will benefit many women previously excluded from the home mortgage market. Second, in the implementation of the housing component, a concerted community program will be undertaken by the Ministry of Housing to promote applications by women. Women will also be encouraged to enroll in training programs designed to increase their access to the new jobs created by the project. The Regional Education Center Component (paras. 3.23-3.25) has been designed to respond to the specific needs of women students by providing child care facilities on the premises, by actively encouraging women to enroll, and by providing diversity and flexibility of curricula. This, combined with the growing employment opportunities should progressively widen the occupational choices available to women.

2.09 It is also recognized that to reverse the secular decline of the area and to broaden its economic base, the availability of a wider range of urban services must be provided. The educational system and in particular post secondary institutions, for example, play an important role in the provision of skilled workers. Higher household incomes and greater propensity to consume transport service means an increased demand for public transport- ation and recreational facilities, particularly among the lower income groups. In addition, the growing container traffic to the Free Zone makes it important for the success of its operations that the Port of Cristobal be better equipped for handling containers. Correspondingly, the increased volume of traffic generated as a result of the industrial activity will place added congestion on the roads. Thus, the project concept includes specific components to improve the general efficiency of the urban and regional services delivery system.

B. Design Objectives and Summary Description

2.10 The project has been designed to assist the Government develop a public investment strategy which will promote a balanced provision of jobs and services, while making a special effort toward poverty alleviation and more efficient urban management. Thus, the objectives of the project are to:

(i) coordinate the provision of housing, the attraction of industry, and the organization of training programs giving priority to the existing residents of Colon; (ii) establish an appropriate institutional and policy framework for public sector investments of this kind;

(iii) include a co-financing arrangement with a group of private commercial banks; and

(iv) stimulate savings for low-income housing and develop a secondary mortgage market.

Summary Description

2.11 The proposed project will be implemented during 1980-83 and is divided into five major sub-projects: (i) urban employment; (ii) urban renewal; (iii) housing and social services; (iv) regional infrastructure; and (v) technical assistance. Each sub-project is further divided into components. With the exception of the urban renewal sub-project, all construction will take place on land that has reverted under the Canal Treaty. Special care has been taken in the design of the project to ensure that environmental damage will be minimized. The location of each component, except Fort San Lorenzo, is shown on Map 14678, and is consistent with the general land use plan approved by the Government for the area. Implementation will be carried out in phases during the 1980-83 period. Each of the components is detailed in Chapter III. All costs are inclusive of physical and price contingencies.

(a) The Urban Employment Sub-project - costing US$56.0 million is designed to create about 8,000 permanent jobs at an average cost of about US$7,000 per job by constructing facilities for free zone operations. The poverty impact of these jobs is high, since most of them are expected to be filled by workers from the low income groups. The sub-project will comprise two components:

(i) a commercial estate - consisting of an extension to the Free Zone's existing duty-free commercial area, including land development and related infrastructure; and

(ii) an industrial estate - consisting of a general purpose industrial estate catering primarily to assembly operations and manufacturing, including land develop- ment, related infrastructure, and the construction of several standard factory buildings.

(b) The Urban Renewal Sub-Project - costing US$6.5 million is designed to create about 350 permanent jobs and to act as a catalyst in the rehabilitation of a blighted area adjacent to the Cristobal Port cruise ship terminal in Central Colon. This initiative is intended to stimulate a favorable investment climate for private sector entre- preneurs to undertake complementary urban renewal projects within the same area. The sub-project will comprise two components:

(i) a retail mall - consisting of the construction of a retail center in downtown Colon and the provision of complementary facilities aimed at the tourist trade; and

(ii) a bus terminal - consisting of the demolition and removal of some condemned tenement buildings which will be replaced by a new bus terminal near the site of the proposed retail mall; - 10 -

(c) The Housing and Social Services Sub-Project - costing US$43.5 million is designed to increase the low-income housing stock in Colon and to provide a range of shelter options within a reasonable distance of employment under appropriate norms and standards, including urban services and community facilities. The sub-project will comprise three components:

(i) low income housing - consisting of a 161 ha site to be urbanized in three separate phases over four years, including the construction of 3,725 houses at three different service levels as well as the construction of about 300 low income apartment units in downtown Colon.

(ii) community facilities - consisting of a complete range of neighborhood facilities including schools, playgrounds, a health center, a firehouse and a police station; and

(iii) home improvement credits - to provide small loans to residents of the project area for home expansion and improvements.

(d) The Regional Infrastructure Sub-Project - costing US$25.3 million is designed to improve the general efficiency of the urban and regional services delivery system and will comprise four components, each of which has direct linkages to the other components:

(i) port improvements - consisting of an extension to the existing container handling facility of the Port of Cristobal;

(ii) road improvements - consisting of capacity improvements to two sections of the Boyd-Roosevelt Highway between Colon and its suburb of Cativa;

(iii) a regional education center - to provide vocational training facilities aimed primarily at Free Zone requirements in a single complex of multiple services sharing such common facilities as classrooms, laboratories and workshops; and

(iv) recreational facilities - consisting of the construction of a nature park to be located on the shore of Lake Gatun, and the restoration of a historical tourist attraction located at the mouth of the River Chagres, on the Atlantic side of the Panama Canal;

(e) The Technical Assistance Sub-project - costing US$2 million will provide consulting and extension services related to program develop- ment, project monitoring and evaluation, urban transport operations management, port operations and professional development.

C. The Employment Strategy

2.12 The employment strategy is quite innovative in that it tackles the fundamental challenge of creating a significant number of new jobs during the 1980-84 period. - 11 -

This will be accomplished in two ways: (i) through the construction industry; and (ii) through prime job creating activities of the Free Zone and tourist services.

Impact of Construction

2.13 The project will entail significant construction expenditures for earth moving, sewerage and stormwater drainage, and the construction of roads, factory buildings, housing and community facilities. The construction expendi- tures are expected to generate about 3,000 direct full-time jobs over a four-year period, which will be replaced by permanent jobs once the first phase of the Free Zone expansion has been completed.

The Colon Free Zone

2.14 The project's principal impact on urban employment will be the creation of an estimated 8,000 permanent jobs in the Free Zone (a full discussion of the Free Zone is contained in Chapter VI). To achieve this, an active campaign to attract business to the Free Zone is being undertaken. This effcrt includes:

(i) Marketing and Promotion. A key component is the research effort aimed at identifying the kinds of industries which are likely to be attracted to Panama. This work will be supported through the technical assistance sub-project. An extensive marketing and promotion effort, including a continuous advertising campaign, will be part of the follow-up efforts. A particularly important part of the marketing activity is the emphasis on building close working relationships with the offshore banking community and the private industrial community in general.

(ii) Creation of a Land Inventory. Under the recently concluded Canal Treaty, about 500 hectares of additional land have been made available to the Free Zone for industrial expansion. Control of this land is a major strength of the Free Zone's industrial promotion plan. Interested industrialists will be offered sites with outline planning permission at a fixed price, and the delays usually associated with land purchase should be eliminated. Controlling this inventory of land, which borders on the site of a future container port, means that the Free Zone can conserve the area for suitable industry and ensure that it is not developed for other purposes.

(iii) Advance Provision of Factory Buildings. Provision of custom- built warehouses and large factory buildings is increasingly important in competing for overseas industry. Part of the expansion strategy entails identifying the mix of industrial sites and warehouse structures that will be required to meet the employment targets. Whenever possible, the supply of sites and structures will lead demand so that the needs of the industrialists for space expansion can be met quickly.

(iv) Provision of Executive Housing. The availability of houses at competitive prices and the assurance that mortgage finance will be available are also valuable incentives in promoting the establishment of new industries. The Free Zone has invested - 12 -

US$1.5 million in this area in the past and will continue to ensure that suitable houses are available for industry executives, most of whom will be brought in by parent companies from outside the country. Although this function is part of the Free Zone promotion package, it is expected that it will be implemented by private housing developers, so that no provision has been made for future investment by the Free Zone.

(v) Manpower Training. The industrial expansion strategy will ensure that a complete range of training opportunities is available in Colon and, in particular, ensure that skill-training programs match the needs of the new industries. The Free Zone is in an extremely strong position to convey knowledge about future patterns of industrial development to the network of agencies responsible for manpower training. Frequent surveys will be undertaken to monitor the training needs of the industrialists.

(vi) Risk Capital. The commercial banking system is expected to continue to provide short, medium and long-term risk finance to larger businesses. Fixed assets and working capital financing will be available to smaller entrepreneurs through the Banco Nacional de Panama, the repository of Government Funds, or the Corporacion Financiera Nacional, a Government-owned agency created to finance smaller scale entrepreneurs. It will not be necessary, therefore, for the Free Zone to make special arrange- ments to supply industry with working capital.

D. The Resource Mobilization Strategy

Introduction

2.15 The resource mobilization strategy is a second innovative feature of the project. Two categories of finance distinguish this strategy: (i) Industrial Finance, and (ii) Housing Finance.

Industrial Finance

2.16 The economic development strategy requires the ready availability of capital, either in the form of direct borrowings or lease back arrangements to finance expansion and modernization schemes. In line with this need and the objective of increasing the multiplier effect of resource transfers in Bank- financed projects, the industrial finance strategy includes a co-financing arrangement with a Japanese banking institution. This will be the first application of such an arrangement in the urban sector in Latin America. This arrangement is particularly well suited for Free Zone type operations. First, they are commercial, self-liquidating, real estate investments; second, the space will be leased to internationally well-known companies; and third, the Colon Free Zone, which will be the borrower, has a history of profitability making it quite attractive to commercial banks.

Housing Finance

2.17 Breaking with past tradition in the low-income housing sector in Panama, the proposed project will establish a clear separation between housing finance and housing construction. The low-income housing and -13 - community facilities sub-projects will be implemented by the Ministry of Housing, but the financial intermediary will be the Caja de Ahorros, a Government owned savings and loan association which operates as a private bank. The purpose of this arrangement is to decentralize the responsibility for low-income housing from one institution, to increase the role of financial intermediation, and to develop an institutional framework capable of attracting private sector capital. This will be the first Bank-financed initiative of this nature in Latin America.

2.18 Until recently, the Caja's focus was concentrated almost exclusively on moderate income housing, but has now begun tailoring its programs to the lower income groups, working with both private contractors and Government agencies. Credit conditions have been geared to the limited capacity to pay of the low income groups. The minimum income requirement has, for example, been broadened to include the earnings of all family members living within the same household, and would include earnings from both the formal and informal sectors, as well as transfer payments. Where there is a conventional family unit, joint tenancy is the normal policy. Where the household is headed by a female, however, title registration is required to be in her name, thus protecting her right of eminent domain while at the same time increasing family stability.

2.19 Aggressive solicitation of savings is a hallmark of the Caja de Ahorros. In fact, over 90% of its capital is derived from savings. The Caja requires that each new borrower open a savings account equivalent to one month's mortgage payment. The Caja de Ahorros intends to extend this program to the lower income groups. A major objective of the project, therefore, will be to channel private savings from all income levels into low-income housing. Because of its efficient administration, the Caja de Ahorros has always been profitable, and it has been able to maintain tight control over a fairly decentralized operation. The Caja de Ahorros has acquired a great deal of experience with conventional housing programs, providing both interim construction financing and mortgage underwriting. The institution has a management contract with the Citibank for collection of about US$20 million in mortgages, and is also handling a loan contract between Immobilaria de Panama and the Federal Home Loan Bank of Boston, which provided US$2 million in mortgage financing for a housing project.

2.20 The Caja de Ahorros also has contingency line-of-credit contracts with various local and foreign banking institutions up to US$10 million. It has not utilized any of these lines of credit, and a key strategy of the project will be to take advantage of them to stimulate a secondary mortgage market in home mortgages. The secondary market would not, however, engage in direct lending on mortgages or bear the risk of the burden of servicing mortgages. The advantages of such a strategy are that it would:

(i) provide additional funds to the Caja de Ahorros while stimulating private sector participation in the low-income housing sector;

(ii) create an effective way of channeling private savings into low-income residential construction; and

(iii) increase the multiplier effect of the project and hence the scope for replicability on a large scale basis by reducing dependence on the fiscal resources of the Government. - 14 -

2.21 The Caja de Ahorros primarily uses a variable interest mortgage instrument for making loans. Under this system, mortgages are amortized on a 15-25 year basis. Normally, interest rates are adjusted every 5 years. More recently they have been adjusted annually. This assures that over time interest rates charged to the ultimate beneficiary will be positive in real terms. The mortgagor has the option of renewing or paying off the mortgage and refinancing elsewhere, but that is not much of an option since the interest rate elsewhere is likely to be as high or higher.

III. DETAILED FEATURES OF THE PROJECT

A. The Urban Employment Sub-Prolect

Introduction

3.01 The Free Zone expansion would be adjacent to a 13-ha site already being developed across Manzanilln Bay from the original commercial park. During 1978, a total of 22,000 m of factory and warehouse spa ce in seven structures were completed in this location. Another 43,000 m will be completed in 1980. The current construction program, including land fill, roads, utility infrastructure and buildings represents an investment of US$8.8 million. Building densities average 65% of urbanized land, which is somewhat higher than the 40-50% generally specified for development of this kind.

3.02 More than 100 firms have applied for additional space in the expan- sion area (some of them presently cramped for lack of space in the 2existing Free Zone), representing an unsatisfied demand for about 125,000 m of leased building space, or the equivalent of about 20 ha of urbanized land. Other firms have applied for about 10 ha of land on which owner-financed buildings will be erected, raising the required amount of urbanized land to about 30 ha.

3.03 The demand for commercial and industrial facilities will be met through the development of two separate parcels of land in the expansion area, one as an extension of the Free Zone's duty-free commercial area and the second as a general purpose industrial estate catering primarily to assembly operations and manufacturing. The commercial area comprises 123 ha of land extending east from Manzanillo Bay to the France Field Airport, and bounded on the south by the Boyd-Roosevelt Highway. The industrial site comprises 250 ha east of the airport, also bounded on the south by the same highway.

The Commercial Component

3.04 This component, whose estimated cost is US$29.6 million (including interest during construction of US$6.2 million) is physically an extension of the 13-ha site currently under development (para 3.01), and will be occupied primarily by duty-free warehouse and commercial operations similar to those already established in the Free Zone. The component will consist of 35 ha to be fully urbanized and will be carried out in two phases of 13 ha and 22 ha respectively. An additional 13 ha will be filled and levelled. The new leasable are2 will be about 69%, or 24 ha of urbanized land at a cost of 2 US$105 per m , and 9 ha of filled and levelled land at a cost of US$48 per m - 15 -

All buildings will be owner financed and constructed. The remaining 75 ha will be urbanized in subsequent phases. Map 14679 shows the detailed site plan. A marketing forecast prepared by the Free Zone indicates that this schedule will provide expansion facilities in accordance with projected demand. About 3,000 additional permanent jobs are expected to be created (para. 3.08).

3.05 Specifically, the component will consist of:

(i) about 840,000 m of land fill trucked from the industrial site to be graded and compacted in six-inch layers elevating the commercial site by an average of one meter above the present level, or as required to make it suitable for buildings;

(ii) paved internal roads, parking lots for trucks, buses and auto- mobiles, and a grade level junction with the existing Randolph Road;

(iii) on-site water distribution and sewerage facilities;

(iv) storm water drainage canals; and

(v) on-site power, telephone, and telex facilities.

The Industrial Component

3.06 This component will support investments of US$26.4 million (including interest during construction of US$5.6 million). Of the 250 ha earmarked for assembly and manufacturing operations, 58 ha of this land will be levelled, while an additional 70 ha will be cleared of vegetation (the cost of which has been charged to the commercial area). Land development and building construction will be carried out in phases during the project implementation period. Of the 58 ha that will be levelled, 35 ha will be full! urbanized. The leasable area will be about 69%, or 24 ha2at a cost of US$65 per m . About 5 ha will be occupied initially by 13-4090 m buildings built by the Free Zone for rental at a cost of about US$243 per m , and the remaining 30 ha will be leased as urbanized land to firms constructing their own buildings. The buildings will be steel frame shells with a concrete floor and a light metal roof. Free Zone estimates, which are based on a feasibility study prepared by an independent consulting firm, show that this implementation schedule will provide facilities in accordance with the antici- pated demand. About 5,000 additional permanent jobs are expected to be created (para 3.08).

3.07 Specifically, the component will consist of:

(i) levelling and grading of four hills as needed to make the area suitable for buildings;

(ii) paved internal roads, parking lots for trucks, buses and automobiles, and a grade level junction with the Boyd- Roosevelt Highway;

(iii) on-site water distribution and sewerage facilities; - 16 -

(iv) storm water drainage canals; and

(v) on-site power, telephone, and telex facilities.

Cost per Job

3.08 The investment cost per job, excluding interest during construction, is about US$5500 in prices of 1982. This is comparable to other similar investments in the Caribbean Area with an investment cost per job estimated at US$5000 in prices of 1982. A total cost per job figure including the invest- ment by firms cannot be estimated with any accuracy since many of the client firms have not been identified. Based on experience in other Bank-assisted projects in Latin America, an estimate of about US$15,000 of total investment per direct job is reasonable. It should be noted, however, that much of this cost represents the investment of incremental foreign capital with no oppor- tunity cost to Panama.

B. The Urban Renewal Sub-Project

The Retail Mall Component

3.09 The creation of a retail mall consists of the commercial and touristic development of several selected blocks in central Colon. It includes the construction of an enclosed shopping area, the restoration of the adjacent area and the creation of additional tourist facilities. The mall will be located on the waterfront at the convergence point of sea and land transportation thus providing optimal accessibility to tourists. The design of this component is consistent with the local historical and cultural environment, maximizing the utilization of existing facilities and preserving the unique character of the existing buildings. Furthermore, the mall has been designed in such a way as to develop strategically located urban renewal growth poles to set the stage for future expansion.

3.10 The major objective of the mall is to attract tourism to Colon. It will bring in cruiseship passengers and other travellers in transit, as well as high-income tourists from South and Central America taking advantage of duty-free shopping. In addition to providing a variety of sales outlets and tourist facilities to serve these visitors, the creation of the mall will lead to the involvement of the local business community and of the Free Zone in the development of Manzanillo Island. This, combined with the oppor- tunities brought about by the increased activity and attractiveness of the mall, would help to stimulate further urban renovation of the island.

3.11 The estimated cost of this component is US$4.6 million. Specifi- cally, the component will consist of the construction of:

(i) a three-story building with a total area of about 5,700 m2 including central air conditioning, four passenger elevators and a cargo lift;

(ii) a 4,000 m paved automobile parking lot;

(iii) the restoration of streets surrounding the mall building and the provision of roofed street crossings, lamp posts and landscaping. The Bus Terminal Component

3.12 This component, whose total estimated cost is US$1.9 million, will comprise the first stage of a 9 roposed two-stage bus depot covering a total area of approximately 11,000 m . The bus terminal will provide 8 operating bays to consolidate local and inter-city bus travel. The volume of existing bus movement into and out of the city averages 432 vehicles each way per day. This represents about 58% of the total daily vehicle trips of all travellers to Colon. As a result of the proposed project, demand by the end of 1985 is expected to increase by 56% or a total of 674 vehicles each way. Specifically, the sub-project will consist of the construction of:

(i) a two-story building containing 3,300 m of floor space for administration and ticket offices, shops and waiting rooms; and

(ii) a 6,000 m paved bus parking lot.

C. The Housing and Social Services Sub-Project

Introduction

3.13 The low-income housing site, where most of the residential develop- ment will take place, has been named Puerto Escondido. Formerly part of the Canal Zone, it consists of 161 ha of land extending south from the Boyd- Roosevelt Highway, bounded on the east by Hardmon Road, and on the south and west by the existing residential areas of Gulick Heights and Margarita. Its topography is rugged, with level differences of up to 50 m and slopes of up to 40%. However, these difficulties are offset by positive features; the site is within 3 km of the downtown and industrial areas, adjoins the Boyd-Roosevelt Highway, and is accessible to existing utility infrastructure. The next closest suitable site is located in Cativa, about 12 km from the downtown area. It was agreed during negotiations that the availability of this land will be a condition of disbursement for this sub-project.

3.14 Residential development will take place in three phases of 31 ha, 46 ha, and 41 ha respectively over four years, or a total of 118 ha during the implementation period. The remaining 43 ha will be developed in subsequent phases. Land use has been designated at 38% for residential housing, 3% for commercial facilities, 20% for community facilities, 21% for circulation, and 18% as unusable. Gross densities will be in the order of 170 people per hectare. This is acceptable given the topography and environmental conditions of the area. The development has been based on a general site plan shown as Map 14681. Limited residential development will also take place in Central Colon. Phase 1 of the general site plan for Puerto Escondido has already been agreed with the Bank. It was agreed during negotiations that no disburse- ment on account of expenditures in phases 2 and 3 or for residential development in Central Colon will be made until a detailed plan of each phase showing works to be performed, housing options provided, schedule of implementation, and esti- mated costs has been agreed with the Bank. - 18 -

The Low Income Housing Component

3.15 This component will support investments of US$29.5 million (net of US$6.2 million in infrastructure costs allocated to the community facilities) Residential development will take place in two locations; Puerto Escondido and Central Colon. Puerto Escondido will consist of the construction of 3,725 units in 3 phases of 1,174 units, 1,526 units, and 1,025 units respectively, serving a population of 20,000 people. Each phase will include piped water, sewerage, surface drains and electricity. Three shelter options at different service levels, all with domestic water and sewerage connections will be be offered (see paras 4.06-4.11 for discussion on affordability). About 300 apartment units will be provided on Manzanillo Island, serving a population of 1,500 people.

3.16 Specifically the component will consist of:

Puerto Escondido (i) levelling and grading as needed to make the area suitable for houses;

(ii) paved internal roads and footpaths;

(iii) on-site electricity, water distribution and sewerage facilities;

(iv) stormwater drainage canals;

(v) 3,725 dwelling units, of which 60% or 2,235 units will be 25 m expandable core houses and sell f2r an average price of US$5,593; 21% or 790 units will be 36 m expandable one bedroom houses which will sell for an averape price of US$7,620, and 19% or 700 units will be 40 m two bedroom houses which will sell for an average price of US$8,256; and

Central Colon (vi) 4 75-unit apartment blocks at a cost of about US$350,000 each.

The Community Facilities Component 3.17 This component, whose estimated cost is US$11.0 million (including US$6.2 million of infrastructure costs), will support investments for the construction of a complete range of community facilities. Specifically, this component will consist of the construction of:

(i) four schools including the purchase of equipment;

(ii) a public library, a cultural center, a health center, a fire station and a police station;

(iii) a baseball field, a football field and three basketball courts; and

(iv) several small parks and playgrounds.

The Home-Improvement Credits Component 3.18 This component, whose estimated cost is US$3.0 million, will pro- vide small credits to residents of the project area for home expansion and - 19 - improvements. The availability of credit will be publicized. These credits will carry interest at 12% per annum, will be repayable in up to 17 years, and will finance up to 90% of the total cost.

D. The Regional Infrastructure Sub-Project

Introduction

3.19 The sub-project is aimed at improving the general level of regional efficiency (para. 2.09), and includes the following components to deal with these requirements.

The Port Improvements Component

3.20 This component, whose estimated cost is US$10.8 million, will improve the capacity and efficiency of the existing container handling facilities at the Port of Cristobal. Specifically, this component will consist of:

(i) the demolition of a transit shed and freight house to provide additional apron space on two piers;

(ii) 8 ha of paved yard for container storage;

(iii) a control tower and security fence; (iv) a 4,500 m container consolidation shed;

(v) a 1,400 m shop for the repair and maintenance of mobile equipment;

(vi) the purchase of container handling equipment, including transfer/ stacking units, chassis, dollies, forklifts, spotting and towing tractors; and

(vii) the purchase of computer and communications equipment for monitoring container operations.

The Road Improvements Component

3.21 This component, whose estimated cost is US$8.6 million, will increase the capacity of the Boyd-Roosevelt Highway between central Colon and its suburb of Cativa, through road widening, one way traffic controls, and prin- cipal junction improvements. Specifically, this component will consist of:

(i) widening 6.25 km length of the Boyd Roosevelt Highway to convert it into a 4-lane divided highway, including the widening of 3 bridges (standards are summarized in Annex 1);

(ii) strengthening and widening 2.9 km of Randolph Road between the Boyd-Roosevelt Highway and the Bolivar Highway and strengthening the latter as far as Manzanillo Island; - 20 -

(iii) improvements to ten road junctions; and

(iv) supervision of the works including logistic support.

Recreational Facilities Component

3.22 This component, whose estimated cost is US$1.0 million, will support investments for (a) the creation of Gatun Lake Park, a 20 ha fresh water facility (the first such facility to be located on former Canal Zone lands) with a capacity of 150 people at a time; and (b) the restoration of Fort San Lorenzo, established in 1575 at the mouth of the Chagres River and now a tourist attraction for the area. Specifically, this component consists of the construction of:

(i) 2.5 km of paved access road and a parking lot for 30 vehicles;

(ii) a floating platform and a deck for small boats;

(iii) a 300 m2 administration building at Gatun Lake Park; and

(iv) a small museum, strengthening and repairing of walls, removal of vegetation, and dehumidifying of vaults at Fort San Lorenzo.

Regional Education Center Component

3.23 This component, whose estimated cost is US$4.9 million, will consoli- date the activities of three educational levels: (i) the Instituto Politecnico, responsible for post secondary education; (ii) the Ministry of Education responsible for secondary technical education; and (iii) the Servicio Nacional de Formacion Profesional (SENAFORP) responsible for all basic skills level training. The component has been designed to ensure access of the Colonenses to the range of job opportunities generated by the project. First, it will provide training at the skilled and semi-skilled levels as well as training at the supervisory and technical levels; second, a job placement center will be provided by the center; and third, a community outreach promotion program will be organized to stimulate involvement of the unemployed and to facilitate the training of women.

3.24 Technical assistance will be provided to reinforce the implementing capacity of the agencies, while their curricula will include:

(i) the SENAFORP program - to train about 350 new workers per year for existing workers in the same trades, to upgrade about 160 workers in the commerce and service sectors, and to provide in-plant training courses varying between 80 and 800 hours;

(ii) the Ministry of Education program - to provide three-year technical courses in six specialities of industry and construc- tion for about 200 students per year;

(iii) the Instituto Politecnico program - to provide professional level education in seven specialities for construction, industry, computer programming, and systems analysis for about 94 graduates per year, of which about 20% will continue to the post-graduate level; and - 21 -

(iv) the intermediate management training program - to provide inter- mediate management training courses administered by the Ministry of Commerce to about 100 entrepreneurs per year in appropriate subject matters.

3.25 It was agreed during negotiations that acquiring a suitable building site will be a condition of disbursement for the component. Specifically, this component will consist of the:

(i) construction or rehabilitation of a building for 15 workshops, 11 laboratories, 26 classrooms, a library, a day care center, and a cafeteria; and

(ii) purchase and installation of equipment and training aids.

E. The Technical Assistance Sub-Project

Introduction

3.26 This sub-project, whose estimated cost is US$2.0 million, will support components for consulting and extension services related to program development, project monitoring and evaluation, transport management, and professional upgrading.

Program Development Component

3.27 This component, whose estimated cost is US$300,000 will provide about 36 man-months of consulting services to assist the Ministry of Planning in developing a prototype program for the Metropolitan Region as a whole. Specifically, the component will consist of:

(i) a study of the supply of available land and the demand for that land by activity and location, including the urbanization cost and the required zoning and development controls, and the system of rent control;

(ii) a study to identify the need for complementary and follow-up public and private investments in other sectors; and

(iv) a study of urban finance which will emphasize resource mobilization.

Management Information Component

3.28 This component, whose estimated cost is US$160,000, will provide 19 man-months of consulting services to the High Level Commission to develop a management information system. Specifically, the component will establish:

(i) targets to be developed in conjunction with the participating agencies;

(ii) a minimum number of new data streams; and - 22 -

(iii) a standard computerized reporting system based on the utiliza- tion of existing data streams collected by the participating agencies.

Project Monitoring and Evaluation Component

3.29 This component, whose estimated cost is US$240,000, will provide to the Ministry of Planning about 34 man-months of consulting services to develop a project monitoring and evaluation system. Specifically, this component will:

(i) develop targets and measures of their achievement;

(ii) design and carry out baseline data, follow-up and project completion surveys in the Colon subregion; and

(iii) prepare the report format for summarizing and analyzing the results of the surveys.

Transportation Component

3.30 This component, whose estimated cost is US$500,000, will provide 72 man-months of consulting services to the Government in implementing procedures for urban transport management, including traffic planning and public transport programming, and operational support to the Ministry of Public Works. Specifically, this component will consist of studies to:

(i) improve the administrative, financial, and operating procedures;

(ii) improve traffic management;

(iii) strengthen operating maintenance and vehicle service procedures;

(iv) develop trend analysis and improvements to terminal operations; and

(v) establish a public information system.

Port Component

3.31 This component, whose estimated cost is US$300,000, will provide about 14 man-months of consulting services to the Port Authority to evaluate the existing railway facilities for purposes of identifying railway transport require- ments across the Panama Isthmus, and an additional 24 man-months of consulting services to undertake an organizational study of the Port Authority.

Regional Education Center Component

3.32 This component, whose estimated cost is US$500,000, will provide:

(i) about 40 fellowships at a total cost of US$234,000 to upgrade teaching skills for staff employed at the regional education center;

(ii) about 20 man-months of consulting services at a cost of US$70,000 to the Ministry of Commerce to support curricula development for the intermediate management training program, and about 15 fellow- ships at a cost of US$50,000 to upgrade teaching skills; and - 23 -

(iii) about 12 man-months of consulting services at a cost of US$146,000 to establish a monitoring system for the 3 institutions.

F. Beneficiaries and Risks

Beneficiaries

3.33 The high unemployment rate and poverty in Colon, mean that job creation and increasing incomes are integral to any attempt at extending urban services to the poor, including the provision of housing. Thus, the central objective of this integrated urban project is the balanced provision of both productive jobs and services. Most of the beneficiaries are expected to be existing residents of Colon.

3.34 It is expected that during the construction phase of the project 3,000 construction related jobs will be generated (para. 2.13). By the end of the implementation period, about 8,000 permanent jobs are expected to be created. The proximity of Panama City suggests that some of the new jobs will be filled by commuters. However, since the bulk of the jobs generated will not pay wages at levels that can support the cost of daily commuting, it is unlikely that there will be a significant expansion in the number of daily commuters. Inmigration to the Colon sub-region of lower paid rural workers and of the unemployed in Panama City is more likely. As such the project will also benefit other parts of the Metropolitan Region. It is not possible, however, to estimate the extent of net inmigration into the sub-region since net outmigration was the dominant feature of the sub-region throughout the 1970s. Hence, despite the potential for increased commuting and net inmigration, it is estimated that more than half of the new employment opportunities will go to the existing residents of Colon, primarily to the poor and unemployed. In order to ensure the longer term comparative advantage and employment of Colonenses, the regional training center component has been designed to include special outreach and job placement features for the existing poor and unemployed in the Colon sub-region, parti- cularly to the tenement population on Manzanillo Island.

3.35 The residential sites to be provided by the project will be based on capacity to pay, and will benefit about 21,500 people, many of whom will be the same beneficiaries described in para. 3.34. Costs have been kept down, so that 80% of the units will be affordable by households in the 15-40th percentiles of the income distribution scale (paras. 4.06-4.10). In addition, home improvement credits will be provided to enable the beneficiaries to improve and expand their houses, especially for additional rooms to rent to those in the lower income brackets who cannot afford to own a house. Thus, the residential component is expected to have a major impact on reducing some of the manifestations of urban poverty, particularly through the relocation of the tenement population of Manzanillo Island. However, by redirecting residential growth in a controlled manner to areas adjacent to the location of new jobs, and releasing land in the central city from uneconomic uses the project also benefits a larger segment of the population of the Colon sub-region. - 24 -

3.36 Private developerson Manzanillo Island will benefit from these arrangementssince publicly financed incentivesand programs will have been in- strumental in releasing their land for redevelopment. The economic revitaliza- tion of the city will likely result in substantialincreases in land values. It was agreed during negotiationsthat to recover the public cost of this benefit to private developers,property values in the city of Colon, which have been frozen for several years, will be revised for purposes of levying real estate taxes not later than one year after completionof the project.

Risks

3.37 The uniquely comprehensiveand innovativenature of the proposed project in the Panamaniancontext carries the risks inherent to any new program involving a number of implementingagencies, and an executiveunit that is relativelyinexperienced (para. 5.01-5.03). The fact that the project interventionis designed to reverse past trends (such as economic decline, outmigrationof the population,etc.) also makes it difficult to anticipate the most likely response to each componentor to estimate the cost effective- ness of the interventionmixes. For example, the response to jobs created can vary from a reduction of net out-migrationand a major impact on local unemploy- ment and the releasing of central city land for more productiveuse, to a substantial increase in net in-migrationthat could reduce the rate at which central city land is released and local unemploymentreduced. There is reason to believe, however, that the former scenario is more likely to occur in the first few years of the life of the project by which time the technical assistance to be provided under the project will have contributedto the establishmentof an institutionalcapability to respond to a changed scenario.

3.38 There are also risks associatedwith the expansion of the Free Zone. In particular,the level of Free Zone activitiesis sensitive to the economic policies of the countriesand multinationalcorporations served by the Free Zone. To the extent that the Free Zone functionswith limited forward and backward linkages to the local economy the multipliereffects of fluctuationsin the level of Free Zone activity are small. Hence, the benefits arising from foreign trade-orientedinvestments that accrue to the local economy are likely to be limited to the direct labor input into these enclave type activities. This risk increases in the case of the footloose manufacturingactivities that the Free Zone will try to attract to its indus- trial sites. The wage rates in Colon are competitivewith those in Panama City and the Free Zones in Mexico; however, they are higher than the wages paid in neighboring Central American countries,Barbados, and Colombia.

3.39 The positive factors making the above set of risks acceptableare: (i) the relative political stability of the country which makes it attractive to foreign companies; (ii) the strong comparativeand locationaladvantages conferred by the presence of the Canal; (iii) the absence of exchange controls and the freedom for repatriationof profits; (iv) the presence of a large off-shore banking community; (v) an attractiveincentive program (para 6.08); and (vi) the presence of sunk infrastructurecosts as a result of the rever- sion of the former Canal Zone lands which can be exploited at modest incre- mental costs. - 25 -

IV. COST ESTLMATES, FINANCIAL ARRANGEMENTS AND LOAN ADMINISTRATION

A. Cost Estimates

4.01 The total cost of the project is estimated at US$133 million, of which US$63 million or 47% represents the foreign exchange component. Base cost estimates are expressed in prices of December 1979 and are based on feasibility studies for the industrial component and preliminary designs for all other components. A physical contingency of upto 15% on base costs was allowed on all components except land, housing improvement credits and techni- cal assistance. Base costs exclude taxes. A total price contingency of 22% was included for expected price inflation of 14% in 1980 and 1981, and 10% thereafter on all local and foreign cost items except home improvement credits and technical assistance, but including physical contingencies. The project contains about 140 man-months of consulting services to assist in the prepara- tion of engineering drawings, specifications and construction supervision, and 231 man-months for the technical assistance component. The average esti- mated cost of these services in prices of December 1979 is US$8,000 per man- month including travel and subsistence. The cost estimates are shown in Annex 1.

B. Financing Arrangements

The Financing Plan

4.02 The financing arrangements include a commitment from the Industrial Bank of Japan to syndicate, under prevailing market terms and conditions, a series of co-financing loans up to a total of US$70 million or its equivalent in Japanese Yen, for which it will charge a commitment fee. The borrower will be the Colon Free Zone. The initial loan under the syndication will be for US$15 million in Eurodollars over eight years including five years of grace, and will carry an annual interest rate of 1-1/4% over LIBOR. The Industrial Bank of Japan expects to be able to compensate for the shorter maturities on this loan with longer maturities in subsequent loans. The initial loan will be sufficient to finance the investment program for the first year (para. 4.20). The remaining US$55 million will be syndicated by the Industrial Bank of Japan as required by the Colon Free Zone. Although there is no firm undertaking as to the currency composition of the remaining US$55 million, it is likely that it will be offered in Yen subject to the same market conditions as the initial loan. In addition to the commitment to syndicate the loans, the Industrial Bank of Japan will undertake to exercise its best efforts to obtain overall terms which would result in a final maturity of approximately 15 years.

4.03 The co-financing loans will be disbursed against all project compon- ents except low-income housing, community facilities and home improvement credits. The loans will thus finance about 53% of total project costs. The proceeds of the loans will be provided in quarterly tranches over a four year period, will be available in advance of the actual construction of the works, and will be channelled through the Banco Nacional de Panama. Procurement will be in accordance with Bank guidelines. The detailed implementation procedures are outlined in Chapter 5. A condition of effectiveness of the proposed Bank loan would be that the Zona Libre has obtained the initial loan from the Industrial - 26 -

Bank of Japan on terms and conditionssatisfactory to the Bank, and that the Bank has been notified that all conditionsprecedent to the initialdisbursement under the loan agreementwith the IndustrialBank of Japan have been met.

4.04 A Bank loan of US$35 million equivalentis proposed. The loan will be made to the Republic of Panama,and will be for a term of 17 years, includingfour years of grace, and has been assumed to bear interestat 8-1/4% per annum. The on-lending arrangements and the implementation pro- cedures are outlined in paras 5.14 to 5.20. The Government will assume the foreign exchange risk of the proposed loan, which will finance about 26% of total project costs. Of the remaining US$28 million or 21% of total project costs, US$19 million will be financed from the internal resources of the Caja de Ahorros, while US$8 million and US$1 million respectively, will be financed from the internal resources of the Colon Free Zone and the National Port Authority. The financing plan is shown in Table 4.1 below.

Table 4.1 COLONURBAN DEVELOIMENT PROJECT FINANCING PLAI (UJ$ MILLION

Fin=ancing T,,7r.-In_

I CAJA 7_ CO- FREE Dr A- PORT COMPONENT TOTAL IBRI Z 7r;IANC ZO,IE| % KUFzOS % AU' I '

Urban Employment

Comnmrcial Estate 29.6 o 25.7 87 3.9 14 ___… . Industrial Estate 26.4 …22.9 87 3.; 114 2____ -- -- w7 17. 14 -_

Urban Rcnewal Retail Mall 4.6 ------3.9 86 0.7 14 ------Bus Terminal 1. I _--.___- n 6.5 1.11 4.2 0.7- -- Housing and Social Services

Low-Income Housing 29.5 17.7 60 ……- __ - 11.8 4c ------Cormunity Facilities 11.0 6.6 60 … _ __ 4C Home Improvement Credits 3.0 ------3.0 100 _ _ Ea 24.3 56 ___ - = _ 1.2 44

Regional Infrastructure

Port Improvements 10.8 ------9.8 90 ------1.0 10 Road Improvement 8.6 5.2 60 3.4 ho --- Regional Educttion Center 4.9 2.9 60 2.0 40 __. ------Recreational Facilities: Fort San Lorenzo 0.5 0.3 60 0.2 40 --- Gatun Lake 0.5 --- __ 00 ------25.3 o.4 33 15.9 63 _ -1.o 4 Technical Assistance 2.0 1.2 T0 0.8 70 __- -- … __-- __ --

Total Capital Requirements 133.3 35.0 26 70.0 53 8.1 6 19.2 14 1.o 1 - 27 -

C. Cost Recovery and Affordability

Cost Recovery

4.05 Cost recovery measures have been developed based on the following objectives (a) investments in commercial activities will be fully recovered through rental charges or tariffs; and (b) except for a portion of the urbaniza- tion costs, investments in low income housing, community facilities, and home improvement credits will be fully recovered. As a result, it is estimated that 77% of total project costs will be recovered, either from the bene- ficiaries or the general revenues of the commercial enterprises. Investments in community facilities totalling US$11 million and certain items of urban infrastructure of the housing component (street paving, sewage treatment, and a major drainage canal), totalling US$3.3 million, together with certain investments in regional infrastructure and technical assistance sub-projects totalling US$16.7million account for the remaining 24%, are viewed as benefit- ting the Colon Sub-Region as a whole, and will be treated as a transfer of resources not recovered from the project beneficiaries. Table 4.2 summarizes the cost recovery provisions of the project.

Table 4.2 COLONURBAN DEVELOEPM1NT PROJECT

SCHEDULEOF COST RECOVERY (US MILLION' COST RECOVERY

CCMPONENT TOTAL RENTAL TARIFFS MORTGAGE GOVERMENT CHARGES PAINENTS TRANSFERS Urban EmBloyment

Commercial Estate 29.6 29.6 __ _ __ Industrial Estate 26.4 2k _ 5s6.o ______Urban Renewal Retail MaU.: 4.6 4.6 ______Bus Terminal 1.9 1.9 ______

Housing and Social Services

Low-Income Housing 29.5 -- __ 26.2 3.3 Community Facilities 11.0 __ __ _ 11.0 Home Improvement Credits 3.0 _ 3.0 _ 43.5 __ 29.2 14.3 Regional Infrastructure Port Improvements 10.8 __ 10.8 __ __ Road Improvements 8.6 _ __ __ 8.6

Regional Education Center 4.9 _ 4.9 Recreational Facilities: Fort San Lorenzo 0.5 _- __ __ 0.5

Gatun Lake __-5 0.5 25.3 14.5 jtechnical Assistance 2.0 __ __ 2.0

ITotal Capital Requirementa 133.3 52.5 10.8 29.2 30.8

Percentage 100 47 8 22 23 - 28 -

Affordability

4.06 A high proportion of the residents in the tenement and slum areas of Colon meet the Bank's urban poverty identification definition, which in the case of Colon is average family earnings of less than US$2,205 per annum. Nevertheless, residents of these areas are not uniformly poor. Some tenement buildings for example, may contain exceedingly poor families, while others, across the street, in the same neighborhood are somewhat better off. This mixing tends to mute the income differences between the middle class and the very poor.

4.07 In designing the shelter options which will be made available in the low income housing site, every effort was made to create an environment which would retain the informal networks of support and preserve the spirit of the neighborhood, avoid income stratification, and encourage middle income and poor families to live in fairly close proximity. Therefore, assurances were obtained during loan negotiations that at least 60% of the shelter options will be for families whose income falls in the bottom four deciles, while the remaining 40% of the shelter options, will be, at the discretion of the Caja de Ahorros and Ministry of Housing, for families whose income falls between the fourth and sixth deciles.

4.08 Although data from the early 1970's and casual empiricism amply reveal the marked incidence of poverty in Colon, there is, nevertheless, a lack of recent individual and household income data. Surveys undertaken in 1972 provide the most reliable information on income and consumption in the city. This information formed the baseline survey, adjusted for esti- mated income growth during the 1973-79 period, which was used to compute the 1980 average monthly family income by decile shown in Table 4.3 below. Estimates of average family monthly income by decile during the 1981-84 period were prepared by the appraisal mission and take into consideration changes in the labor force participation rate, and a general shift upward in average incomes as a result of the project.

Table 4.3: AVERAGE MONTHLY FAMILY INCOME BY DECILE US$ per month 1982 % of Income Affordable Decile 1980 1981 1982 1983 1984 for Housing Payment

0-10 62 68 74 80 86 10 7 11-20 177 196 241 210 281 25 60 21-30 235 260 283 306 330 25 71 31-40 292 323 352 380 410 25 88 41-50 341 377 411 444 480 25 103 51-60 403 445 485 524 566 25 121 61-70 465 514 560 605 653 30 163 71-80 561 620 676 730 788 30 169 81-90 705 779 849 917 990 30 212 91-100 1,553 1,716 1,870 2,020 2,183 30 468

4.09 In calculating affordability, the Caja de Ahorros has traditionally operated on the premise that 25% of family income will be devoted to housing. The appraisal mission, however, related housing expenditure to household income more selectively for the purpose of judging affordability. For the - 29 - lowest 10% of families, it was felt that 10% of household income allocated to housing was a realistic figure; this proportion will increase to 25% for succeeding deciles.

4.10 The resulting comnparisonsof costs and capacity to pay are shown in Table 4.4. Costs include design, supervision, physical, and price contin- gencies. For purpose of affordability, the percentage decile reached is based on estimated 1982 incomes. Title will be in the form of a 99 year lease. The monthly payment assumes a 10% down payment, with the house financed over 17 years at 12% interest, with land and urbanization costs financed over 25 years at 12% interest.

Table 4.4: COMPARISONS OF COSTS AND CAPACITY TO PAY (In Mid-1982 Prices and Incomes)

Size Size of Esti- Month- Per- % of of 2 Ho2se mated ly Pay- centile Opt- Housing Options Lot (m ) (m ) Cost Demand ment Reached ions

Apartment Unit - 25.2 5,300 300 53 11-20 7 Basic Dwelling Row House 96 25.2 5,470 1,300 57 11-20 33 Basic Dwelling Side x Side 120 25.2 5,765 935 58 11-20 23 One Bedroom Row House 108 36.0 7,575 590 78 31-40 15 One Bedroom Side x Side 135 36.0 7,755 200 79 31-40 5 Two Bedroom Side x Side 135 39.6 8,385 700 81 31-40 17

------4,025 -- -- 100

4.11 All housing options have been designed to standards which are affordable to the final beneficiaries, are fully replicable, and in fact follow existing Ministry of Housing practise. The special features of housing finance described in Chapter II, ensure a high probability of a continuing line of credit from the private sector and domestic savings to finance similar housing projects in the future.

D. Procurement and Disbursements

Procurement

4.12 Contracts for the supply of equipment and materials valued at US$250,000 or more and totalling about US$1.5 million will be awarded through international competitive bidding procedures in accordance with Bank guide- lines. Contracts under US$250,000, totalling about US$2.5 million, open also to foreign contractors, will be awarded on the basis of local competitive bidding procedures acceptable to the Bank. For bid evaluation purposes, - 30 - under international competitive bidding, a margin of 15% or the value of the applicable customs duties, whichever is lower, will be allowed for materials and equipment manufactured in Panama.

4.13 Contracts for civil works valued at US$2.0 million or more, other than for the housing and social services sub-project where the figure will be US$1 million, will be awarded through international competitive bidding in accordance with Bank guidelines. Civil works contracts under US$2.0 million, other than for the housing and social services subproject, where the figure will be US$1 million, will be awarded through local competitive bidding open also to foreign contractors, using procurement procedures aceptable to the Bank. Because of the large number of competent local contractors, it is expected that all such contracts will be won by local bidders. Exceptions are outlined in paras. 4.15 to 4.17.

4.14 All civil works contracts valued at US$800,000 or more and equipment and goods contracts valued at US$250,000 or more will be subject to the prior review of procurement documentation. These represent about 40% of the contracts and will result in a coverage of about 80% of the total estimated value of contracts. The balance of contracts will be subject to post review after contract signature on a selective basis.

4.15 Local procurement procedures are covered by the Panamanian Fiscal Code which requires that all contracts above US$5,000 in value be subject to competitive bidding. However, with a view to expediting housing construction, the Minister of Housing has been granted by the Government, on a year-to-year basis, exemption from the requirements of the code, and has been permitted to contract directly for housing construction without inviting competitive bids. Under the procedure that has been established, selected contractors are invited to construct groups of 100 houses at a unit price predetermined by the Ministry on the basis of an analysis of current market prices. As a result, the Ministry considers that housing costs have been kept down and construction speeded up. This procedure has also enabled a large number of local contractors to partici- pate, and has had the grudging acceptance of the Panamanian Chamber of Construction--the local association of building contractors. The resulting prices appear reasonable.

4.16 For site preparation, the practice has been for the Ministry of Housing to hire equipment from plant owners at an hourly rate fixed by the Ministry on the basis of actual operating costs. This has given the Ministry flexibility in the use of equipment to meet peak demands, has tended to keep costs down, and has also permitted the work to be spread amongst a large number of plant operators. Since the Ministry also carries out works by force account, this practice can be regarded as an extension of the Ministry's own force account operations without an increase in capital investment.

4.17 The total cost of the housing construction is estimated at approx- imately US$18 million, of which about US$5 million will be spent in the first phase of construction, and about US$6.5 million in each of the two subsequent phases. The cost of site preparation for all three phases of the housing component will be about US$4.0 million (approximately US$1.3 million per phase). While the practice of direct contracting without competitive bidding - 31 -

is not the preferred procurement procedure, it would be indefensible if Bank insistence on competitive bidding were to lead to higher prices. Therefore, agreement was reached during negotiations that:

(i) for the construction of houses, the Ministry of Housing would initially call for competitive bids, but if it is subsequently demonstrated in a manner satisfactory to the Bank that this will lead to inefficiency and higher costs, the Ministry would be permitted to revert to its present practice of direct contracting; and

(ii) for site preparation, the direct hire of equipment by the Colon Free Zone, and by the Ministry of Housing for those works for which retroactive financing is proposed, would be recognized as acceptable to the Bank; the direct hire of equipment for subsequent works would also be recognized if it is shown, satisfactorily to the Bank, to be more economical and efficient than by competitive bidding and admeasurement contracts.

Disbursements

4.18 Disbursements under the proposed Bank loan will be fully documented. The proceeds of the loan will finance the following items on all components except the industrial and commercial estates, the retail mall, the ports improvements, and the Gatun Lake Recreation Park.

(a) 60% of total expenditures for all materials, equipment, civil works, and consulting services and salaries for support staff; and

(b) 60% of total expenditure for technical assistance.

4.19 Retroactive financing in an amount not exceeding US$1.8 million is recommended for expenditures incurred from December 1, 1979 for (a) hiring of consultants, (b) site preparation, and (c) construction of infrastructure works.

4.20 The schedule of estimated disbursements is shown below. The closing date will be June 30, 1984. - 32 -

In US$ Millions IBRD % of Co-financing % of Quarter ending Cumulative Total Cumulative Total

September 30, 1980 1.1 3 1.4 2 December 31, 1980 2.5 7 5.9 8 March 31, 1981 4.9 14 10.4 15 June 30, 1981 7.0 20 15.0 21

September 30, 1981 9.5 27 24.3 35 December 31, 1981 12.6 36 31.0 44 March 31, 1982 15.8 45 38.6 55 June 30, 1982 19.3 55 43.3 62

September 30, 1982 22.8 65 48.0 68 December 31, 1982 25.6 73 52.6 75 March 31, 1983 28.0 80 57.2 82 June 30, 1983 30.1 86 61.9 88

September 30, 1983 36.5 90 64.6 92 December 31, 1983 31.3 91 67.0 96 March 31, 1984 34.0 97 70.0 100 June 30, 1984 35.0 100 - -

V. COORDINATION. ORGANIZATION AND IMPLEMENTATION

A. Coordination, Programming and Engineering

5.01 The integrated approach to urban development in Panama has evolved from both the declared policy of the Government to adopt a comprehensive strategy, and from the combined impact of sub-projects when concentrated on a single purpose. In order to carry out this policy and to achieve rapid, consistent and comprehensive development, the Government has established a special High Level Commission to co-ordinate the project at the general planning level, at the strategic development level, and at the implementation level. The Commission's role is essentially one of co-ordination and liaison between the various implementing agencies.

5.02 Created by Presidential Decree No. 144 of December 13, 1979, the Commission operates much along the lines of regional development corpora- tions in other countries, and has broad powers to channel resources and determine the priorities of Colon. The Commission is headed by an Executive Committee, which is chaired by the Vice-President of the Republic, and con- sists of the Minister of Planning, the Minister of the Presidency, the Minister of Housing, the Governor of the Province of Colon, and each of the Managers of the Caja de Ahorros and the Colon Free Zone, as well as the Managing Director of the Commission.

5.03 Having its own expertise in technical management, contract supervision and monitoring and evaluation, the Commission employs six pro- fessionals from different disciplines. A monitoring and evaluation officer to be financed from the proceeds of the Bank loan will also be appointed. - 33 -

Apart from coordinating and phasing the various implementation activi- ties, the Commission will, in the case of the Bank-financed components, be responsible for approving the disbursement requests from the implementing agencies prior to payment by the Caja de Ahorros. In the case of the co- financed sub-projects, the Commission will be responsible for administratively approving disbursement requests from the Free Zone and Port Authority prior to release of the funds by the Banco Nacional.

5.04 The Free Zone, the Caja de Ahorros and the Ministry of Housing have already established project management units to be responsible for the sub- projects under their command. In keeping with Government policy of using existing institutions, these management units, working together with the Commission, form the basic structure responsible for carrying out the project (see paras. 5.12 and 5.19 for detailed implementation procedures). The other agencies are also equally important to the success of the project, but play a more specialized role. These arrangements should provide satisfactory coor- dination and administration of the project. Assurances were obtained during loan negotiations that the Commission will be maintained with its present powers during the implementation period of the project.

5.05 Detailed engineering and construction supervision for the industrial, commercial and retail mall components will be performed by independent consul- tants; all other detailed engineering will be provided by the appropriate sector agencies. Detailed engineering has been completed for earthworks and structures for the industrial and commercial components, while the remaining detailed engineering for infrastructure will be completed by June 30, 1980. Detailed engineering has also been completed for the port, road improvements and the first phase of the Puerto Escondido housing component. The balance of the detailed engineering for phases two and three, which will be completed by September 30, 1980 and September 30, 1981 respectively, will form part of the detailed site plan referred to in para. 3.14.

B. Organization

The Implementing Agencies

5.06 The project will be implemented as shown in Annex 2 during the 1980-83 period. Each of the implementing agencies has had previous experience with similar programs in the past, and will be responsible for all of the requisite programming and budgeting of their respective sub-projects, includ- ing the design, bidding, procurement, construction, as well as the project related co-ordination of other participating agencies, such as those respon- sible for urban infrastructure, education, health and public works. In all cases, each of the participating agencies will provide the necessary personnel for staffing the facilities once they have been constructed. Agency responsi- bility for project execution is shown below. - 34 -

Borrowers ImplementingAgency

Colon Free Zone

Industrial Estate Colon Free Zone (CFZ) CommercialEstate Colon Free Zone (CFZ) Port Improvements National Port Authority (APN) Retail Mall Colon Free Zone (CFZ)

Republic of Panama

Bus Terminal Ministry of Public Works (MOP) Low-IncomeHousing Caja de Ahorros (CA) Community Facilities Caja de Ahorros (CA) Home ImprovementCredits Caja de Ahorros (CA) Regional EducationCenter Ministry of Education (MOE) Road Improvements Ministry of Public Works (MOP) RecreationFacilities: - Lake Gatun Park Ministry of Public Works (MOP) - Fort San Lorenzo National Cultural Institute (INAC) TechnicalAssistance Ministry of Planning (MIPPE)

Organizationand Management

5.07 Of the seven implementingagencies, the Colon Free Zone, the Caja de Ahorros, and the Ministry of Housing, will be collectivelyresponsible for more than 76% of the total cost of the project. The organizationstructure of each of these agencies, is therefore,briefly describedin the succeeding paragraphs. The other four agencies,which account for the remaining24% of the investmentprogram, are all Government entities.

The Colon Free Zone

5.08 The Free Zone is governed by a ten-personBoard of Directors,with one person each appointedby the Ministry of the Presidencyand the Ministry of Finance,while six members including the manager are drawn from the business communityat large. The Minister of Commerce is the Chairman of the Board. Activitiesare organized in four functionalareas--planning and programming,engineering and design, administration,and business pro- motion--allof which report to the general manager. The engineeringand design area has recentlybeen strengthenedby the appointmentof a project manager and additionaltechnical staff. The Free Zone is audited annually by the Office of the ContraloriaGeneral de la Republica (AuditorGeneral). The organizationstructure of the Free Zone is shown in Annex 3.

Caja de Ahorros

5.09 Establishedin 1934 by ExecutiveDecree No. 54, the Caja de Ahorros is the oldest savings and loan associationin the country. Governed by a five person Board of Directorsappointed by the Presidentof the Republic,the Caja de Ahorros has broad powers for offering a full range of banking services. - 35 -

The Caja de Ahorros does not engage in housing construction. In addition to its central office in Panama City, which is responsible for its policy forma- tion, project design, and construction procedures, the Caja de Ahorros operates 25 regional offices located in departments throughout the country. Four of the regional offices are located in Colon. Employing a total staff of about 600 people, 430 work in offices throughout the Metropolitan Region, and of these, 50 work closely with housing finance and housing design activities. The Caja de Ahorros is organized into 17 functional divisions and three geographic management units. The organizational chart is shown in Annex 3. The Caja de Ahorros is audited annually by Arauz, Hermida and Pazmino, an independent firm of public accountants acceptable to the Bank. Assurances were obtained during loan negotiations that independent auditors acceptable to the Bank will be maintained.

Ministry of Housing

5.10 The Ministry of Housing was established in January 1973 by Executive Decree No. 9, superseding the former Institute of Housing and Urban Affairs. The Ministry operates eight branches, four of which are in Panama City, and one each in Colon, David, Chitre and Santiago. Of the total staff of about 2,400 people, 920 are considered permanent, while the balance of 1,480 are on contract. The professional staff includes 56 architects and 20 engineers. The Ministry is organized into four major operating divisions--administration, urban development, programming and budgeting, and construction--all reporting directly to the Minister of Housing.

5.11 The Ministry's implementation capacity is such that it frequently undertakes urban infrastructure projects such as roads, surface drainage, water supply, sewerage and electricity. In such cases, design specifications are submitted to the relative sector agency such as the National Water and Sewerage Agency (IDAAN), and the Ministry of Public Works. On completion, these projects are inspected by the agency concerned, which subsequently assumes responsibility for operation and maintenance. The Ministry also undertakes the construction of general public works, health clinics and schools in its public housing project areas. These resources endow the Ministry with great flexibility of action and place it in an excellent posi- tion to participate effectively in integrated urban development projects.

C. Implementation Procedures - Co-financed Components

Industrial, Commercial and Retail Mall Components

5.12 In the design and construction of drainage works and roads, close liaison with the Ministry of Public Works (MOP) will be maintained. Follow- ing standard practice, the design specifications for the water and sewerage networks will be subject to the final approval of IDAAN, the national water supply and sewerage agency, although the Free Zone will be responsible for their construction. Assurances were obtained during loan negotiations that the Colon Free Zone will prepare and furnish to the Bank, not later than June 30, 1981, a proposal satisfactory to the Bank for sewage collection and disposal prepared in consultation with IDAAN. The electricity and tele- communications networks will be constructed and installed by the national - 36 - agencies responsible for each sector, IRHE and INTEL, which will obtain the funds as required from the Free Zone. Upon completion, the Free Zone will own and operate all of the facilities except the utility infrastructure, which will be transferred to the appropriate sector agency for operation and maintenance. While the Free Zone will not receive payment for these assets, it will recover the costs through rental charges for the facilities.

Ports Improvement Component

5.13 The Free Zone, which will be the borrower, will onlend the appro- priate amount to the Port Authority. The loan will be under the same terms and conditions as those given by the Industrial Bank of Japan to the Free Zone. The repayment obligations arising from this loan will exceed the limits stipulated under Loan Agreement 1114-PAN, Section 5.06, between the Bank and the Port Authority for the execution of the Vacamonte Fishing Port Project. According to this agreement, the Port Authority is not permitted to incur further debt, without prior Bank approval, unless net revenues for the pre- ceding twelve months were not less than 1.4 times the maximum debt service in any future year. In fact the Port Authority's net revenues for 1979, about US$2.6 million, were well below the maximum projected debt service including this borrowing (over US$4.7 million). However, the Port Authority's earnings are expected to increase substantially during the next few years as a result of the fishing port at Vacamonte and the reversion of the Canal Zone ports of Balboa and Cristobal (para 6.03). Preliminary data provided by the Port Authority indicates that net revenues during 1980 will exceed the US$6.6 million required to comply with this covenant. It is proposed, therefore, that the Bank approve the proposed borrowing.

D. Implementation Procedures - Bank Financed Components

On-lending Arrangements - Housing and Community Facilities Components

5.14 The financial intermediary and administrator for the housing and community facilities components will be the Caja de Ahorros. The Government will on-lend to the Caja de Ahorros the appropriate portion of the Bank Loan (60% of expenditures for the foregoing components) while the Caja de Ahorros will finance from its own resources the remaining 40%. The expenditures will be segregated to show separately the cost of houses, community facilities and urbanization of land. Upon completion, the community facilities and urbanized land will be transferred by the Caja de Ahorros to the Government, which will cancel the appropriate portion of the Bank loan (60% of expenditures) and reimburse the Caja de Ahorros for the remaining 40% under the same terms and conditions as the Caja de Ahorros obtained the funds. The houses will be sold by the Caja de Ahorros, which will underwrite and service the mortgage port- folio (see paras 5.16 and 5.17). Final signature of an agreement between the Government and the Caja de Ahorros covering their respective obligations, will be a condition of disbursement for the housing and social services sub-project.

Physical Implementation - Housing and Community Facilities Components

5.15 Although the financial intermediary and administrator for the housing and community facilities components will be the Caja de Ahorros, assurances - 37 - were obtained during negotiations that unless otherwise agreed by the Bank, the physical implementation, including the design, procurement and construction will be carried out by the Ministry of Housing. Consistent with existing practice, the Ministry will use the same procedures for infrastructure as outlined in para. 5.12. The design and cost estimates, however, will be subject to the final approval of the Caja de Ahorros. A memorandum of understanding between the Caja de Ahorros and the Ministry of Housing has already been entered into. As part of this understanding, the Caja de Ahorros will, in addition to the construction supervision provided by the Ministry of Housing, maintain its own inspector at the job site. The inspector will recommend for payment on behalf of the Caja de Ahorros all progress payments made to the Ministry. The original procurement and disbursement documents will be held by the Ministry, but copies will be sent to the Caja de Ahorros. Assurances were also obtained during loan negotiations that the Caja de Ahorros will prepare and furnish to the Bank, not later than June 30, 1981, a proposal satisfactory to the Bank for sewage collection and disposal prepared in consultation with IDAAN.

5.16 The delivery mechanism for the housing units will be in keeping with national policy, so that beneficiary selection criteria will be established by the Ministry of Housing. Loans for the purchase of houses (excluding urbanization costs) will be administered through one of the offices of the Caja de Ahorros using its normal criteria which are acceptable. Loans will be denominated in Balboas, which are at unity with the US dollar, and will bear interest at 12% per annum, adjustable not later than every 5 years on the basis of the institution's average cost of funds (para. 6.21), will be amortized over 17 years, and will finance up to 100% of the cost of the house. All documentation for these loans will be retained by the Caja de Ahorros, which will reserve the right to repurchase any house within the first five years of occupancy should the existing owner choose to sell. The purpose of this policy is to minimize pressure on land speculation. Assurances were obtained during negotiations that any change in the foregoing lending terms will be subject to agreement with the Bank. Assurances were also obtained that the Ministry of Housing will implement a site allocation system satisfactory to the Bank.

5.17 Urbanization costs allocated to the housing site (para. 4.05) will be recovered from the home owner in the form of a valorization tax amortized over 25 years at an ieterest rate of 12% per annum. Raw land will be valued at about US$4 per m and will be recovered from the home owner as a rental charge under the same terms and conditions as the valorization tax. Assurances were obtained during loan negotiations that the Government will apply these cost recovery policies.

5.18 The increase in the wholesale price index averaged 7.1% in 1977, 5.5% in 1978 and about 18.0% in 1979. This increase is expected to average 14% in 1980 and 1981 reducing to 10% thereafter. It is unlikely, therefore, that the onlending rate of 12% per annum (para. 5.16) charged by the Caja de Ahorros will be positive during the early stages of the project. However, the rate of inflation is expected to decline in 1982, the period when the bulk of the mortgages are expected to be written and when the onlending rate is expected to turn positive in real terms. In addition, the Caja de Ahorros is the largest single domestic mortgage institution in the country, and the onlending rate of 12% per annum is consistent with other similar types of lending (para. 6.20). - 38 -

Other Sub-Projects

5.19 The appropriate sector agencies as shown in para. 5.06 will be responsible for the implementation of the bus terminal, regional education center, road improvements, recreational facilities and technical assistance components. These components will be jointly financed by the Bank and the Industrial Bank of Japan (para 4.04). The Free Zone, which will be the borrower for the Industrial Bank of Japan, will onlend the appropriate amount to the Government. With the exception of the bus terminal, each of the implementing agencies will be responsible for the operation and maintenance of their respective facilities. Upon completion, the bus terminal will be transferred to the Transport Directorate of the Ministry of Justice and Government for operation and maintenance.

E. Monitoring

5.20 To ensure that information essential to project execution is pro- vided, monitoring of the project components will be undertaken. Responsibility will rest with the respective implementing agencies (para. 5.05), but the Commission will co-ordinate all of these monitoring activities and the informa- tion generated will be used by the Ministry of Planning for designing similar projects in the future. Quarterly reports will be prepared on the basis of records systematically kept of key indicators of progress toward project goals. The format of such reports were discussed at negotiations. Themes to be treated in the reports, which will be submitted to the Bank, include: (i) the pace of construction; (ii) types of industries using the industrial facilities and the number and type of jobs created; (iii) housing loans and repayment experience; (iv) employment characteristics of the beneficiaries; (v) impact of community participation; (vi) appropriateness of service standards and tenure arrangements; (vii) turnover of area residents; (viii) development trends in the downtown area of Colon; and (ix) demand and payments for rental accommodations. Annexes 2 and 4 contain the estimated values for indicators that were discussed during negotiations, as well as key dates for project implementation. Agreement on these figures was recorded. Commitments and disbursements under each loan category will be reviewed at the halfway point, in addition to normal monitoring, to gauge the overall effectiveness of these programs in reaching the intended beneficiaries.

VI. FINANCIAL ANALYSIS

A. Introduction

6.01 The two main implementing agencies for the project--the Colon Free Zone and the Caja de Ahorros are commercial, profit making enterprises. Of the total project costs, about 78% would have a direct impact on the financial position of these agencies; a full financial analysis has therefore been done for both of them. While the project has been broadened to include other in- vestments related to raising the general level of urban services, these compon- ents account for about 14% of total project costs while the port improvements component, which accounts for the remining 8%, would be implemented by the - 39 -

National Port Authority, also a profit making enterprise. Since these components present no significant risks to the implementing agencies involved, their financial position has not been analysed in this report. However, since the Port Authority is a profit making enterprise, its financial position is briefly described below.

B. The National Port Authority

6.02 Since its creation, in 1974, the Port Authority has been a profit- able institution handling steadily increasing traffic and receiving rapidly expanding revenues. Total revenues, which were US$0.5 million in 1975, increased by 140% to US$1.3 million in 1978 and are expected to have in- creased substantially in 1979 (figures are not yet available but are ex- pected to be over US$10 million). The dramatic 1979 increase arises because, during the year, the port facilities at Vacamonte were opened and the Port Authority assumed responsibility for the ports at Balboa and Cristobal which had been previously operated by the Panama Canal Company.

6.03 Under the terms of the agreement with the Bank for Loan 1114-PAN (Section 5.05), the Port Authority is required to earn a profit at each of the ports that it operates. Total profit earned has increased from US$88,000 in 1975 to US$246,000 in 1978 and is expected to have exceeded US$1.0 million in 1979. The main uncertainty affecting the future profitability of the Port Authority arises from the Canal Ports at Balboa and Cristobal. Because of the accounting policies used by the Panama Canal Authority, it has not been possible to determine whether tariffs cover their full operating costs. The Port Authority is currently receiving UNDP financed assistance from technical experts who are working on improving the Port Authority's financial data systems. This work, which should be completed in mid-1980, will indicate to what extent tariff adjustments are required in order to ensure the profit- ability of the ports. In view of the foregoing loan covenant and the signi- ficant amount of revenue generated (estimated at over US$30 million per year), the Port Authority will no doubt implement suitable tariff revisions in due course.

6.04 The economic justification of the port container handling component of the proposed project raises a more specific issue with regard to tariffs that is not covered by the tariff covenant discussed in para 6.03. The benefits of this component accrue directly to the shipping companies which are foreign owned. While some of the savings may be passed on to Panamanians in the form of lower import prices and/or higher export prices, the Port Authority would have to raise tariffs on container services at Cristobal if the port component is to yield an acceptable economic rate of return. This action should be feasible in view of the substantial savings accruing to the shipping companies. Therefore, assurances were obtained during negotiations that the Port Authority will implement, within one year after completion of the works, a tariff system for container services at Cristobal to ensure that the revenue so earned would be at least sufficient to yield a satisfactory economic rate of return on the proposed investment in container facilities. - 40 -

C. The Colon Free Zone

General Overview

6.05 The Free Zone generates most of its business through real estate rentals. Although the Free Zone was established in 1948, it was not until 1952 that it opened for business with 10 companies on a modest six hectares of land. By the end of 1979, the Free Zone had fully developed 44 hectares of land, 70% of which was covered by warehouse type buildings and display offices. The facilities are fully contracted to 350 individual companies with almost 250 others using the service of Free Zone based redis- tribution agents. The Free Zone now employs just over 5,000 workers.

6.06 Goods arrive by ship that dock at the adjoining port of Cristobal, and leave either by ship from the same port or by air from Tocumen Airport near Panama City. The main exporters to the zone are Japan, the United States, Taiwan and Britain. The main buyers are Brazil, Venezuela, Ecuador, Peru, Colombia and Mexico. Many of the trading companies, especially those dealing in electronic components, cameras, watches, perfumes and recording equipment sell to other free port areas of Latin America: San Andres Island in Colombia, Manaus in Brazil, Aruba, Curacao, and Panama City. In the past, space limita- tions in Colon have been one of the Colon Free Zone's constraints for growth.

Sector Strategy

6.07 In addition to a major expansion of its existing activities for the 1980-84 period, the Free Zone Industrial Program also includes the expansion of its range of activities for the manufacture and export processing sectors. The principal target sectors from which projects will be sought are: (i) elec- tronics and computers; (ii) mechanical engineering, including industrial machinery, valves and compressors; (iii) selected areas of the textile industry; (iv) consumer products including sports, leisure equipment and photographic equipment; and (v) health care products, intermediate and related chemical products. These sectors, while providing some jobs in the short-term, are principally directed at the long-term development of Colon, and will bear fruit in the mid 1980's when physical works commencing now can be expected to mature. By the end of 1986, more than 8,000 new jobs are expected to be created. The first phase of the program is included as part of the proposed project.

Incentives

6.08 The program is aimed at attracting a share of the internationally mobile investment by means of an incentive package, which is summarized as follows:

(i) External operations are taxed in accordance with graduated rates at 2.5% on the first US$50,000 to 8.5% on taxable income in excess of US$100,000. Internal operations are taxed at rates which start at 20% for the first US$30,000 to 50% on taxable income in excess of US$500,000;

(ii) depending on the number of Panamanian employees working for a company in the zone and on the basis of its taxable income, tax credits ranging from 0.5 to 1% to 1.5% are allowed; and - 41 -

(iii) companies established after January 1, 1976 are granted a 95% tax rebate for the first five years if 80% of their revenues are from external operations and they engage a minimum of 30 Panamanian employees.

6.09 In addition to the above incentives, there are others, such as: (a) dividends paid on profits obtained from external operations and from direct sales are not subject to a dividend tax; (b) royalties paid to compa- nies established abroad are not taxable; (c) merchandise stored in, or leaving the zone for foreign countries is exempt from taxes, assessments and fees of all kinds; and (d) total exemption from any other type of national or municipal tax providing the assets are located within the zone.

Past Finances

6.10 As shown in Annex 4, the Free Zone is financially strong, having as of December 31, 1979, US$22 million in total assets. Of this amount, about 77% or US$17.0 million was in the form of paid in capital and retained earnings, 18% or $4.0 million was in the form of long-term debt, and 4% or US$1.0 million was in the form of short-term debt. In the past, investments in land and buildings were mostly financed on a cash basis from net earnings. This accounts for the relatively small amount of long-term debt outstanding. As shown by the current ratio, which has averaged 2.0 over the last two years, the liquidity position of the Free Zone is quite strong. A current ratio of about 1.2 for this type of enterprise is generally considered the norm for adequate short-term liquidity.

Rental Revenues and Tariff Structure

6.11 Rental revenues, which account for about 84% of total revenues, are earned in the following manner:

(i) an individual company may build its own warehouse or plant on a serviced lot rented from the Free Zone. Under this arrangement, the building standards are established by the Free Zone. The building must be kept open during regular Free Zone working hours, and the utilities must be paid by the company. The monthly land rental tariff as of January 1, 1?80 was US$0.40 per m in the existing area and US$0.30 per m in the expansion area. Rental contracts range from one to 20 years;

(ii) an individual company or firm acting as a representative for various clients may rent the exclusive use of all or part of a building from the Free Zone for a period of one to five years, renewable. With Free Zone permission, tenants may adapt this space to their own needs for warehouses, showrooms and offices. The monthly buigding rental tariff as of January 1, 180 was US$2.00 per m in the existing area and US$1.50 m in the expansion area;

(iii) companies or individuals may rent space in public warehouses owned and operated by the Free Zone. The rental tariff as of January 1, 1980 was US$3.00 per month per 40 cubic feet or metric ton. - 42 -

6.12 Additional revenues are also generated by providing storage, repacking and reshipping services in Free Zone owned public warehouses,as well as customs and declarationservices, insurancebrokerage services, consular certifications, and trash collection. These charges are adjusted periodicallyto take into account the increasedoperating costs associated with such services.

6.13 The followingsummarizes the number of square meters of rental space and the average tariff for land and buildings at the end of 1979 and 1984 respec- tively; the period in which the new facilities are expected to be completed.

1979 1984 2 Contracts 2 Contracts Description m Existing New m Existing New

Land - Existing Area 134,428 0.19 0.40 156,028 0.50 0.61 Land - ExpansionArea 6,002 0.21 0.30 213,823 0.45 0.46 Buildings - Existing Area 164,235 1.57 2.00 164,634 3.00 3.07 Buildings - ExpansionArea 18,571 1.37 1.50 165,571 2.79 3.07

6.14 Present forecasts indicate that the Free Zone will require tariff increases of about 9% per year to generate sufficient revenues to cover debt service requirements,working capital needs, and the contributionsneeded to finance new works. Present tariffs are low when compared to other Free Zones in the Latin America. The net effect of the tariff increaseswould be to gradually raise tariffs to a level about equal to what other free zones are charging. Assurances were obtained that the Free Zone (i) will implement no later than September 30, 1980 and maintain thereafter tariffswhich will generate revenues at least equal to the sum of all operating expenses including maintenance and administration(but excludingdepreciation and other non-cash operating charges),working capital requirements,payments of interest and other charges on debt, repayment of principal, all taxes or payments in lieu of taxes, all cash dividends and other distributionsof retained earnings, and all capital expendituresnot covered by long-termfinancing; and (ii) will earn a reasonable return in real terms on the value of its facilities, taking into account the value of the land on which such facilities are located and the level of tariffs charged in other Free Zones of the CaribbeanArea for use of such facilities.

Financing Plan

6.15 Looking ahead, the capital requirementsof the Free Zone during the 1980-83 period total US$93.2 million. This amount includes the proposed industrial estate sub-projectof US$20.8 million, the commercial estate sub- project of US$23.4 million, the commercialmall sub-projectat US$4.6 million, interest during constructionof US$11.8 million, completion of works already in process of US$8.6 million, other investmentsof US$4.3 million, an increase in working capital of US$2.2 million, a loan to the Central Government of US$7.7 million and a loan to the National Port Authority of US$9.8 million. About 13% of the requirementswould be financed from net internally generated funds, 2% from prepaid rents, 10% from existing commercial loans, and 75% from the proposed loan provided by the IndustrialBank of Japan.

6.16 The following table summarizes the cost of the sub-projects,the additional funds required during the period of execution, and the sources of funds: - 43 -

Table 6.1: THE COLON FREE ZONE

Financing Plan 1980-83 (In US$ Millions)

Application of Funds Cost _

Proposed Project 60.6 65 Completion of Work in Process 8.6 9 Other Investments 4.3 5 Working Capital Requirements 2.2 2 Loan to Central Government 7.7 8 Loan to National Port Authority 9.8 11

Total Application of Funds 93.2 100

Source of Funds

Funds Provided by Operations 18.4 20 Less Debt Service 6.8 7 Net Internally Generated Funds 11.6 13 Prepaid Rents 2.6 2 Other Loans 9.0 10 Proposed Loan-Industrial Bank of Japan: Initial loan 15.0 15 Future loans 55.0 59

Total Source of Funds 93.2 100

6.17 To protect the financing plan and the Free Zone's future financial viability, assurances were obtained during loan negotiations that, during the period of implementation of the proposed project, except with the agreement of the Bank, the Free Zone will not undertake any investments in excess of US$1 million per year over those contained in the agreed investment program, which consists of the proposed project of US$60.6 million, completion of works in process of US$8.6 million, and other investments of US$4.3 million. Assurance were also obtained during negotiations that the Free Zone will take all measures to obtain the additional US$55 million in co-financing under terms and conditions satisfactory to the Bank, and not later than March 1, 1981 and thereafter by March I in each year until the project has been completed, furnish to the Bank information on the estimated amounts of financing it requires during the following two years and on the terms and conditions in which such financing will be available to the Free Zone.

Future Finances

6.18 On the basis of the proposed tariffs, and the increase in available rental space, revenues should almost triple, from US$4.5 million in 1979 to US$13.4 million in 1983. The operating ratio before interest and depreciation would remain at about 60% throughout the period, which is considered accept- able. As shown in Annex 4, the current ratio and debt/equity ratio would be satisfactory throughout the period. - 44 -

D. The Caja de Ahorros

Financial Structure

6.19 As shown in Annex 4, the Caja de Ahorros is quite large, having, as of December 31, 1979, US$152 million in total resources. Of this amount, about 93% or US$141 million is in the form of savings deposits, 6% or US$10 million in the form of reserves and equity, and the remaining 1% or US$1 million in the form of liabilities. Savings deposits are divided into three main cate- gories: (i) passbook savings, which account for about 50% of the total, pay interest at the rate of 5 1/2% per annum (this may be increased to 7 1/2%); (ii) 3 month certificates of deposit, which account for about 40% of the total, pay interest at the prevailing market rate (currently about 14%-16%); and (iii) 10 year bonds, which account for the remaining 10%, pay interest at the rate of 10% per annum. The interest paid on savings accounts can be adjusted as required, since the Caja de Ahorros uses a variable interest mortgage (para. 2.21). Thus, the risk of disintermediation is quite low. The Caja de Ahorros is extremely liquid, maintaining on average, about US$30 million in free funds at any given time. This is the equivalent of about 25% of total deposits, which is considered more than adequate to meet overall requirements.

Mortgage Lending and Interest Rate Policies

6.20 The Caja de Ahorros can finance mortgages up to 80% of the assessed value for commercial properties and up to 100% for residential properties. Mortgage rates for residential properties are divided into three categories: (i) loans of US$10,000 and under pay interest at 12% per annum plus a fee of 1% per annum (usually waived for lower income groups); (ii) loans from US$10,001 to US$16,000 pay interest at 12% per annum plus a fee of 1%-2% per annum; and (iii) loans of US$16,000 and over pay 12% plus a fee of 3%-4% per annum. Due to its effective management, the portfolio shows only 1.3% in arrears of 90 days or more. There is a risk that the delinquency will rise with the increasing size of the low-income mortgage portfolio.

6.21 As part of the policy of the Caja de Ahorros to maintain at all times a sound financial position, the rates of interest which it charges on lending operations, are on the average, two percentage points higher than its average cost of capital. This policy, including the following method used for computation, was confirmed to the Bank:

(i) Average cost of capital is computed by dividing the sum of all interest, commissions, and other charges paid or payable on debt in any given year by the average of all debt payable, including deposits and other forms of investors savings, at the beginning and end of such year; and

(ii) Average rate of interest on lending operations is computed by dividing the sum of all interest, commissions, and other charges received or receivable in any given year by the average of all loans receivable at the beginning and end of such year.

Future Finances

6.21 Looking forward, the financing requirements of the Caja de Ahorros during the 1980-83 period are estimated at US$256 million. This amount includes an outlay of US$44 million for the proposed project, other lending - 45 -

operations of US$194 million, liquidity requirements of US$11 million and other investments of US$7 million. About 55% of requirements would be financed from repayments of principal, 31% from depositor's savings and 14% from borrowings. Table 6.2 summarizes the financing requirements, the funds required during the period of execution, and the sources of funds.

6.22 The proposed Bank financed component is quite small relative to the Caja de Ahorros' overall investment program, representing about 17% of total expenditures during the 1980-83 period. It is, therefore, unlikely that any change in the Caja de Ahorros' financial position would significantly alter the implementation of the project. Conversely, it is unlikely that the project would significantly alter the financial position of the Caja de Ahorros. The Caja de Ahorros' overall operating performance is expected to be strong throughout the period.

Table 6.2: CAJA DE AHORROS

Financing Plan 1980-83 (In US$ Millions)

Application of Funds Cost % Loan Disbursements: Existing Programs 193.6 76 Bank Financed Project 43.5 17

Total Loan Disbursements 237.1 93 Increase in Liquidity Requirements 11.6 4 Other 7.3 3

Total Application of Funds 256.0 100 Source of Funds

Loan Collections 140.1 55 Customers Savings Deposits 78.8 31 Borrowings 36.5 14 Other 0.6 -

Total Source of Funds 256.0 100

VII. ECONOMIC AND SOCIAL JUSTIFICATION

Introduction

7.01 The project is Panama's first attempt to confront urban development problems via an integrated project, involving the interaction of various sectors and the coordination of private and public entities. The government has con- cluded that only within such an integrated context can the continued secular decline characteristic of Colon be reversed and economic growth resumed. The components of this project have been designed to work together and ensure that the generated benefits accrue to the depressed sub-region of Colon. - 46 -

7.02 The principal economic factor contributing to the timeliness of the project is the availability of new land for the expansion of commercial, indus- trial and residential activities as a consequence of the recently enacted Canal Treaty. This offers an excellent opportunity to attend to the situation in Colon by reorienting growth in a planned way, both spatially and sectorally, by providing as well as stimulating, possibilities for productive employment, and by increasing the stock of housing and the availability of other urban services.

Summary Analysis

7.03 Analysis of the cost and benefits of the project has been performed for those sub-projects which generate benefits that are readily quantified. These include the industrial and Commercial Estates, the Port and Road Improve- ments, the Retail Mall, the Bus Terminal and the Low Income Housing Sub- Projects. The estimates of the economic rates of return are based on constant 1979 prices. Efficiency prices have been used for labor and foreign exchange.

7.04 The nominal wage-rate for unskilled labor in Colon is $9.48 per day. The shadow wage-rate used for the purposes of this analysis is $3.50 per day. This is based on the opportunity cost of rural in-migrants and as such over- states the opportunity cost of using unemployed workers. However, since the objectives of the project include both economic growth through increased savings and improved income distribution through the expansion of employment, the above opportunity cost has been used in lieu of an alternate shadow wage-rate.

7.05 Panama's currency is the dollar, hence the nominal exchange rate is unity. The presence of tariffs and quotas, however, suggests that a shadow exchange rate exists between domestic and international prices. To convert domestic prices to border prices, a conversion factor of .06, 1/ based on the 1974 to 1976 average ratio of total revenues from imports, was used. 2/

7.06 Transfer payments, which do not represent direct claims to the resources of the country, such as interest, depreciation allowances, taxes and subsidies, are all excluded from the cost streams. Costs borne by foreign parti- cipants are also excluded, as are the benefits accruing to them. Physical contin- gencies are included for all capital costs, as they represent part of the expected value of the costs, but price contingencies are excluded. Although the land for the Free Zone and residential expansion has been provided to the project at no financial cost, it represents a resource cost to the economy and has been included in the cost streams. The benefit streams are based on cost savings and rental values directly arising from the various components of the project.

7.07 Rates of return have also been calculated for the Port, Highway Improvements, the Bus Terminal, and the Retail Mall components, which represent US$25 million or one fifth of project costs. Their quantified benefits are based on tariff yields (Port and Retail Mall), cost savings (Road), and time savings (Bus Terminal).

7.08 Benefits have not been quantified for five sub-projects: Community Facilities, Home Improvement Credits, Regional Education Center, Recreational

1/ Contraloria General de la Republica, Panama en Cifras, 1974-1976.

2/ Due to the relative importance of non-tariff protections in Panama, in particular the imposition of quantitative restrictions and price controls, this method may underestimate the actual difference between border prices and domestic prices. - 47 -

Facilities, and Technical Assistance, which account for the remaining 13% of project costs. Their qualitative justification is provided below.

7.09 Due to space limitations, a summary of the economic analysis is provided for the Free Zone expansion and Low Income Housing components only. Together they account for $80 million, or two-thirds of project costs.

Expansion of the Free Zone

7.10 The provision of industrial facilities and the preparation of land for commercial use is expected to generate a wide range of economic benefits to the country and the Colon sub-region, associated primarily with the attrac- tion of investment by foreign exporting firms and industries. It is expected that this induced investment will stimulate regional economic growth in Colon and contribute to alleviating the economic imbalances that exist within the Metropolitan Region.

7.11 In the calculation of economic rates of return, land has been assumed to have an opportunity cost of US$4 per square meter. Other costs included in the calculation are urbanization costs, building construction, and annual operat- ing costs.

7.12 Benefits of the Free Zone expansion have been limited to the revenues generated by the rental of industrial buildings and the lease of industrial and commercial sites. The resulting rate of return, based on the above assumptions and on sensitivity tests for 15% over- and under-estimation of cost and bene- fits, are summarized below.

Internal Rate Range Resulting from Component of Return Sensitivity Analysis

Commercial Estate 13.7 8.7 to 11.1

Industrial Estate 30.1 21.7 to 32.9

7.13 It should be noted, however, that due to the relatively high level of unemployment and underdevelopment existing in the sub-region and the magnitude of the expected foreign investment, the major impact of the expansion of the Free Zone is associated with the generation of employment and not just the receipt of rental income. At full development and occupancy of the projected first phase of the Free Zone expansion, by 1985 estimated employment would be approximately 8,000 permanent jobs. Assuming that the opportunity cost to Panama of the induced investment is zero, since none of this employment would be created and none of the wages would be generated without the expan- sion of the Free Zone in Colon, net benefits should include the net output resulting from the induced employment in addition to the direct rental revenues generated. However, of the net output generated in the Free Zone, labor income is the only significant return to the Panamanian economy. Therefore, wages rather than the net export value of the output has been used as an alternate proxy measure of the benefits to the economy of the Free Zone expansion. Rates of return calculations based on the inclusion of these benefits are more than 50% higher than the rates of return excluding them. - 48 -

Housing and Social Services

7.14 The provision of housing and social services at the periphery of the city center represents a significant effort in easing the conditions of urban decay in the center of Colon. This component will help to relieve the inten- sive overcrowding characteristic of the city and to reduce the occupancy of unsafe tenement buildings that have been condemned by the municipality. More- over, as the Free Zone components of the project are implemented and as economic conditions begin to improve, the population of Colon is expected to increase. In particular, persons previously employed in Colon but living in Panama City would be attracted to Colon by the improved living conditions, and migrants would be attracted from other areas in response to the employment opportunities. Thus, this component also helps to redirect this new growth away from the overcrowded city center to a more viable growth area.

7.15 In calculating the economic rate of return from the residential component, all economic costs are included: land, administration, design and engineering, infrastructure, house construction, physical contingencies and maintenance. Although the land has no financial cost, it is assumed to have an economic cost equal to the cost foregone by its use in this project. Based on the high cost of urbanizing this land and on the market value of serviced land in the surrounding area, the cost is estimated to be US$4 per square meter. Annual maintenance costs are estimated at 3% of capital costs. Taxes, interest and price contingencies are excluded from the costs.

7.16 The costs of schools, clinics, parks and other community facilities and benefits, which represent about 15% of the total cost of the residential components, have been excluded from the analysis because of the difficulty of quantifying their benefits. The facilities will be provided on a least- cost basis in accordance with minimal national urban standards.

7.17 The benefits to be derived from the housing are based on the imputed rental income. This value is based on the current market rental values in urban and suburban Colon of units similar to those to be provided in this project. Because of the peculiar conditions of Colon, as evidenced by the high incidence of condemned buildings that have zero rental value, by the scarcity of housing, particularly of non-deteriorated housing and by the lack of individual rental housing units, the information collected in the Colon area is combined with data on rents from similar areas in Panama City. The resulting rental values for individual houses range from US$30 per month for a single room house to US$190 for a two-bedroom house. Rents were slightly lower for comparable apartments, ranging from US$28 per month for a one- bedroom unit to US$175 for a two-bedroom unit.

7.18 Based on the above assumptions and estimates, the internal rate of return is 15.7%. Assuming a 15% over- and under-estimation of benefits and costs, the resulting rate is at least 12.8%.

7.19 The rates of return for the individual sub-projects and the combined weighted average is summarized in Table 7.1. The weighted average economic rate of return for these components, which represent 87% of the project costs is about 21%. - 49 -

Table 7.1: ECONOMIC RATES OF RETURN

Sensitivity Analysis Economic Costs Benefits Component Rate of Return + 15% + 25% - 15% - 25%

30.1 1/ 25.7 23.3 25.1 21.7 1. Industrial Estate 55.7 2/ 48.7 44.9 47.5 42.1

13.7 1/ 11.1 9.7 10.7 8.7 2. Commercial Estate 54.3 2/ 47.7 43.9 46.5 41.1

3. Port Improvements 14.1 11.2 9.5 12.5 11.3 4. Road Improvements 39.7 34.7 32.1 34.0 30.2 5. Retail Mall 23.3 19.7 17.7 19.1 16.1 6. Low Income Housing 15.7 13.1 11.7 12.7 11.2 7. Bus Terminal 49.0 43.5 40.5 42.7 38.3

Weighted Average 21.0 17.3 16.0 17.4 14.9

1/ Benefits include only direct revenues from the rental of sites.

2/ Benefits includes revenues and wages as a proxy for net output from induced investments with no opportunity cost to Panama.

VIII. AGREEMENTS REACHED AND RECOMhENDATIONS MADE

8.01 During loan negotiations, assurances were obtained that:

(a) property values will be revised (para. 3.36);

(b) at least 60% of the shelter options will be for families whose income falls in the bottom four deciles, while 40% will be for families whose income falls between the fourth and six deciles (para. 4.07);

(c) procurement will be in accordance with competitive bidding procedures acceptable to the Bank, unless it is subsequently demonstrated that this will lead to inefficiency and higher prices (para. 4.17);

(d) the High Level Commission will be maintained during the imple- mentation period of the project (para. 5.04);

(e) the Caja will continue with independent auditors (para 5.09);

(f) the Caja will designate the Ministry of Housing to implement the Housing and Community facilities components (para. 5.15); - 50 -

(g) the Colon Free Zone and the Caja de Ahorros will prepare not later than June 30, 1981 a proposal for sewage collection and disposal in consultation with IDAAN (paras. 5.12 and 5.15);

(h) the Ministry of Housing will implement a site allocation system satisfactory to the Bank (para. 5.16);

(i) any change in lending criteria or credit terms will be subject to agreement between the Caja and the Bank (para. 5.16);

(j) a valorization tax will recover land value and urbanization costs (para. 5.17);

(k) the Port Authority will implement tariff increases sufficient to yield a satisfactory economic rate of return on the proposed investments (para. 6.04);

(1) the Free Zone would implement tariff increases and earn a rea- sonable return in real terms on the value of its facilities (para. 6.14);

(m) the Free Zone would agree to a ceiling on investments (para. 6.17); and

(n) the Free Zone would obtain cofinancing and inform the Bank on its terms and conditions of future loans from the Industrial Bank of Japan (para. 6.17).

8.02 The following special condition of effectiveness has been specified:

(a) that the Bank has been notified that the Free Zone has obtained the initial loan from the Industrial Bank of Japan and that all conditions under the loan agreement have been met (para. 4.03).

8.03 The following special conditions of disbursement have been specified:

(a) the availability of land for the Puerto Escondido housing site and downtown Colon (para. 3.13);

(b) a site plan will be prepared (para. 3.14);

(c) the Ministry of Education would acquire a suitable building site (para. 3.25); and

(d) final agreement between the Government and the Caja de Ahorros (para. 5.14).

8.04 With the assurance and conditions indicated above, the proposed project is suitable for a Bank loan of US$35 million equivalent.

May 20, 1980 ANNEX 1 - 51 - Page 1

PANAMA

COLON URBAN DEVELOPMENT PROJECT

ProAject Cost Estimates Summary

us$ millions % Foreign Local Foreign Total Exchange

A. Urban Employment Commercial Estate 4.16 10.19 14.35 71 Industrial Estate 7.33 5.31 12.64 42 Interest During Construction 6.58 5.22 11.80 44 Subtotal A 18.07 20.72 38.79 53

B. Urban Renewal Retail Mall 1.70 1.13 2.83 40 Bus Terminal 0.75 0.47 1.22 40

Subtotal B 2.45 1.60 4.05 40

C.. Housing and Social Services Low-Income Housing 14.61 9.74 24.35 40 Community Facilities 1.99 0.85 2.84 30 Home Improvement Credits 2.10 0.90 3.00 30

Subtotal C 18.70 11.49 30.19 38

D. Regional Infrastructure Port Improvements 2.44 3.99 6.43 60 Interest During Construction o.46 0.74 1.20 62 2.90 473 7.63 62 Road Improvements 2.32 3.48 5.80 60 Regional Education Center 1.37 2.o6 3.43 60 Recreational Facilities: Fort San Lorenzo 0.21 0.09 0.30 30 Gatun Lake 0.21 0.09 0.30 30

Subtotal D 7.01 10.45 17.46 58

E. Technical Assistance 1.00 1.00 2.00 50

F. Design and Supervision 5.45 1.36 6.81 20

Base Costs (Subtotal A-F) 52.68 46.62 99.30 47

Physical Contingencies 5.20 4.6o 9.80 47

Price Contingencies 12.89 11.34 24.23 47

TOTAL PROJECT COST 70.77 62.56 133.33 47 -52- ANNEXI Page 2

PANAMA

COLONURBAN DEVELOPMENT PROJECT

Project Cost Estimates (In USS Thoousods) Engineer- ns Phys.ial Prite

D-reot Cost MOwO,S 3FverliVt e Co.t V.Ai,o _nt Sub-Total koUflt 7. Tot1l

Commercial Estate E.rth-orks 7,700.00 4.0 308.00 6.0 462.00 8,470.00 15.0 1,270.50 9,740.50 2,839.07 29.1 12,579.57 Infrtsrct-t-re 6,650.00 4.0 266.00 6.0 399.00 7,315.00 15.0 1,097.25 8,412.25 2,451.93 29.1 10,864.18 Int.-eat D-ing C-n.t-uctlon 6,200.00 _20000 _ _ _ 6,200.006,002.00 Tot.l Comeri Ett 20,550.00 4.0 574.00 6.0 861.00 21, 985.00 15.0 2,367.75 245,52.75 5,291.00 22.9 29,643.75

Industriol Estate Feosibility Sttudy :40.01 240.20 - 240.00 - - 240.00 oInfrast-'t-re 5,900.00 4.0 236 00 6.0 354.00 6,490.00 15.0 973.50 7,463.50 2,302.50 30.8 9,766.00 Btildin8e 68500.00 4.0 260.00 6.0 390.00 7,150.00 15.0 1,072.50 8,222.50 2,536.50 30.8 10,759.00 Int.e-et Dortog Con-tro.otin 5 60000 - _-. - 5,600.00 _ 5,600.00 - _ E 5, 00.00 Total I,d-str il 18,240.00 5.9 496.00 5.9 744.00 19,480.00 14.7 2,046.00 21,526.00 48039.00 23.7 26.365.00

Retail Mail Mall Co.str.ut.lo 1,722.00 4.0 68.88 6.0 103.32 1,894.20 15.0 284.13 2,178.33 579.27 26.6 2,757.60 SiteR inort-low 86.00 4.0 3.44 6.0 5.06 94.60 15.0 14.19 108.79 28.93 26.6 107.72 Other B.ildi,ng 357.00 4.0 14.28 6.0 21.42 392.70 15,0 58.91 455.60 120.09 26.6 571.70 Malt Eqoipoent 668.00 4.0 26.72 6.0 40.08 734.80 15.0 110.22 845.02 224.71 26.6 1,069.73 Total Retail MRll 2,833.00 4.0 113.32 6.0 169.98 3,116.30 15.0 467.45 3,583.75 953.00 26.6 4,536.75

b.u Te-minal 1,215.00 3.8 46.00 6.0 71.60 1,332.60 14.5 192.94 1 525.54 362.77 23.7 1.888.31

Low-Intone ROCIouen, Infrastructure Earth-orke 2,553.00 4.0 102.12 4.0 102.12 2,757.24 25.0 689.31 3,446.55 773.58 22.4 4,220.13 Water Distributio- 962.00 4.0 38.48 4.0 38.48 1,038.96 12.0 124.68 1,163.64 261.18 22.4 1,424.82 Etreoset L'agtine 2,860450 4.0 93 80 4 0 93 80 2,532 60 12 0 303.91 2,836.51 636.66 22.4 3,473.17 Otroet Drainege 1,~~~~~~~~~876.0040 750.04 4.0 70.04 2,026.08 12.0 243.13 2,269.21 009.33 22.4 2,778.04 olol DraInage 238.00 4.0 9.52 4.0 9.52 257.04 20.0 51.41 308.45 69.23 22.4 377.68 streete and Alleys 750.00 4.0 30.00 4.0 30.00 810.00 20.0 162 00 972.00 218.17 22.4 1,190.17 Street P0050s 1,326.00 4.0 53.04 4.0 53.04 1,432.08 20.0 286.42 1,718.50 305.72 22.4 2,104.22 Erv.ron.ental Cooserva-tio 298.00 4.0 11.92 4.0 11.92 321.84 20.0 64.37 386.21 86.69 22.4' 472.90 Sewage Tr-tt.e.t Poot 7 500.00 4.0 20.00 4.0 50.00 540.00 20.0 108.00 648.00 145.44 22.4 793.44 BildiI,848.00 4.0 433.92 4.0 433.92 11,715,84 17.4 2.033.23 13,749.07 3,086.00 22.4 16,835.07 OEutiinge UnIt. 13,500.00 4.0 040.00 4.0 540.00 14,580.00 2.0 291.60 14,871.60 4,208.56 28.3 19.080.16

Community F-otitles 2,837.00 4.0 113. 6.0 170.22 3,120.70 10,0 312.07 3.432.77 1,305.92 38.0 4.738.69

Home I-.rove.ent Credits 3,000.00 _- _ _ _ 3,000.00 3 C0000 _ _ 3.000.00

Port leeroneenete

2,26. 103.00 Sot-digsStorage Yard. 2,678.00 4.0 107.02 6.0 16.1016074 2,952.102,839.74L0 10.0o 295.21283 97 3,25.7.33,123.71 7631734.07 23.5 .4,010.433,857.78 Btilding. 1,180.00 4.0 47.20 6.0 70.80 1,298.00 10.0 129.80 1,427.00 341.13 23.5 1 I6A 3 Interest DOwing Constr-cton 1,200.00 - - _ - 1,200.00o - 1,200.00 - - 1,210.00 TotalFor t Ip-ens.. e 7 ,634.00 .0 2 7.20 7 8,289.84 108.09 81,998.82 10,837.14 Remrovernente CatRl'IRAi.dolp - Stru1turns 5,450.00 - - 8.0 116.00 1,566.00 15.0 234.90 1,800.90 350.00 19.4 2,150.90 C.ti-a/Randolph - Roadwo-ks 2,800.00 - - 8.0 224.00 3,024.00 15.0 453.60 3,477.60 675.86 19.4 4,153.46 Randolph - Colon Loop 1,550.00 8.0 124.00 1,674.00 15.0 251.10 1,925.10 374.14 19.4 2,299.24 Totel Rood Improvemeots 5,800.00 - 8.0 464.00 6,264.00 15.0 939.60 7,203.60 1,400.00 19.4 8,603.60

Regional Edunotlto Center Ter4nttal TraIning Center 3,326.00 4.0 133.04 6.0 199.16 3,658.60 10.0 365.86 4,024.46 776.65 19.3 4,801.11 Snail B.eioess Training Center 100.00 4.0 4.00 6.0 6.00 110.00 10.0 11.00 121.00 23.35 19.3 144.35 Total Regional Edc.titon Center 3,426.00 4.0 137.04 6.0 205.56 3,768.60 10.0 376.86 4.145.46 800.00 19.3 4,945.46

Ronreoti.oal FaCilities Fort San Lorsoso 300.00 2.0 6.00 5.0 15.00 321.00 10.0 32.10 353.10 75.00 21.2 428.10 GatZ n Lake 300.00 2.0 6.00 5.0 15.00 321.00 10.0 32.10 353.10 75.00 21.2 428.10 Total Reoreational Facilitlos 600.00 2.0 12.00 5.0 30.00 642.00 10.0 64.20 706.20 150.00 21.2 856.20

Te-hotnal Aesist-ane 2.000.00 - - _ _ 2.000.00 - _ 2,000.00 - - 2,000.00

TOTAL COSTS 92,483.00 2.9 2,722.96 4_4 4 1688 92 99 94 88 9_8 9 800 88 109,95 56 24,224 07 22,2 L}a3 0L.

I/ Sobjeot to opp-ov-l by the Benk of IDAA.t' overall sewege treon-ent end dieposal plan ior the Colon Atee - 53 - ANNEX 1 PANAMA Page 3

COLONURBAN DEVELOPMENT PROJECT

COMMERCIALAND INDUSTRIAL AREAS

Design Standards, Land Use and Unit Costs

A STANDARDS

Commercial Area Industrial Area

Water distribution networks

Pipes 4" to 12" dia PVC 4" to 12" dia PVC

Basis of design flow 20 persons per ha 200 persons per ha 80 gphd 310 lpcd

Minimum residual pressure 40 p.s.i. 40 p.s.i.

Sewerage

Pipes 6" to 21" concrete 6" to 21" dia. concrete (18" dia and over reinforced) (18" dia and over reinforced) Basis of design flow (minimum) 80% of water 80% of water consumption consumption

Sewage Treatment Package treatment plants providing secondary treatment, including aeration and chlorination, under consideration,subject to approval by the Bank of IDAAN's overall sewage treatment and disposal plans for the Colon Area. Effluent discharge by gravity to Folk River Coco Solo River

Roads

Lane width 3.50 m, 3.0 m 3.75 m

Paving concrete concrete

Flood Protection

Existing water courses N/A To remain largely undisturbed

Minimum formation level + 10.0 m (the observed flood plain elevation)

Storm Drainage

Design storm frequency 5 years 5 years

On-site collection 18" to 84" dia reinforced 18" to 84" dia reinforced concrete concrete pipes - 54 - ANNEX 1 Page 4

PANAMA

COLONURBAN DEVELOPMENT PROJECT

Commercial and Industrial Areas

Land Use Summary

B. LANDUSE Coco Solito 1. Commercial Area initial future Phase 2 Phase 3 Expansion Total (%)

Gross useable area (ha) 13 22 13 48

Urbanized area (ha) 13 22 - 35 (100)

Leasable area (ha) 9 15 _ 24 ( 69)

2. Industrial Area

Phase 1 Phase 2 Phase 3 Total (

a) Area to be levelled (ha) 5 23 30 58

b) Additional area to be cleared of vegetation (ha) 43 17 10 70

c) Gross useable area (ha) 48 40 40 128 (100)

ci) Percentage of leaseable area to remain in seminatural condition (b)-(c) 90 43 25 55

e) Urbanized area 35 - - 35

f) No. of Lot Spaces 20 20 15 55 -55 - ANNEX 1 Page F

PANAMA

COLON URBANDEVELOPMENT PROJECT

Puerto Escondido Housing Site

DESIGN STANDARDS, LAND USE AND UNIT COSTS

I. INFRASTRUCTURE

A. STANDARDS

Water Distribution Networks

Pipes 3" to 10" dia PVC Basis of design flow 80 gphd System pressures: 50 to 70 p.s.i. Minimum residual pressure: 15 p.s.i.

Sewerage

Pipes: 6" to 24" dia concrete (18" dia and over, reinforced with rubber gasket joints) Design Velocities: 2 to 3 feet per second 1/ Basis of design flow: 56 gphd (70% of water consumption) -

Sewage Treatment (Plant under Study)

Design criteria: Suspended BOD5- 20 Solids

Strength of sewage received 200 mg/l 200 mg/l Strength of treated effluent 30 mg/l 30 mg/l Percentage removal 85% 85%

Plant to include: Bar screens, primary settling, aeration secondary settling, chlorination, digestion and vacuum filtration of the primary sludge

Sludge disposal: No plans yet made Effluent disposal: Gravity flow to Folk River estuary

Roads

Widths: Paved Width R.O.W.

Footways 1.20 m 5.0 m Pedestrian streets 2.60 m 7.0 m Local streets 2 x 3.0 m lanes 12.0 m 2 x 1.1 m sidewalks Secondary streets 2 x 3.75 m lanes 15.0 m 2 x 1.2 m sidewalks Principal streets 2 x 3.75 m lanes 20.0 m 2 x 1.2 m sidewalks

Paving: Concrete over selected basecourse material

Storm drainage

Design storm frequency: 5 years On site Collection: Open channels, about 50% concrete lined, remainder grass or earth lined. Concrete pipes (18" to 84" dia) at street crossings.

1/ This is low--should be 90% - 56 - ANNEX 1 Page 6 PANAMA

COLONURBAN DEVELOPMENT PROJECT

Puerto Escondido Housing Site

Land Use Summary

Phase I Phase II Phase III Total Heotares Hectares Hectares Hectares

Total Project Area 30.52 46.16 41.10 117.78 Less Unuseable Area 2.25 9.26 9.52 21.03 Streets and Parking 8.93 9.56 5.66 24.15 19.34 27.34 25.92 72.60

Developed as Follows: Residential 15.29 17.16 12.52 44.97 Commercial 0.29 3.59 0.13 4.01 Community Facilities 1.63 2.08 11.71 15.42 Sports Facilities 0.07 3.79 0.10 3.96 Parks and Landscaping 2.o6 0.72 1.46 4.24 19.34 27.34 25.92 72.60

Road Design Standards

Widening of Boyd- Strengthening & Widening Roosevelt Highway Randolph-Colon Road

Design speed 80kph 65kph (urban)

Max. grade 5% 3%

Pavemiient: - addition (2-lane) 7.30m (1-lane) 2. o- - overlay None Existing pavement Siioulders- paved 2 @ 1.40m = 2.80m 1@ 1.40 m = 1.40 m

Cross-slope: - pavement 1.5%o 1.5% - shoulders 2.0% None

SuDerelevation 7.0% (max) n/a

Interseetions At grade At grade

Bridge: loading (AASHTO-USA) HS-20-44 None Deck width - curb to curb 7.848m None - out to out 8.584m

1/ Only the two-lane section will be widened; existing three-lane will only require strengthening. - 57 - ANNEX2 PANAMA COLON URBAN DEVELOPMENTPROJECT Impleffentation Schedule

Year lH~9SD 1981 582 1983

Qurnr 1 2 3 4 t 2 3 4 1 2 3 4 2 3 4 cOmercrHt A,ea

P-hr ...... leelel

S-wage Thetmet Plant ..... I Phe. 11

tntrstttctore _I_ tdiurial Ata PE55. I -- ,uworts * ,:a - _n _-A Bs=cur

Retail Malt

Bu.ding C..n...tu.fl4...... Are Rertab,lHaeon

Otht F-11tit-es

BusT er"in"

S.sigrt&I 9,dOnErg Ba | || Site Clearant_

Build.n Cots=utro_ HrstoricOl Monuments

Hous,eoatd SocblatSo,vtes Ph.a 1: EanhwotksB| _ _ Water O,sttjrluptt*rsnz _ Sawerge *CCC*CCC W _ _ Streets C.|Z _

El-triclty

H-usitConst-ctio- r _

CPmrnrroityFacilities "XCC@|5_ - Hormn Impo-emant Crdts__ Phase II:

Water Disttb.utot ..... S-erle ...... I _

Storm Dr-maipoa.._._ Elecer,c,tv

Housing Corsn.rctiOfl" S =w _ _

Commurird Fatil,tiw ...... I Horns ltrpr ent Cred___ Ph.. III E-nhw-rk1---Z ..... ,-_ rDstetobge- ...... el S-._ra '|W8e"WW _ St-ests. .. Storm Otroamgel ----

ElenrO-ty El

CPrtrrunhY Fecilorele aa"| h Home l--ro -roonCtdits Porttnpros.orens - Storae Yr d...... Hoiteings @@|@1 A'gSlll s

Rooed tmprooenrents Boyd-Oooew.eltS.etior ...... 'A

RenHolPS-CHIoo LoPPP.| |W @|sAI A'A' RgeknralEdHoetron Canter ***@" . .Xg" ee ; A'A' Rsslewrond Paoilrties

Gnun Lake ...... Tecttnicol Asrstanet|o

Progtrrt Oeoelopmnrrrerr_t_ MarregemOrretIflorrntwt rt Project Momretprmg 0 _ __ _ _

UrMen Pranaportetror t - _

Porteand RlilwansStudiesll--

Edocation l l t

Imp leme tat to rA',rA'-sA' 0.4dm 0 .------tn Woltd Betrk-2t550 PANAMA

COLON URBAN DEVELOPMENT PROJECT

Monitoring Indices

TARGET 1980 1981 1982 1983 Total

1. Employment

Commercial Estate No. of permanent jobs -- 500 1,500 1,000 3,000 Industrial Estate No. of permanent jobs -- 500 2,000 2,500 5,000 Urban Renewal Sub-project No. of permanent jobs -- -- 150 200 350

2. Retail Mall % Completed 5 55 40 -- 100

3. Bus Terminal % Completed -- 50 50 -- 100

4. Low Income Housing

Puerto Escondido Completed dwelling units 350 1,190 1,750 435 3,725

Downtown Colon Completed dwelling units 70 230 -- -- 300

5. Home Improvements Credits Amount loaned, $ millions -- -- 1.5 1.5 3.0

6. Port Improvements % Completed 20 80 -- -- 100

7. Road Improvements % Completed 30 70 -- -- 100

8. Regional Education Center % Completed 25 75 -- __ 100

9. Technical Assistance % Disbursed 10 40 30 20 100 oq M4 (D LN REPUBLIC OF PANAMA COLON URBAN DEVELOPMENT PROJECT LA ZONA LIBRE DE COLON (THE COLON FREE ZONE) ORGANIZATION CHART - 1980

BOARD OF DIRECTORS

EXECUTIVE COMMITTEE

LAUDITOR GENERAL ......

MANAGER

ASSI STANA MANAGER

COORDINATING I CONRMITTEE IVI

PLANNIN ANDPROGRAMMING DIRECTOR IDIRECTOR F ADMINISTRATION

COMMERCIALOR |AECONDPROGRAMLMING | |EVALUAT(ONPHYSICAL~~~~~ |k;<| 21 WAREHOUSING I SERVICE | AND ARCHL IVES | |ADMINISTRATION ! PRESITYCU DIRECTOR OF IETRO EXPANSIONL COMMERCIALACTIVITIES|1 S11~~~~~[|I:RCRMNG E3RtIAMNSRTOG [4[N COMRILUBLICRELATIONS

F3~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~P

JO (D >:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~( REPUBLIC OF PANAMA COLON URBAN DEVELOPMENT PROJECT LA CAJA DE AHORROS ORGANIZATION CHART -1980

I INTERNAL. | -IO|AL.LEGL-

|- ~~~~~~~~~~~~.ENPRA |ANRGGROAAL MASARAT |

MONEYEPAA CA IDNFORA O EN NERN AGA TLERNTOA|ULI |GIIYAV |- SYSTEM SA

ORYGIEVES REAlOSIY ESATE ERNEF-| TANYSUSTMIN CA NYROLLER IiIAN STTSTC AR CTHITRE AFA| LEA CERONCEPCJ MONTO|-

R|SMGELT| |77ERA LAGSTA8LMANSR| | MLENERCD

S. FRANCISCO |S NIVERSIDADS- MONAGRILLO| }

-|RIG A8AJO | |CHORRERA F5 SNIG

COLON | COLON CONTRALFHPNNM

1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~S || ASEDVaEDA21488-w a ICOLON I ZO2NACl18E | (D>J> rDtzI 61 MNEX 4

LDIIA111R' DI 10N I.-lid-d II- t

1985 Mt, 1987 T -1 984

R 21 37 1313 1,704 2,01H 2.306 2.519 153 IM -141 88I 433 363 M3 393 158 383 ml 200 135 2oO 333 830 tl 20 3 99 171 560 5 72 loa L7 I 5 7.1 -71-2 T_2p 2.1 --;7 121 _2 z -17&o1 ...... h.

n - 11-di,. 2 411 t,415 6,115 -d 10% 7:4 411 37,193 ':dno f, 0 7 11:n17 I:_ 36,049 In 31 037 0 4 3, 311 11 M'wo 43,i73 41,04 1.,i4d ?48 1,391 1,347 71, oi'k .. 17I 119 15 2,115 2:?Du' 2 : 30105 3 : I'M' 13,131 66 31,394 7,- 1,131 -1 .id 520 L2L gr M - -r7F dC-- 777nT 7rT6T 7 =1 7r,7r tuT 1-7-5 2-0 20 663 7H4 91 hffi 818 I.- n$70 All,.. i-d 2. 47 L- - I6,665 'T kw T... .1. 2kE _"t14 .1 IzB. Ik% o7.5% 1 980, 5,5% 111,48D IQ 1981, 11.3% il 198Z -d 1983, -d 10% lh---) -- g- T-1 -2il,011 ikffi 7d- 16R -94.39 - - "I ,Iq -. n? 114-5i7 5H5 4 11 4n,t 481 532 IIB 172 2 r 300 33G 4p 348 348 :iE ::E 1-. f-qhl, i6l d.b, d- ilhi, 542 3 ::jg T.-,.f 65D -715 5- -64 C73 fl- il f LIB.R 11", 4,292 _d f I,- 1,742 2,492 2,992 3,392 3,812 -i" Lf 332 413 782 2 782 782 T 1- 782 782 bi 2 17 7-4 Ij/. 334 -4 20 -2--74- I, I d . Ilo 1, . ,,. j I--- T- 4,Z40 60,9,0 57 ..... f- g 5"5o 43,,OD 5,6oo 7G,ooo 0.300 .280 -ff lh it/ - - - B-k. 7 44; + IF3 A'64' 'Ih- 1,151 2,930 3.943 " 44g 464L7 49 #4'q'-1' _1 I , 75 7 2,93D 3,93 , 348 3,906 !g by f 91 542 4B 14B "'691 ...... 3,891 7.797 .LI W-ki 9 -Pi.l 8,749 8,149 8, 749 e,10 8,149 8,749 8,514 E,5L4 8749 3,741 8,749 - 1,11,d IV 1,1 1 11 414 8,172 'I 42187 7 _,2 T.-I tibiliU.. -d b,-,

EINGS MLRITAIII 10,264 11 342 12,308 13,4 70 2,11-1 1,311 5,487 I'- 21111 I'll, a,712 ,10 4,504 I'll, 3" 4 681 1,055 1,691 M '71 - 441 444 444 - - - 430 523 M8 704 8-15ff -6 M77 2.,785 3,030 1,8197 1,q14 1,177 2,349 2,51 1,1 2-1 1411 1,141 1.1,44 d 4 1 m oc 5o 5 650 no 57 Ili 411 1 137 2,7 141 114 318 354 it 16, 9 5 69 6- .1 864 9 244 1 1 '41 4, 5,04 4,977 4,831 4,393 38 I" 59 1,293 1,170 n. fl i13 2.DE9 La" 3M 153 561 78, ±3 2=7 1-:7 +176 ;490 'IR'14' ill 11'27I 1,255 I 131 E2 i,131 6,638 1 47 T, "800 2,ooo 21 1,0oo "'200 1,400 1,6oo 1,60G too loo 'no 4DD 2oovo 537 24D 240 14o 30D 3oo M 213 240 9-4 9 -_6827 P-42 11=4 -4,77 rT6-1 n i- lwE.l T n-I 13,095 14,507 15,989 3,8D2 4,972 6,'l ),4I' 11,726 - -,:!"-d. 2,454 _2 711 313 707 1 _141 -- Q,--, 't- , _ 41' -1'71 1 'M' TeMN7 174 1,464 1,747 7 I-M

1,)16 5,., 1,977, 4,831 4,393 216 "I ",59 1,29 1,170 348 90' I t4 Irl 4B 348 - 1,, =7 -I -,WI rl-518 44 1 M. 45, 4no 400 400 'Do 32D 41o 40o 40D 400 .- ki, cVitl - 444 4I 1 11 I p;11 -9_-117 I, 1 1;3 49 FU 2 2 3 6-1z TR - - 235 - - 150 40 5oo 4 I1 310 600 350 - n- 11 .111 4oo .. -

Z,614 i,ooo ooo - 11:1ooI 25,4oo 13,3oo 13,2oo 7W L-d- fl 21 16 :Eft :3:tff =1k, 9,1

467 3M 116 45 060 5,901 1.3 6' 1,012 2,288 3,6D, 1,703 :,9 o I- - P-k 250 92 2" 5,$ 9 .11 R- il 3,67 700 2,500 -R- 2,288 1,8" IT, 6-04 20,311 14 92. 4 43o 4oO 4 0 4oo 4() -d q.jp-- 13 j., 310 0 7am 7oo 70 7 06 .0 60,0 Ill 910 o1h. In na

77-- -Q1T7

ANNEX 4

Page 2

Zona Libre de Colon

Monitoring Indices

Operating Data 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Building Rentals: M2 Warehouse-Central Colon 168,520 168,520 164,235 164,634 164,634 164,634 164,634 164,634 164,634 164,634 164,634 Average Monthly Tariff 1.29 1.32 1.57 2.04 2.28 2.51 2.75 3.00 3.37 3.67 4.00 Actual Monthly Tariff 1.50 2.00 2.00 2.18 2.37 2.59 2.82 3.07 3.35 3.66 4.00

M2 Office - Central Colon - - - - 3,900 3,900 3,900 3,900 3,900 3,900 3,900 Average Monthly Tariff (= actual) - - 8.50 8.50 8.50 10.00 10.00 10.00 12.00

M2 Warehouse - France Field Commercial 7,292 11,073 18,571 63,571 63,571 63,571 115,571 115,571 115,571 115,571 115,571 Average Monthly Tariff 1.14 1.27 1.37 1.91 2.07 2.31 2.57 2.79 3.04 3.31 3.61 Actual Monthly Tariff 1.25 1.50 1.50 2.18 2.37 2.59 2.82 3.07 3.35 3.66 4.00

M2 Retail Space - Downtown Mall ------3,700 3,700 3,700 3,700 3,700 Average Monthly Tariff (= actual) ------8.50 10.00 10.00 10.00 12.00 O

Land Rentals: M2 Land - Central Colon 119,573 132,298 134,428 134,428 156,028 156,028 156,028 156,028 156,028 156,028 156,028 Average Monthly Tariff 0.14 0.17 0.19 0.29 0.34 0.37 0.42 0.45 0.50 0.57 0.60 Actual MlonthlvTariff 0.30 0.30 0.40 0.44 0.48 0.52 0.56 0.61 0.66 0.70 0.75

ME Land - France Fie d Commercial 6,002 6,002 6,002 73,823 123,823 173,823 223,823 313,823 313,823 313,823 313,823 Average Monthly Tariff 0.19 0.21 0.21 0.29 0.3? 0.35 0.38 0.41 0.45 0.50 0.55 Actual Monthly Tariff 0.30 0.30 0.30 0.38 0.36 0.38 0.42 0.46 0.50 0.54 0.60

M2 Land - France Field Industrial - - - - 50,000 TVO,000 150,000 240,000 240,000 240,000 240,000 Average Monthly Tariff (-actual) - - - - - 0.38 0.42 0.46 0.50 0.54 0.60

Financial Data

Working Capital Ratio 10.6 2.3 2.0 4.3 5.8 5.8 7.0 7.8 8.0 8.1 8.1 Equity to Total Capital 0.9 0.8 0.8 0.4 0.3 0.3 0.3 0.3 0.3 0.4 0.4 Debt Service Ratio 1.5 0.9 3.9 2.1 2.1 3.1 3.2 1.1 1.2 1.4 1.5 Operating Ratio 2.8 1.9 2.2 2.2 2.4 2.7 3.4 3.7 3.8 3.8 3.7 Average Fixed Assets in Operation (Ustmillions) 15.7 15.7 16.6 24.7 28.2 40.5 69.1 76.1 82.3 82.9 84.9 Net Earnings Before Interest and Grants 1.9 1.5 2.1 3.2 4.2 5.2 7.7 9.7 ll.l 12.4 13.9 Rate of Return (%) 12.1 9.6 12.7 l3.0 i4.9 12.8 11.1 12.7 13.5 13.2 14.7

ANI.EX

-6 - Page 3

CAIA DE AH11RROS ! Co. clid;...v Fa,--ci,,l RLsW zo

Actual Forecast 2977 198 19)79 1980 199! 398? 18-3 BALANCE SHFET-

Assets Cask and Due from Banks b/ 31,464 23,547 27,281 31,350 34,381 36,431 38,930 a/ Caja do Ahlurrs it a Panama Government autononoos mortg.age Investmcents cli 437 537 419 470 400 470 550 bank, goversed by Its own organic law and regulated by mortgages a' 87,213 99,998 108,030 118,200 :37,800 160,900 188,380 Decree Law No. 23 of July 2, 1970. Loans e/ 7,170 73467 7 930 8,200 8,500 8,830 9,130 Construction Loans 1,429 2,237 2,800 9,200 14,900 23,500 19,300 b/ li.i-iuu liquidity requires 257. of savings depositsg lank Premises and Equipment 2f/2,192 2,585 2,700 2,975 3,325 3,725 4,175 excluding money market instruments, as cash an hand. AccumulaLed Interust and OLher Assets 2,886 1,718 3,281 3,731 4,900 7,276 9,748 c/ I-etents are recorded at cost and comprise bonds 3 Total Assets 132a191 138,084 1523381 174126 204,206 241,104 '7D121 of the Gov-rity-dt of P-aama, earning interest at 6/1, ~~~=-- ~L~~==:~===~~ ~==-=- ~------~ith maturity dates up to tO ye.ar fmo. date of Liabilities and Capital auquiitiin, and Pas-no Treasury motes at 37, per annum Current Liabilities 294 483 431 300 450 750 900 with short-term maturities. Savings Deposits g/ 122,279 126,614 141,300 157,000 175,000 196,100 220,109 Loons Payable 878 758 638 6,318 18,498 33,278 36,658 d/ Mortgage loans are granted at various iL-terst rates, Other Liobilitics 495 1,310 1,162 1.282 1,102 1,122 1,342 renewable every 5 years. Capital 6,750 6,900 7,050 7,200 7,350 7,500 7,650 Re.erves hI 1,971 1,815 1,346 1,372 902 1,150 2,280 0/ Loa-u ace secured by Caja do Ahorrosdepoaitor'e savings ReLaised Earnings 124 204 454 654 904 1,204 1,554 account.

Total Liabilities and Capital 1321791 138 084 152a38l 1741126 204 204 241,104 270g213 f/ Premises and sqoipdent are the ------a= ----- straight-limemethod of 2% deprecitedfor buildings on and 10%basis for of the

R-ecenue and Expenses cquipmeet. Leasrhnld improvements are asortized uo-r Revenses: 10 years. L-o Interest 8,109 9,068 9,853 t0,700 12,510 14,520 16,614 Comsissions and Other 3068 3,870 4,S30 5,079 s,aoo 6,515 7,296 / Passbook savings account for about 50% of all deposits, money market instrumets aconut for abost 407,,while Total Rewesues 11,177 12,938 14,380 153775 18,310 21,035 23.910 the remaining 107 is account.ted for by 20 year bhods. Savings deposits are expected to grow or about 117. per Expeases: anum. Ieterest Eaponse - Savings 6,730 7,788 8,804 9,804 10,784 17,004 13,333 Interest Exponse - Borrowings 38 34 26 21 976 1,931 2,886 L/ Consists of reserves for loan losses and uansaned interest. Salories and Benefits j/ 2,737 3,063 3,400 3,700 4,100 4,300 4,910 Other Operating Expenses j 1,547 1,849 1,900 2,050 2,200 2,300 2,403 / Assumzed to inarease at a rate in line with inflation.

Total Expens- 11,052 12,734 14,130 15,575 18,060 20,735 23,i60 it Represents eapitalitation of retained earnings per Law Nvo.238 of July 0, 19313. Net Revenue 125 204 250 200 250 300 350 RIAllbuildings sod facilitiesofurnit ure and fixtures, Source and Application of Funds vehicles and equdpment are insred against fire and public Sources: lisbility. Fidelity insturanrecovers aal key employees. Net Revenue - After Reserve Adjustments ( 287) 89 196 100 100 ( 200) 200 Mortgage Repayments 17,274 16,091 14,935 18,800 23,250 26,800 30,800 Luan Repayments 5,560 6,258 6,467 8,600 9,200 10,500 11,970 Custumers Savings 16,778 4,334 14,686 15,700 18,000 21,100 24,009 Laans - - - 3,800 12,300 14,900 3,500 Capital J/ 600 150 150 150 150 150 150 Other 1,103 874 ( 475) 220 ( 949) ( 80) 100

9 5 4 9 , Total Sources 41,028 27,796 35, 9 370 62,051 73,i70 70,7Z9

Applications: In-estments ( 208) 100 ( 1161 51 ( 70) 70 80 m.rtpages 26,166 28,674 24,500 29,000 34,850 41,900 50 280 Con-truction Advances - - - 6,400 13,700 16,600 3,800 Other Loans 6,164 6,561 6,900 9,900 9,500 10,800 12,300 Debt Repa.yment 120 170 120 120 320 120 120 urchase of Fixed Assets 232 598 250 275 350 400 490 Other 354 ( 146) 516 555 570 1,230 1,200

2 Total Applicmtions 3 ,828 35,907 32,168 45,301 59,020 71,120 68,230

INCREASE (DECREASE) IN LIQUIDITY 8,200 C 8,111) 3,791 4,069 3,031 2,050 2,499

Financial Data

Average Cost of Capital 5.5 6.2 6.5 4.5 6.8 6.8 7.1 Average Interest of Lending 7.0 8.9 8.8 8.8 9.1 9.1 9.1 Interest Rate Spread 1.5 7.7 2.3 2.3 2.3 2.3 2.0

- 64 - ANNEX5 PANAMA Page I COLONURBAN DEVELEPMENT PROJECT

Economic Rate of ieturn at Constant Prites ('000 in 1979 Prices) Converted to Efficiency Prices

.1984- 1980 1981 1982 1983 1998 1999 Conmercial E-tate Costs: */ Repressnos an nppartunitp cast of 0SS4 nfor Land al1 land. 5,240 --- - 1 .~..~. p--t . S4~ -1d CapitalCoats hI 5,154 ,7 4564_ 537 - Includes enineerng and deeign, supervision and perapittnCoevt - 106 i,54 402 479 479 physical contingencies. Oi5ZgZ ____ ~77;F 4,8-48 T_ 4^gee -M Ns generated by the oreati-n of 3,000 (vbe at Renefitn:- ana--ragaoaer-te Eof US02,556 p-r annur. Rental R--nnues 1,100 2,949 3,950 4,999 4,999 d( Waes genera-td by the orestion of 5,000 JIbs by Wages tevertatd d1 - 2 812 7 540 II 096 12,780 12 280 t985 at an average nags rats of as32,556 per W. - Gt -1 1 4 ,0 4 6 7d2u - Z an n um . s,,

Net Renefits: e Represents a-ost of US$52n for land. Eto.idiogWaase -enerted (10,394) (7,584) ( 1,899) (1,489) 4,520 4,520 Inciuding W.age G-eerated 510,394) (4,772) 5,641 8,607 17,300 17,300 industrial Rstate Coats: Land a/ 5,120 - - - - _ Capital Coete bh 4,436 5,r44 4,722 4,958 Operating Coete - 211 565 804 958 938 5,755 ,2 5.762 958 958

RentaL Revanoe' _ 2,008 4,839 6,930 9,129 9,129 Wages Ge-erated cl _ 64 5 8

Net Benefite: En_lodini Wanes Ge-nraced (9,556) (3,747) ( 448) 1,176 8,171 8,171 Inciuding Wages G-naroted (9,556) (2,060) 3,61D 7,004 15,839 15,839

Poerto Esoo.dido - HogainaComponent

Land u/ 3 640 - - - Capital Coets b/ 6,921 12,004 12,202 3,496 - _ Maintenance Coets - 227 621 1,021 1,021 1,021 10,561 12.231 12,823 4,517 1,021 1,021 Benf its: inp.ted Retnal Value - 737 3,783 7,289 7,289 10,929

Net Benefits (10,561) (11,494) ( 9,040) 2,772 6,268 9,908

Retail Rail

Land el 260 - Capital Caste h/ 245 3,336 776 - - - Operating Costs - 17 227 273 273 273 505 f § 1,003 7273 Benefi*ts: Rental Rvenue - 51 707 851 1,902 1,902 Other Peee - 15 15 15 15 15 -= 66 722 86 1,917 1.917

Nst.. fsict. ( 505) (3.287) 2081) 593 1,644 1,644 -65 - ANNEX6 Page 1

PANAMA

COLON URBANDEVELOPMENT PROJECT

Selected Documents and Data Available in the Project File

A. Urban and Regional Planning

Autoridad del Canal de Panamai,Plan General de Usos del Suelo para el Area y la Cuenca Hidrogrfificadel Canal de Panama, Panama, septiembre de 1979, 102 pages. MIPPE/MIVI, Desarrollo Urbano de Col6n: Marco de Referencia para la Eje- cucion de Proyectos, Panama, octubre de 1978. MIPPE, Marco F'sico para eI Desarrollo Urbano de Col6n (Documento Prelimi- nar) Panam'a,enero de 1979, 82 pages.

B. Selected Reports and Studies Relating to the Project

Bi. Housing

Caja de Ahorros, Solicitud de Prestamo Hipotecario (Formulario, Panama, 1979, 2 pages. C'amara Panamnea de la Construccion, Lista de Precios de Materiales de Construcci6n, Panama, 15 de oct-abre,de 1979, 123 pages. .Camara Panamera de la Construccion, Robert C. Wildeman, "Discurso al VII Con-eso Interamericano de ia Vrivienda,"Ciudad de Panama, noviembre de 1979, 23 pages. MIPPE, Analisis de la Situacion Socio-Econnomicade la Poblacion Encuestada por la Comision de la Renovacion Urbana (COREUR) en la Ciudad de Col6n en el Afno1978 (Documento Preliminar) (by Agustan Garcia L. and Genda de Bern), Panama, mayo de 1979, 6 pages. MIVI, Col6n y su Area de Influencia, Panama',mayo de 1977, 116 pages. MIVI, Plan Normativo de la Ciudad de Col6n. Panama, julio de 1976. MIVI, Legislaci6n sobre Renovacion Urbana, Panama, Julio de 1978. MIvi, Propuesta para Sub-Centro Urbano en Puerto Escondido, Colon, Panama, 1979, 179 pages and 5 annexes. MIVI, Especificaciones Tecnicas: Urbanizacion Viviendas en Hilera y Adosadas Multifamiliares. Panama, nd. 200 pages. MTVI, Sub-Centro Urbano en Puerto Escondido: An'alisisde Aspectos Fisico- Geograficos y Ambientales (by Mario Castillo), Panama',mayo de 1979, 26 pages. HIVI, Prapuesta para Sub-Centro Urbano en Puerto Escondido, Col6n: Modifica- ciones y Anexos a la Propuesta Original, Panama, enero de 1980 (in two volumes). MIVI, Zonificacion, Ciudad de Colon (MAP), Panama, junio de 1979. B2. Employment

INDESA Investigacion y Desarrollo, S.A., Zona Libre de Colon Area Industrial: - 66- Page 2

Sintesis General, Panam6, 1979, 95 pages. .Livesey,Henderson and Partners, Estudio para el Desarrollo de la Zona Libre de Col6n: Informe Econ6mico (in two volumes), Panama-,n/d. .Zona Libre de Colon, Proyeccionesde EdificacionesRequeridas v Programa de Implementaci6n.Panama. 1979. .Zona Libre de Colon, Gula para el Establecimientode Empresas Comercialese Industrialesen la Zona Libre de Colon, Panamai,octubre de 1979, 96 pages.

B3.Education, Culture and Health

.DINAR, Ministerio de Educaci6n,NecesidadesEducativas para el Sub-CentroUrbano de Puerto Escondido, Provincia de Colon, Panama.,noviembre de 1979, 37 pages. .DINAR, Ministerio de Educacion, Especificacionde Mobiliario para Centros Educativos de 1 a 9 grado, Panama, noviembre de 1979, 31 pages. .DINAR,Ministerio de Educaci6n, EquipamientoPara Centro Educativo de 1 a 9 grado, Panama, noviembre de 1979, 14 pages. .DINAR, Ministerio de Educaci6n, EspecificacionesTecnicas Para la Construccion de Escuelas: Programa Ministerio de Educaci6n/BancoMundial, Proyecto Puerto Escondido, Col6n, Centro Educativo,1 a 6. 1 a 9i 7 a 9. Panama.,noviembre de 1979, 117 pages. .DINAR, Ministerio de Educacion, Equipamiento para Centro Educativo de 1 a 9 Grado (TalleresUnitarios), Panama.,noviembre 1979. .DINAR, Ministerio de Educacion, Especificaciones para la Construcci6ndel Centro Cultural en Puerto Escondido, Provincia de Col6n, Panama, enero 1980, 52 pages. .Ministeriode Educacion, Programa de Desarrollo de Co16n. Sub-Prograna.de Educacion Tecnica r Profesional. (in two volumes), Panama, 1979. .Ministeriode Trabajo y Bienestar Social (MITRAE), Servicio Nacional de Formacion Profesional. Ante-ProvectoProgramas de Formacion Profesional para el Proyecto de Desarrollo de Col6n. Panama.,agosto de 1979. .MITRAB/MIPPE,El Plan de Desarrollo de Col6n: Su Componente de Empleo y Recursos Humanos, "Sintesis Informativo.Panama, Julio de 1979. .Ministerio de Salud, Especificaciones para la Construccion del Centro de Salud Tipo "U" Proyecto Puerto Escondido, Colon, Panama, noviembre de 1979, 90 pages. Bl .Public Utilities and Site Infrastructure

.Luis Carlos Cho, Consideraciones sobre el suelo de Old France Field, Col6n, Panamza,Julio de 1978. .IRHE, Programa de Desarrollo de Colon 1980-1984, Informe Ejecutivo, Panama, agosto de 1979. .IRHE, PresupuestosPreliminares Para el Suministro de Energia a las Nuevas Areas Comercialesde Zona Libre, Panama, noviembre de 1979. .InstitutoPolitecnico, Universidad de Panama, Estudio de Suelos para el Area Comercial de la Zona Libre de Col6n (Espansi6nFutura), Panama, octubre de 1979. .MIVI, Estudios de Suelo Para la Urbanizacion de Puerto Escondido en Col6n. Panama, noviembre de 1979. .Sociedad Italo-Panamefla de Consultoria Cerpi-Indesa,Proyecto para la Urbani- zacion del Area Industrialde la Zona Libre de Col6n (Informe Final) in two volumes, Panama. 1979. ANNEX 6 - 67- Page 3

B5.Transportation.Transport Terminals and Ports

.Autoridaddel Canal de Panmanm,Anteproyecto Nuevo Terminal Ferroviario, (pre- parado por Direcci6n de Ferrocarril), Panama, septiembre de 1979. .AutoridadPortuaria Nacional, Anteprovecto de Desarrollo de Facilidades Para el Manejo de Contenedores en el Puerto de Crist6bal,Panama., noviembre 1979, 43 pages and annexes. .MIPPE, Estudio de FactibilidadTerminal de Transporte Publico de Pasajeros de la Ciudad de Col6n. Provincia de Colon (by Departamentode Terminales de Transporte),Panama., septiembre de 1979, 94 pages. .MOP, Previsiones de Tr'aficoen la Carretera Boyd-Roosevelt,Panama, 1979, 101 pages. .Tudor Engineering Co. and Empresa Consultora de Arquitectura e Ingenieria, S.A. Estudio de FactibilidadTecnica y Economica de la Autopista Panama'-Colon, (Informe al MOP), Panama, junio de 1973, 407 pages. (Also available in English "Technical and Economic Feasibility Study of the Panama.-ColonFreeway").

B6.ProAectManagement

.MIPPE, Organizaci6n y Administraciondel Programa (de Desarrollo de Colon), Panama.,noviembre de 1979. 4hi~~~~~~i

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The inner-city slum tenementsare often in an advanced state of disrepair and their structuralweaknesses are plainly visible, includingbulging outer walls temporarily buttressed by wooden supports or corrugated iron sheeting. The physical deteriora- tion is such that a large number of the buildings have been condemnedby public safety authorities.

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In the Barrio Norte area of Colon, some structureshave collapsed.

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Spontaneoussquatter settlements,such as La Playita, have developedas a result of the deterioratinghousing conditions.

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The expansion of the Free Zone will almost double the volume of container traffic of an through the port of Gristobal. The port improvement component consists extension to the existing container handling facility of the port.

The duty-freewarehousing and commercialoperations of the Free Zone represent a large proportionof the economic activity in Colon.

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