World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 6532 Public Disclosure Authorized

PROJECT PERFORMANCE AUDIT REPORT

PAKISTAN THIRD AND FOURTH KARACHI PORT PROJECTS

(CREDITS 422-PAK AND 492-PAK) Public Disclosure Authorized December 9, 1986 Public Disclosure Authorized

Operations Evaluation Department

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. Country Exchange Rates (Yearly Average)

Rupee (Rs) Name of Currency (Abbreviation)

Year Rs per US$

1972 (Appraisal Third Pjct) 9.90 1973 (Appraisal Fourth Pjct) 9.90 9.90 1974-1980 1981 (Accounts Closed) 9.90 1982 (Fourth Pjct Completed) 10.50 1983 (Third Pjct Completed) 12.75 ONLY THE WORLD BANK FOR OFFICIAL USE Washington, DC 20433 US A

Office of O,recto-Cenral Opelations Nvaluation

December 9, 1986

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Performance Audit Report on Pakistan Third and Fourth Karachi Port Projects (Credits 422-PAK and 492-PAK)

Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Pakistan Karachi Third and Fourth Port Projects (Credits 422-PAN and 492-PAN)" prepared by the Operations Evaluation Department.

Attachment

This document has a restricted distributioa 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. FOR OFFICIAL USE ONLY

PROJECT PERFORMANCE AUDIT REPORT

PAKISTAN THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK AND 492-PAK)

TABLE o CONTENTS

Preface * *. ***.. * * * ** * * * ** * * * ** * * * ** * * * Basic Data Sheet ...... ****** ii Evaluation Sumary ...... v

PROJECT PERFORMANCE AUDIT MEMORANDUM

I. BACKGROUND...... 1 II. PROJECT IMPLEMENTATION ...... 4 III. PROJECT RESULTS...... 10

TABLES

1. Average Load per Tanker...... 14 2. Forecasts vs. Actual Traffic...... 15 3. Karachi ContainerTraffic...... 16

ANNEX Borrower Comments ...... 17

PROJECT COMPLETION REPORT

I. Introduction...... 31 II. Project Preparation and Appraisal...... 32 III. Project Implementation and Costs...... 34 IV. Traffic and Operations...... 48 V. Financial Performance of the Karachi Port Trust...... 49 VI. Institutional Development...... 52 VII. Economic Re-evaluation...... 54 VIII. The Role of the Association...... 57 IX. Conclusions...... 58

ANNEXES

1. Summary of Covenants and Actions Taken...... 60 2. Railway Yard Materials Ccntracts...... 64 3. Disbursements, Credit 422-FAK...... o*..... 65 4. Disbursements, Credit 492-PAK...... 66 5. Appraisal and Final Disbursements...... 68

TABLES

1. Actual and Expected Implementation...... 70 2. Actual and ExpectedCosts...... 71 3. Actual and Expected Traffic.,...... 72

4. Actual and Forecast Income Statement...... 73 5. Actual and Forecast Balance Sheet...... 74 6. Costs and Benefits, Third Project, Berths and Rail Yard ...... 75 7. Costs and Benefits, Third Project, Bri... ge...... ,...... 76 8. Costs and Benefits, Fourth Project, Oil Jetty...... 77

MAPS

IBRD 10170 Karachi Port IBRD 10171 Karachi Port and Approach Channel PROJECT PERFORMANCE AUDIT REPORT

PAKISTAN THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK AND 492-PAK)

PREFACE

The following is a Project Performance Audit Report (PPAR) on the Third and Fourth port projects the Bank assisted in financing in Pakistan under two IDA Credits approved in 1973 (Credit 422-PAK, US$18.0 m1n) and 1974 (Credit 492-PAK, US$16.0 m1n)(Bank is used throughout this report to refer without distinction to the International Development Association, IDA, and the International Bank for Reconstruction and Development, IBRD). Both projects were aimed at improving and expanding the port of Karachi, which they did; however, the projects suffered long delays that adversely affected their economic impact. The credit accounts were closed in 1981, but work continued and the main project items were finally completed between 1982 and 1983, 2-4 years late.

This report consists of a Project Performance Audit Memorandum (PPAM) prep:red by the Operations Evaluation Department (OED), and a Project Completion Report (PCR) prepared by the South Asia Regional Office. The PPAM is based on a review of the Mir-ites of the Executive Directors Meetings at which the projects were approved, the President's and Staff Appraisal Reports for the projects (PR and SAR), the legal documents on the Frojects, Bank Supervision Reports and other documents contained in Bank files, and the PCR. The PCR is based on a Completion Report and other data prepared by the Executing Agency (the Karachi Port Trust, KPT) in 1983, and field discussions during August 1985.

The draft PPAR was sent to the Borrower and its agencies for comment; the Karachi Port Trust's (KPT) views are reproduced in full as an annex to the PPAM. As KPT has somewhat different views of the projects than OED, the three documents in this report: the PPAM, KPT's comments and the PCR are complementary to one another. i.

PROJECT PERFORMANCE AUDIT BASIC DATA SHEET

PAKISTAN THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK AND 492-PAK)

Key Project Data

Appraisal Actual or Item Expectation Reestimate

Third Fourth Third Fourth Pict Pict Pict Pict

Total Project Cost (US$ min) 34.2 23.9 79.1 39.3 Cost Overrun (%) 0 0 131 64 Loan Amount (US$ m1n) 18.0 16.0 18.0 16.0 Disbursed (US$ m1n) 18.0 16.0 18.0 16.0 Cancelled (US$ m1n) 0 0 0 0 Repaid (US$ mln)(02.28.86) - - 6.3 0.3 Outstanding (US$ mln)(02.28.86) - - 11.7 15.7 Project Completion Date 6/78 6/79 9/82 6/82 Proportion Completed On Time (%) 100 1,0 30 40 Proportion of Time Overrun (1) 0 0 85 60 Economic Rate of Return (%) 32.7 23.0 10.5 21.7 11

Joint Estimated and Actual Cumulative Disbursements (US$ million)

FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82

Estimated 2.5 10.0 23.3 30.8 33.6 34.0 - - - Actual 0 0.9 10.6 15.5 21.8 24.5 29.6 33.6 34.0 Act/Est (%) 0 9 46 50 65 72 87 99 100

11 Actual rates as reestimated in the PCR. Based on a review of the assumptions used to arrive at these rates the Audit concluded that they over- estimate probable results (PPAM, paras. 41 and 46); however, the Audit did not estimate alternative rates of return. iii,

Other Project Data

Original Actual or Item Plan Reestimated

Third Fourth Third Fourth PJct Pict PJct Pct

First Mention in Files - - 6/70 5/73 Government's Application - - 7/72 5/73 Appraisal 6/72 6/73 6/72 8/73 Negotiations 5/73 4/74 5/73 4/74 Board Approval 6/73 5/74 6/73 5/74 Loan Agreement Date 7/73 6/74 7/73 7/74 Effectiveness Date 10/73 9/74 12/73 10/74 Closing Date 6/79 12/79 6/81 12/81

Borrower Islamic Republic of Pakistan Executing Agency Karachi Port Trust (KPT)

Fiscal Year of Borrower July 1 to June 30

Follow-on Projects None

Staff Input (Staff-Weeks)

FY72 FY73 FY74 FY75 FY76 FY77 FY78 FY79

Preparation 14.5 1.3 8.5 - - - - - Appraisal .5 45.0 40.6 - - - - - Negotiations 14.8 10.9 - - - - - Supervision 9.6 24.4 36.6 15.4 29.3 32.2

FY80 FY81 FY82 FY83 FY84 FY85 TOTAL

Preparation ------24.3 Appraisal ------86.1 Negotiations ------25.7 Supervision 9.1 10.9 6.1 1.4 2.7 6.6 184.3 iv

Mission Data

Month/ No.of No.of Staff Report Year Weeks Persons Weeks Date

Appraisal 6/72 4.0 3 12.0 6/73 8/73 2.0 4 8.0 4/74 Supervision I 2/74 0.5 2 1.0 3/74 Supervision II 4/74 1.0 3 3.0 6/74 Supervision III 11/74 0.5 3 3.5 12/74 Supervision IV 3/75 1.0 1 1.0 4/75 Supervision V 5/75 2.0 2 4.0 6/75 Supervision VI 10/75 2.0 1 2.0 11/75 Supervision VII 11/75 1.0 3 3.0 1/76 Supervision VIII 6/76 2.0 2 4.0 676 Supervision IX 3/77 2.0 2 2.0 5/77 Supervision X 6/77 0.5 1 0.5 7/77 Supervision XI 12/77 3.0 4 12.0 1/78 Supervision XII 3/78 0.5 2 1.0 3/78 Supervision XIII 5/78 0.5 3 1.5 6/78 Supervision XIV 9/78 2.5 3 7.5 11/78 Supervision XV 2/79 2.0 1 2.0 n.r. Supervision XVI 6/79 1.0 2 2.0 6/79 Supervision XVII 10/79 1.0 1 1.0 12/79 Supervision XVIII 11/79 1.0 1 1.0 12/79 Supervision XIX 5/80 1.0 1 1.0 6/80 Supervision XX 2/81 1.0 1 1.0 3/81 Supervision XXI 4/81 1.0 2 2.0 5/81 Supervision XXII 5/81 1.0 1 1.0 6/81 Supervision XXIII 11/81 0.7 2 1.4 2/82 Supervision XXIV 10183 0.5 3 1.5 n.r. Completion 6/85 1.0 1 1.0 n.r. Completion 8/85 2.0 1 2.0 5/86 v

iROJECT PERFORMANCE AUDIT REPORT

PAKISTAN THIRD AND FOURTH KAR4CHI PORT PROJECTS (CREDITS 422-PAK AND 492-PAK)

EVALUATION SUMMARY

Objectives

The Third Project (Credit 422-PAK, 1973) intend . ra reduce the dry cargo berth occupancy rates from the 100% or more the port was sustaining et the time, to about 80% by 1978 by building four new berths, two sheds and remodelling the railway yard at the port; the Fourth Project (Credit 492-PAK, 1974) was aimed at ensuring the continued supply of imported oil and reducing the cost of handling oil imports by replacing an old oil jetty (PPAM, paras. 13 and 14).

Implementation Experience

The main items of civil works in the two projects were construction at Juna Bunder of 4 dry cargo berths (reconstruction of two 100-year old lighter berths and the addition of 2 new ones); construction of 2 new sheds; replacement of Napier Mole road bridge; remodelling of the West Wharf rail yard; and construction of a new oil jetty, including dredging an access channel to the jetty for large tankers (PPAM, para. 16). The projects also included the purchase of a dredger and procurement of freight handling equipment.

Progress on the civil works items was extremely slow, the Juna Bunder berths and the Napier Mole bridge were completed 3 to 4 years behind schedule with 137% and 113% cost overrun respectively (PPAM, para. 21). The contracts for remodelling the rail yard were let to a local firm and a slow start and high inflation determined that the works were completed approximately 3 years late with a cost overrun of 194% (PPAM, para. 22). Partly because of the late appointment of the consultant, the bidding documents for the oil jetty were nearly 2 years late. Work on the jetty started in late 1976 and was completed in November 1978 with 55% cost overrun (PPAM, para. 23).

The high cost of all project items forced the Government to seek bilateral assistance to cover part of thems the channel dredging contract was carried out with bilateral aid from the Netherlands and the dredger was withdrawn from the credit and totally financed with bilateral aid from France (PPAM, para. 24). Bids for the equipment were also much higher than expected, and for this reason tenders were cancelled and the equipment was obtained under a barter agreement with Bulgaria (PPAM, para. 27).

The Bank appears to have had difficulties in following its own procurement rules in the award of some of the civil works contracts. The late vi completion of the Third Project for instance, was primarily caused by the use of an inexperienced contractor whose prequalification the Bank had opposed and who won the contract in the face of no competition (PPAM, paras. 17 to 20).

Other project items did not fare much betters institutional changes, for instance, were ineffectual because the staff who were promoted to the new positions were not trained (PPAM, para. 28); a new cost-based tariff that was to be developed under the Third Project was started by KPT, and later contracted out to the Karachi University, where a draft report was produced which was received without much enthusiasm anu' never completed (PPAM, para. 30); finally, KPT and the Ministry of Railways did not coordinate their views on rail operations in the Karachi area and, as a result, the recommendations of a study included in the Third Project were not implemented (PPAM, para. 33)./2

Project Results

Despite four projects and the continued, uninterrupted relationship between the Bank and KPT for over 25 years (from 1955 to 1981), the port has been congested for most of that time. The two projects under review were a continuation of two earlier Bank projects in Karachi. The Bank made a first loan to the Karachi Port Trust in 1955 (Loan 126-PAK, US$14.8 million) and a second in 1964 (Loan 376-PAK, US$17.0 million); both projects tock inordinately long to carry out, the first 9 years instead of the 5 planned, the second 13 years instead of 4 (PPAM, paras. 2 and 3). These delays led to the congestion and to shipping surcharges./3

The two projects under review were also seriously delayed. By the time the Third Project was completed (1982 instead of 1978) the need for undertaking it had been superseded by events and other developments. Had it been ready in time, it would have made a major contribution to reducing congestion in 1979, the year in which the average waiting time peaked, for general cargo ships it was about 10 days and for bulk carriers it was in excess of 20 days (PPAM, para. 41). Because it was so late the project ended up having a minor impact, its rate of return was commensurately low. The new oil jetty in the Fourth Project was completed about two years late in 1978, but could not be fully used until 1981 when the access channel to it was completed. However, alternative locations for the jetty could have achieved the same result at significantly lower costs. Thus the project might have had a much higher rate of return than it actual did (PPAM, paras. 45 and 46).

/2 According to KPT it did coordinate with the Ministry of Railways on the study (see Annex, para. 8).

/13 According to KPT congestion was the result of the 1973 dock labor legislation (Annex, para. 9). vii

Part of the reason for the persistent delays and the lowly rates of return of the projects seems to have been KPT's inability to control matters to produce the desired results in a timely fashion (PPAM, para. 54)./4

The financial impact of the projects was not as large as the significant cost overruns would indicate, largely because KPT could increase its tariffs substantially. The costs of the two projects were well in excess of appraisal estimates, mostly because the execution delays subjected them to the effects of worldwide increases in prices, and to much higher than expected domestic inflation (PPAM, paras 47 utid 48).

Finally, the institutional impact of the two projects was relatively minor; in the opinion of the Audit more emphasis should have been placed oa management training, in particular to prepare the new general managers appointed under the project (PPAM, paras. 51 and 52)./5

/4 According to KPT the delays were caused by force majeure (Annex, paras. 1 to 7).

/}. According to KPT a great emphasis was placed on management training (Annex, para. 12). 1

PROJECT PERFORMANCE AUDIT MEMORANDUM

PAKISTAN THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK AND 492-PAK)

I. BACKGROUND

1. Karachi was Pakistan's only deepsea port until 1980, and the city itself evolved primarily as a port, railway, and warehousing complex. At the time of Independence in 1947, the port had a total of 21 deepsea dry cargo terths (17 on the East Wharf and 4 on the West Wharf) and an oil pier, all funct.onally obsolete and deteriorated. Congestion became chronic in the early 1950s, and since then ship waiting has been a constant feature. Because of this, substantial tonnages have had to be handled by lighter, and freight aurcharges were imposed on cargoes using the port.

2. To assist in rebuilding the facilities the Bank made a first loan to the Karachi Port Trust in 1955 (Loan 126-PAK, US$14.8 million) and a second in 1964 (Loan 376-PAK, US$17.0 million). The first loan financed the reconstruction of 13 of the East Wharf berths, and the second the reconstruction of the other four, in addition to the construction of three new ones on the West Wharf, a new oil pier (OPI), dredging alongside the berths, widening and deepening of the access channel, and rehabilitation of the breakwater.

3. Both projects took inordinately long to carry out. The first took 9 years to complete instead of the 5 years planned, and the second took 13 years, to the Spring of 1977, instead of the 4 years planned. In both cases the efZort to minimize foreign exchange expenditures contributed to the delays in construction, these in turn led to increased port congestion and to shipping surcharges. Therefore, even though the foreign exchange spent by the Port Trust was minimized, the country as whole ended up spending much more in surcharges, than was saved in construction costs (OED report No.1612, Project Performance Audit Report on the Second Karachi Port Project, May 27, 1977).

4. Despite the renovation and expansion of the port, the new berths did no more than keep up with declining productivity. This was the result of labor practices and politics. In particular, it was the effect of the Industrial Relations Ordinance of 1969 and the formation of the Dock Labor Board in 1973, both of which greatly strengthened the position of labor and permitted productivity to drop. Also, however, traditional cargo handling methods continued, with only small scale mechanization. Thus, despite continued investments, much still remained to be done to relieve congestion.

5. To study what should be done to help the situation the Bank extended Pakistan an engineering credit in 1970 (Credit S-9 PAK). The studies carried out under Credit S-9 proposed the addition of eight new berths; 4 to be built from reconstructing the 2 lighter berths on the West Wharf and adding 2 new 2 ones, and 4 new berths at the Keamari Groyne near the seaward entrance to the port (effectively an extension of the East Wharf). Preliminary economic evaluations indicated that the berths were justified in terms of reduced ship waiting time, and this provided the basis for the Bank's Third Project (Credit 422-PAK).

6. To obtain the maximum possible use of the reconstructed lighter berths on the West Wharf, the studies also proposed to remodel the railway yard located behind them. However, the Bank held the view that the proposed scale of the yard was excessive in the light of expected rail traffic. Whilst KPT forecast the traffic to be 700 wagons per day, the Bank considered that 300 per day was more likely. In the event, the proposed layout was finally accepted by the Bank without modification, but studying all rail operation in the Karachi area was made a condition of the credit. In retrospect, the yard has indeed proved to be much larger than needed, particularly after another very large railway yard was built at Pipri, near Phitti Creek (see below para. 8), financed under another Bank project (the Ninth Railway Project, Loan 621-PAK) appraised and approved shortly before (June 1969) the port projects were considered.

7. Under Credit S-9 alternative sites for processing oil imports were also studied. The consultant recommended the construction of a new oil terminal at Buleji Point, one of the sites the Government was considering for a new steel mill. At about the time the projects were appraised, the Government of Pakistan took the decision to construct a steel mill in the country, and a deep water port to serve it. Wherever the mill and the new port were located was a natural location for the new oil *srminal.

8. Various sites were considered for the steel mill. One was an area of tidal flats just west of Karachi harbor, at the head of the port's Western Backwaters, others included Buleji Point. The Bank, considering the Western Backwaters the best possible location for any further port expansion, arranged for and coordinated a UNDP financed study of port development there, on the assumption that the port and the mill would be located at the Western Backwaters. However, in consideration of likely environmental effects on the city of Karachi of locating the mill in the path of prevailing winds from the West, but also on the basis of hydraulic studies and on the strength of a Japanese feasibility study, the Government decided to locate the mill and the new port East of the city at Phitti Creek. Having coordinated the Western Backwaters study, which recommended in favor of locating the steel mill there, the Bank was skeptical of the feasibility and economics of the Phitti Creek location, in particular because it involved dredging and maintaining a long, and possibly unstable, access channel. But this co-,cern went unheeded.

9. Despite the new port development at Phitti Creek, KPT's Board pre- ferred a site within the confines of the existing harbor for the new oil terminal. Yet, within the port the most suitable location for the terminal was the Keamari Groyne, the same location chosen for the 4 new dry cargo bertha. KPT then decided to forego construction of the dry cargo berths and locate the new oil jetty at Keamari. At the time, oil was the primary source of revenue 3 of the port, and locating the terminal outside Karachi port would have neces- sitated increasing all other tariffs to keep the port financially solvent./6 However, the dicision carried with it the implicit acceptance of high berth occupancy rates at the remaining dry cargo berths, and the strong possibility that the port would continue to have capacity problems, high ship waiting times and be subject to freight surcharges. The decision also delayed the consultant's report on the oil jetty and for this reason it was not included in the Bank assisted project (SAR, para 4.08). The Bank then seized the opportunity to require, as part of the project, a reevaluation of all relevant technical and economic factors comparing Phitti Creek with the Western Backwater, before any substantial investment was made in the Phitti Creek develcpment.

10. Notwithstanding the agreement to study the matter, the Government formed in June 1973 the Port Mohammed bin Qasim Authority (PQA), to administer the new port at Phitti Creek. Construction of Port Qasim was funded with ADB loans and from bilateral aid, and carried out 6etween 1977 and 1982 approximately in parallel with the execution of the two Bank financed projects for Karachi. The new port has an iron ore and coal jetty, and 7 general purpose berths. Steel mill traffic has been handled there since 1980 and other traffic since 1981.

11. The feasibility report on the new oil terminal was finalized shortly after the Bank had appraised the Third Project (Credit 422), and presented a good case for an early start on the project. The expected imminent collapse of the old Karachi oil jetty (OP-3) weighed heavily in favor of replacing it, as opposed to building a new terminal at Port Qasim. The Bank agreed that interim measures had to be taken to handle oil imports, and promptly appraised the proposal. This became the Fourth Karachi Port Project (Credit 426) only 10 months after Credit 422 had been approved. Thus, with the Bank's acquiescence, the new oil terminal was located within the port of Karachi.

12. The two Bank projects were thus effectively just one, financed by two credits slightly separated in time. The Third (Credit 422-PAK, 1973) intended to reduce the dry carg berth occupancy rates from the 100% or more the port was sustaining at the time, to about 80% by 1978, by turning 4 existing lighter berths into deep water berths, building 2 sheds to serve the new berths, remodelling the rail marshalling yard, and reconstructing the bridge that linked the East and West Wharves of the port. These actions were expected to eliminate ship waiting times and the double banking of ships at berths and anchorages, and limit lightering to about 300,000 tons per year. The project also provided funds for carrying out studies of the tariff and of overall xail operations in the Karachi area, and required the introduction of changes I.n the management structure.

/6 According to KPT the ready existence of the on-shore infrastructure was one of the major deciding factors (see Annex, par&. 15). 4

13. The Fourth Project (Credit 492-PAK, 1974) was aimed at ensuring the continued supply of imported oil and reducing the cost of handling the imports by replacing the old OP3 berth, which could handle tankers up to Just 25,000 dwt, with a new jetty capable of handling tankers up to 75,000 dt. To take the larger tankers, dredging alongside the jetty to 44 ft depth and the approach channel to 37 ft depth was necessary, and the project also included dredging a test section of the channel to 45 ft depth. Since construction of Port Qasim required dredging a similar channel, the duplication the Bank had tried to avoid in arguing against Port Qasim occurred anyway. To do part of the work, the project included the purchase of a new ocean-going, trailing suction, US$15 million, dredger. Training in the operation of the dredger and technical assistance were also included.

14. The Third and Fourth Projects exhausted expansion possibilities within the existing port area. Because it was likely that the port would continue to run short of capacity if more berths were not added or if productivity did not improve, KPT decided to build the 4 dry cargo berths foregone in favor of the oil terminal, at the Western backwater. This was expected to solve the capacity problem and at thz same time open up a major new development stage for the port of Karachi. In view of the opening of Port Qasiq this development should now be reconsidered, and most likely scrapped./7

15. The two Bank projects became effective in December 1973 (Credit 422) and October 1974 (Credit 492) with an originally planned execution period of 6 years the first and 5 years the second; they should have been finished in 1979. In the event both projects suffered, as the two projects before them, long delays, modifications and cost overruns. The credit accounts were closed in 1981, but work continued (with KPT financing) and the main project items were finally completed between 1982 and 1983, 2-4 years late.

II. PROJECT IMPLEMENTATION

Civil Works and Equipment

16. There were three main stems of civil works in the Third Project: construction of 4 dry cargo berths (two reconstructed from old lighter berths and two new ones) and 2 sheds at Juna Bunder; replacement of Napier Mole road bridge; and remodelling of the West Wharf rail yard. There was one in the Fourtn Project: the construction of the new oil jetty.

17. For the first two items, the Juna Bunder berths and the Napier Mole bridge, 14 and 15 firms respectively were prequalified. However, about that time the Federal Republic of Germany suspended its export credit insurance for contracts in Pakistan and other European countries considered taking similar action. A strong possibility existed therefore, that the European firms

/7 KPT has a different view on this subject (see Annex, para. 17). 5 prequalified (most of those who had been prequalified) would not bid for the works. KPT tried, with the Bank's assistance and through diplomatic channels, to find ways to allow the Europeans to bid.

18. However, only one bid for each contract was received, from a consortium of the National Contracting Company (NCC), a Government controlled contracting company that had just been formed, and a Danish contractor. The Bank had earlier refused to prequalify the NCC on the grounds that it lacked experience. The Bank suggested that to prequalify the NCC form a consortium with a reputable international contractor, in which both partners would assume joint and several responsibility for works. At the time the bids were opened, Bank approval for the prequalification of the consortium had not been granted because the partnership did not provide for joint responsibility. Although, therefore, the bids were technically invalid, the Bank agreed that KPT nego- tiate with the NCC the prices, which ware about 60% above the official cost estimate, and the many conditions attached to the bids, provided the partnership statutes were modified to provide for joint responsibility.

19. About two months after the bids had been opened, the Bank learned that the German credit insurance had been reinstated shortly before the tenders closed. Thus, in considering a single bid for the contracts, KPT (who was in full knowledge of this fact and had not informed the Bank) had pre- cluded effective competition, and on account of the high pricas the bids should have been rejected and the contracts retendered. However, because by then negotiations were already underway, the Bank accepted KPT's argument that more would be lost than gained by rebidding. An important factor in the decision was the rapidly rising costs on account of the upsurge of demand from the Middle East.

20. For 6 months though, attempts to produce a legally acceptable joint responsibility agreement between the NCC and its Danish partner failed. In the event, an ostensibly acceptable agreement was made, and the Government controlled consortium was persuaded to remove all conditions and to drop the price by 20%. However, the two contracts were, by then, about a year behind schedule and suffered the adverse effects of time, without the benefit of increased cor-petition.

21. Progress on the two contracts was extremely slow, as well described in the PCR (paras. 3.08 to 3.17). Yet, when the Bank tried to hold the foreign contractor responsible for the delays, it transpired that the joint rosponsibility agreement had been voided by a parallel secret agreement under waich the foreign partner was only responsible as a consultant and not as a partner (PCR, para. 3.11). The contracts were completed 3 to 4 years behind schedule, in June 1982, with 137% and 113% cost overrun respectively. Partly because of this delay, the remaining berths in the port were congested and traffic was subject to heavy freight rate surcharges./8

/8 KPT has a different view on these issues (see Annex, para. 18). 6

22. The three contracts for remodelling the rail yard were let to a local firm and the combination of a slow start, no feult of the contractor, and high inflation, determined that the works were completed approximately 3 years late, with a cost overrun of 194% (PCR, paras. 3.18 and 3.38). The low share of rail traffic at the port and the low utilization of the yard make the investment questionable; and, moreover, given that the huge Pipri rail yard (c&pacity 2,500 wagons per day) was built at about the same time for US$12.5 million, the US$25 million paid for the port yard (capacity 700 wagons a day) appears exorbitant.

23. It is a well established Bank requirement that consultants be appointed to assist in the preparation and evaluation of bids, and subsequently for the supervision of the contracts. Unfortunately the requirement does not specify exactly when the consultant should be hired. Most consultants used in the project had to start work with the KPT without a contract. Partly because of the late appointment of the consultant, the preparation of bidding documents for the oil jetty was nearly 2 years late./2 Four bids were received, the lowest (US$11.0 million) was substantially higher than the appraisal estimate (US$6.3 million). Work on the jetty started in late 1976 and was completed in November 1978.

24. The high cost estimates for the jetty gave rise to concerns over the likely costs of the dredging and the dredger. Bilateral assistance was then sought to cover part of the expected additional costs. Bids were opened in 1978, about 3 years behind schedule, and were indeed much higher than expected. The lowest bidder for the dredging contract was a Dutch firm and works were carried out with bilateral aid from the Netherlands. The dredger was financed with bilateral aid from France, at a price equal to the lowest bid, and withdrawn from the credit.

25. At appraisal it was expected that a channel adequate for 45,000 dwt tankers would be built by contract, and that the new dredger would be used to deepen the channel and make it suitable for 75,000 dwt tankers and for maintenance thereafter. However, the trend towards broader beam tankers requiring less depth of water, meant that the depth necessary for 75,000 dwt tankers could be achieved by the contractor under minor modifications to the contract. Thus the US$15 million new dredger has been used very little, for maintenance dredging only.

26. The new access channel was put in use in January 1981, 2 1/2 years after the oil jetty was completed; the full benefits of the new jetty were not available therefore, for this considerable period. The jetty has permitted the use of larger tankers: in 1980 the average crude oil load per tanker was 42,500 tons, while in 1982 it was 64,400 and, in 1983, 67,500 tons. The

/9 According to KPT the delay was due to the unsatisfactory performance of the foreign consultant (Annex, para. 20). 7 number of tanker calls at the port carrying more than 70,000 tons of crude oil increased from none in 1981, to 9 in 1982, to 32 in 1983 (PPAM, Table 1). This has resulted in some important savings to the country.

27. Bids for equipment were much higher than expected, probably on account of Middle Eastern demand. For this reason, tenders were cancelled and equipment was obtained under a barter agreement with Bulgaria. The opportunity was taken during the process to reconsider the list of equipment: conventional general cargo equipment was reduced and substituted by some limited container handling equipment, but not the container crane recommended by the Bank.

Institutional Chanzes

28. The technical assistance under Credit S-9 concentrated on the development of a new management accounting system and related organizational changes. Among the latter was the appointment of 4 General Managers to reduce the number of senior officers reporting directly to the Chairman; this was made a covenant under Credit 422. The appointments were made, but they appear to have had little effect on decentralizing decision making. Existing staff were promoted, but because no training was provided they were less effective than they could have been, had they been properly trained in their new jobs. In fact, other than some training on the use of the new dredger, no training was included in either credit.

29. During implementation it was realized that the KPT Act, which dated to 1886, was itself a serious obstacle to any fundamental institutional change. Similarly, the creation of the Dock Labor Board in 1973, which greatly increased the power of the labor force, seriously limited management's room for manoeave,. No action has been taken to modify either.

Tariffs

30. Under the Third Project a new cost-based tariff was to be developed. Work was started by KPT, but, as progress lagged, the job was contracted out to the Karachi University where, with the assistance cf a Bank cargo handling consultant, a draft report was produced. However, in the meantime, adjustment had been made to the existing tariff. In particular, storage charges were increased substantially to discourage delays and reduce yard congestion. This reduced the urgency for the new tariff. Thus, the draft report was received without much enthusiasm and the work was never completed.

31. The tariff differences between Karachi and Port Qasim were the subject of much discussion. The ADB loan for Port Qasim required the establishment of tariffs high enough to recover all costs; this, however, on a new and expensive port, implied that Qasim's tariffs would be many times higher than Karachi's. The difference was made greater by Karachi's practice of not revaluing assets, which allows them to keep their tariffs relatively low. Clearly, the interests of the country are best served when differences in tariffs relate only to differences in operating costs. The Audit recommends 8 resolving this problem promptly to avoid further misuse of overall port capacity.

32. The two credits required KPT to achieve certain target returns on essets. In the event, KPT reemingly obtained much higher returns than tar- geted, but only because assets were not revalued. It was indeed a shortcoming that neither credit agreement required KPT to rev&lue assets. However, in 1980 KPT did evenually revalue its assets.

Study of Rail Operations in the Karachi Area

33. The Third Project included a study of rail operations in the Karachi area, with special emphasis on the interaction between the new marshalling yards at Pipri and the West Wharves. The study was late getting started because the Government could not decide who should do it. It wai finally agreed that the Ministry of Railways (MOR) would be responsible. Hovever, KPT and MOR did not coordinate their views and as a result recommended modifications to the West Wharves yard to take account of special features of the Pipri yard were not implemented, ostensibly because they came too late./1O

Traffic Forecasts

34. The traffic forecast on which the projects were based had been prepared in 1970, before the separation of East and West Pakistan and about three years prior to appraisal. This forecast, as revised downward at appraisal, is contrasted with actual traffic volumes in PPAM Table 2. The most noteworthy feature is that wheat imports, forecast to disappear by 1979, were in fact at a record level that year (over 2 million tons). Similarly, fertilizer imports, forecast to be 400,000 tons in 1979 were, in fact, more than three times that level (1.4 million tons) in that year. Cement, expected to be an export product, was in fact imported in substantial quantities, 630,000 tons in 1979 and 1.3 million in 1982. Altogether, bulk imports were the main contributor to the port's congestion. However, since 1981 wheat and rice have been handled at Port Qasim, relieving some of the pressure at Karachi.

35. Despite the substantial tonnages of bulk wheat and fertilizer handled at the port, no specialized facilities were provided. This shortcoming was brought to KPT's attention by successive supervision missions, but no action was taken. Only for cement was a specialized mother ship installed, enabling at least this commodity to be handled more efficiently.

36. Interestingly, the appraisal reports made no mention of containers. The national shipping line of Pakistan was strongly resisting containerization at the time. Nonetheleus, small numbers of containers started arriving in 1977/78, increasing rapidly thereafter (PPAM, Table 3). Some minor changes were made to the vsving specification of the West Wharves and to the equipment list, in response to the growing numbers of containers. But, other than the

/10 According to KPT it fully coordinated with MOR on the railway operations study (Annex, para. 24). 9

"Improvisation Plan of 1980", which assigned three areas of the port for cont&iner storage and processing, KPT did little to accommodate the containers. Their plan was to develop a major container terminal in the Western Backwaters, a possibility that now appears remote.

37. Another possible point of entry for containers would be Frt Qasim. That port, in fac-t:, handled nearly 5,000 TEUs (twenty foot equivalent container units) in 1982183, when labor troubles occurred in Karachi, leading the Government to reconsider the role of the two ports for container traffic. Karachi was designated the container port of the country. Since then the port has handled more than 100,000 TEUs each year over its conventional berths, while nothing has moved through Qasim. The Audit is of the view that the designation of Karachi as the container port should be reconsidered, and that specialized facilities for containers should be provided wherever (Karachi or Qasim) it is overall more economical (i.e. cheaper) to handle them.

Productivity and Ship Waiting Time

38. It is difficult to get a consistent picture of the long term trend in productivity and ship waiting time at Karachi. Productivity (tons per hook hour) for bulk commodities (fertilizer, wheat, rice) declined in the early 1970's- then improved from 1973/74 onwards following the introduction of an incentive scheme. Since 1978, the National Logistics Cell (NLC), a unit of the Pakistani Army, has been in charge of clearing the wheat and fertilizer from the port, and this had the very beneficial effect of decongesting the berths and improving stevedoring performance.

39. General cargo handling rates also reached a low in the mid 1970s and then improved, partly as a result of the increasing use of containers:

General Cargo tons/hook hour

1977 4.0 1980 9.0 1983 11.0

Given that containers now represent approximately 25% of general cargo, still higher figures are to be expected in the future.

40. Waiting times for general cargo ships increased in the early 1970s reaching an average of more than 5 days per ship in 1973. Through 1979 the average fluctuated between 5 and 12 days per ship, then dropped in 1982/83 to 1.7 days per ship. Given the additional berths built under the Third Project, which came on line in June 1982, the increasing use of containers, and the additional capacity provided by Port Qasim, there is no need to wait for a berth at the present time. For the same reasons no ship waiting delays are expected to occur in Pakistan in the foreseeable future. 10

III. PROJECT RESULTS

Economic Impact

4. The economic impact of the four West Wharf berths wAs seriously affected by their delayed completion. The berths were a short term measure to relieve congestion, and their completion was planned for late 1978. Had they been ready at that time, they would have made a major contribution to reducing congestion in 1979, a year in which the average waiting time of general cargo ships was about 10 days, and of bulk carriers in excess of 20 days. In the event, the berths were not ready until 1982. By then the combined effect of using the NLC, Port Qasim, and containerization had already eliminated congestion. Thus the contribution made by the new berths to reducing ship waiting time was negligible. At appraisal the economic rate of return of the four berths was forecasted to be 40%; the PCR (paras. 7.04 and 7.05) now estimates that the rate will be only about 9%, and this is probably overstated, as it is based on assuming that, without the project, ship waiting would have continued, while in fact it had disappeared well before the project was finished (PCR, para. 7.05).

42. The Audit agrees with the PCR (para. 7.05) that it was a serious appraisal shortcoming not to consider the effect of increasing containerization on congestion. It was similarly inadequate to disregard the possibility of improving productivity by actions similar to those taken by the NLC.

43. No separate assessment of the economic rate of return of the rail yard was made, either at appraisal or in the PCR. Both included the cost of the yard together with the cost of the berths. However, the 194% cost overrun and the meager use of the rail yard, cast doubt over the economic rate of return of this component of the project. In the Audit's view it was a serious appraisal shortcoming not to quantify independently the expected return of remodelling the rail yard, in particular because it was known that the Pipri yard was also being built.

44. The PCR (para. 7.06) reestimates the rate of return for the Napier Mole Bridge to be about 15%, compared with the appraisal estimate of 16%. This result seems reasonable.

45. The new oil jetty OP-4 was justified on two groundst first, the dilapidated condition of the OP-3 jetty, which was said to be in imminent danger of collapse, and second, the economics of accommodating larger tankers. In the event, OP-3 has not collapsed and is still being used; the adjacent OP-2 (then being used to handle molasses) did collapse though. The new jetty has indeed allowed using larger tankers (see para. 27). However, although the new jetty was completed in 1978 it could not be used fully until 1981, when the channel was completed. The PCR (para. 7.11) estimates that the rate of return on the jetty will be 21.7% compared with the appraisal estimate of 232. More timely completion of the channel would have increased the return to ab7out 23%, and if only benefits associated with the use of OP-4 for larger tankers 11

(those that could not have used OP-3 because of draft and size restrictions) are taken into account, the rate of return would be only 16%.

46. However, in the opinion of the Audit the oil terminal should be looked at in a different light altogether. In retrospect, the Audit considers that building the jetty at Karachi should have been weighed against the alternative of locating the new oil terminal at Port Qasim. That location would not only have been in line with the Government's policy of concentrating bulks at Qasim, but would have avoided much of the costs incurred in providing OP-4, because #he approach clannel to Port Qasim had to be dredged in any event for the ore carriers. Similarly, had the terminal been located at Qasim, the Keamari dry cargo berths, foregone in favor of the oil jetty, could have been built and the congestion costs of the late 1970s would have been avoided. The risks of placing the new terminal at the alternative location, looked at from the viewpoint of 1974 when the project was appraised, would have been the result of how promptly Port Qasim could be expected to be completed (it was then only in its early days), vis-a-vis how soon OP-3 would collapse. In the event, OP-3 did not collapse, and a jetty built at Qasim would have come on line just about at the same time as the jetty in Karachi, as construction of Qasim was delayed as long as the jetty in Karachi was delayed.

Financial Impact

47. The final costs of the two projects were substantially in excess of appraisal estimates. This was largely because the execution delays subjected the projects to the effects of worldwide increases in prices fueled from the Middle East, and to higher than expected local inflation. The final figures (PCR para. 3.40) show that the overall overrun was 104%, with the largest overrun being in local costs, and then mostly on the Third Project which had the larger proportion of civil works%

Overruns Local Costs Foreign Costs Total Costs

Third Project 212% 51% 131% Fourth Project 56% 72% 64% Both Projects 162% 61% 104%

48. The difference between estimated costs and final expenditures, about US$47 million equivalent, was paid for by the KPT from its own resources (PCR, para. 3.42). Despite this, the KPT is still in a healthy financial position largely on account of substantial tariff increases, especially storage charges.

49. The KPT has about US$29 million equivalent invested in Government bonds (PCR, para. 5.04). Thus, part of the revenues generated by the higher tariffs have been transferred to the Government.

50. The target financial ratios were met, as noted in paragraph 32, thanks to the use of historical rather than current asset values by the KPT. 12

The issue of asset valuation and its effect on tariffs has been a major obstacle in setting the charges for Karachi and Port Qasim at levels that encourage an efficient distribution of traffic between them. Finally, in 1980, KPT eventually revalued its assets paving the way for a better tariff setting environment.

Inst itutiona. Impact

51. The institutional component of the two projects was relatively minor: four general managers were to be appointed to reduce the load on the Chairman, and to provide for a more rational grouping of functions. Also, a new management accounting system was to be implemented. Both actions were carried out. The PCR notes (paras. 6.06 and 6.07) that any more radical institutional changes will require a revision of the KPT Act of 1886. In the opinion of the Audit it might be time to do so, given the role of institutional changes in improving port efficiency and reducing port costs. Such changes might also result in greater involvement of the private sector in port investment, and in motivating greater competition within the port of Karachi, and between Karachi and Port Qasim.

52. A management training component might have been included in the projects, in particular to prepare the new general managers for their jobs. As it turned out, they all came from internal promotions, and could well have used training to help create awareness of their new roles and promote a fresh outlook.

53. In the opinion of the Audit more emphasis should have been given in the Third Project to monitoring cargo handling productivity and ship waiting time. As in many similar projects, targets should have been set for the indices and consideration might have been given to reflecting in them the possible impact of containerization.

General Points

54. The projects under review were a continuation of earlier Bank assistance to Karachi. Yet, despite four projects and the continued, uninterrupted relationship of the Bank and the Port Trust for over 25 years (from 1955 to 1981), congestion has persisted at the port for most of that time. Part of the reason for this was the delay in carrying out agreed works. KPT seems to have been unable to control matters to produce the desired results in a timely fashion. However, KPT's resistance to mechanize the handling of bulk commodities and other products, also contributed to congestion. Arguments about a grain silo for instance, centered on who was to pay for it and the impact on employment, rather than on the increased productivity and the relief of congestion that could be brought about. Similar arguments were put forward on the provision of mechanized bagging equipment for fertilizer. The port for example, has never had enough pallets to enable full use of the forklift trucks purchased to handle general cargo. The argument again was about who would pay for the pallets. In the view of the Audit the Bank should have taken a less compromising attitude in these cases. 13

55. The Bank also appears to have been weak in following its own procurement rules. The late completion of the Third Project was primarily dve to the use of an inexperienced contractor whose prequalification the Bank had opposed and who won the contract in the face of no competition. Whilst the desire of the Government to engage its own company is understandable, the Bank's acquiescence in this area cost the country a high price in the form of congestion and shipping rate surcharges.

56. Similarly, the lack of provision in the design of Bank projects for implementation delays, was the result of -xcessively sanguine assessments of Borrower capacity to efficiently carry out works. Finally, the Bank seems to have been weak in responding to project design changes that were not solidly backed by technical and economic analysis; for instance, the reduction from 8 to 4 berths in the Third Project was accepted, even though 8 had been shown to give an acceptable return and 4 berths were known to be insufficient to solve the congestion problem. While in retrospect this appears to have been a good decision, there was no indication at the time, that indeed 4 berths would be more than enough because of containerization.

57. Bank lending for ports in Pakistan has been centered on Karachi and the KPT. Whatever the rights or wrongs of the decision to locate the steel mill and the new port at Phitti Creek, the Bank should have taken it for a fact instead of bringing a rearguard action against Port Qasim long after it was a fait accompli. Once the decision was made and construction of the mill started, it was inescapable that a port was to be built for it, with all the associated costs. Given the large sunk cost, the marginal cost of any additional berths at Port Qasim could not fail to be at most equal, if not considerably less than the cost of developing a similar number of berths anywhere else including Karachi's Western Backwater. Despite this the Bank continued its support for the Western Backwaters. Thus, an opportunity was lost (or at least, deferred) for considering how best the two ports could serve together the needs of Pakistan. Concentration on a single important Borrower-the KPT- may have led the Bank to give insufficient attention to the overall port needs of the country. - 14 -

TABLE 1

PROJECT PERFORMANCE AUDIT MEMORANDUM

PAKISTAN THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK AND 492-PAK)

Average Load per Tanker Port Call

1978/79 1979/80 1980/81 1981/82 1982/83

Numbers of crude oil tankers 42 84 78 68 63

Average load per tanker (tons) 41,000 42,500 50,500 64,400 67,500

Tankers carrying between 70,000 and 75,000 tons crude oil - - 9 32

Average load per fuel oil tanker (tons) 27,900 23,900 24,500 39,800 35,100

Source: KPT

April 1986 - 15

TAl 2

PROJECT PEIMACE AUDIT I hWilMM

PAKISTAN MTiAlD FUJRM P(BT PIWMCS (CPEDI 422-PAK AND 492-PAK)

Forecast vs Actual Traffic (000 tons)

1972/73 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 lq)orts

(a) kheat Ibrecast 1,000 730 400 200 120 100 ------Actual 1,358 1,024 1,414 1,452 394 967 2,161 654 308 242 213 322 1,073 /a

(b) 1ertilizer Forecast 200 200 220 220 260 330 400 450 - - - - - Actual 398 690 339 324 510 578 1,400 1,237 1,294 314 692 491 569

(c) Other imports Forecast 1,600 1,670 1,780 1,890 2,020 2,160 2,320 2,130 - - - - - Actual 1,848 1,780 1,970 1,906 /b 2,385 2,978 3,321 3,229 4,338 3,887 4,199 3,753

(d) Ttal dry imports Forecast 2,800 2,600 2,400 2,310 2,400 2,590 2,720 2,580 - - - - - Actual 3,604 3,494 3,723 3,682 /b 3,930 6,539 5,212 4,831 4,894 4,792 5,012 5,395 /a

Exports

(a) Rice Forecast 400 440 480 520 560 570 620 680 - - - - - Actual n.a. n.a. n.a. 799 n.a. 806 1,008 1,106 1,257 956 866 /c 1,310 731 /e

(b) mient Fbrecast 550 Actual - - - 100 ------

(c) other exports Forecast 1,350 1,610 1,770 1,820 1,890 1,890 2,050 2,200 - - - - - Actual - - - 992 - 819 733 990 1,101 1,085 1,312 1,418 1,398

(d) Total exports Forecast 2,300 2,600 2,800 2,890 3,000 3,010 3,270 3,530 2,178 - - - - Actual n.a. r.a. n.a. 1,891 n.a. 1,625 1,741 2,0% 2,358 2,041 2,178 /c 2,728 /d 2,129 /e

/a Includes 254,000 tons Pbrt Qasis. T Figure not available Tc Includes 260,000 tons lort Qasim. T Includes 1,048,000 tons Fbrt Qasim. SIncludes 596,000 tons Port Qasim.

Source: KPT

April 1986 - 16 -

TABLE 3

PROJECT PERFORMANCE AUDIT MEMORANDUM

PAKISTAN THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK AND 492-PAK)

Karachi Container Traffic (TEUs)

Total Imports Exports Full Cargo (tons)

1977/78 2,961 1,368 4,329 n.a.

1978/79 7,135 9,743 16,878 n.a.

1979/80 15,627 16,569 32,196 295,400

1980/81 26,118 25,934 52,052 419,350

1981/82 35,432 34,612 70,044 806,301

1982/83 55,783 45,119 100,902 1,033,692 /a

1983/84 n.a. n.a. 115,480 n.a.

/a In this year Port Qasim handled 4,916 TEUs.

Source: PCR and Supervision Reports and PCR.

April 1986 - 17 -

ANNEX (TELEX ) Page 1 of 13

NO. P4D-AI/PP(753)/83/I DATED:- 15TH NOVEMBER, 1986.

TELEX NO. RCA 248433 ITT 440008

MR. OTTO MAISS, ACTING DIRECTOR, OPERATIONS EVALUATION DEPARTMENT, WORLD BANK, WASHINGTON DC., U.S.A.

CC : TO MR. BRIAN SHIELDS, CHIEF, TRANSPORTATION DIVISION, OPERATIONS EVALUATION DEPARTMENT, INTBAFRAD, WASHINGTON D.C., U.S.A. - TELEX NO. RCA 2484.3 & ITT 440098.

SUB:- DRAF1 PROJECT PERFORMANCE AND AUDIT REPORT - THIRD & FOURTH PORT PROJECTS (CREDIT NO. 422 AND 402-PAR.)

AA - WE ACKNOWLEDGE THE RECEIPT OF DRAFT PROJECT PERFORMANCE AND AUDIT REPORT FOR CREDITS 422-PAK & 492-PAK, AND HAD REQUESTED FOR ADDITIONAL TIME VIDE OUR TELEXES DATED 22ND JULY, 1086 AND 6TP OCTOBER, 1986, AS THE PROJECTS WERE COMPLETED DURING 1982-83, AND COMPREHENSIVE COMPLETION REPORTS WERE FURNISHED SIMULTANEOUSLY BY KPT, ANDFILES CLOSED & SENT FOR RECORD. ACCORDINGLY, THE OFFICERS/STAFF DEALING WITH THE PROJECTS AND PROJECT RECORDS HAD TO BE LINMD-UP AGAIN, FOR CHECKING REFERENCE RECORDS AND FURNISHING MEANINGFUL COMMENTS. WE, THEREFORE, REGRET ANY DELAY OR INCONVENIENCE CAUSED TO YOU. KPT'S COMMENTS AND OBSERVATIONS ARE FURNISHED BELOW SERIATIM FOR THE IDA'S CONSIDERATION, NECESSARY ACTION DEEMED FIT, AND INCLUSION WITH THE DRAFT EVALUATION REPORTS.

PREFACE - PAGE - I.

1) IT IS QUITE CORRECT THAT THE PROJECTS FINAL COMPLETION SUFFERED WHICH WAS DELAYSDUE TO FORCE-MAJEURE REASONS, AND THESE APPEAR TO HAVE BEEN OVERLOOKED IN THE PERFORMANCE EVALUATION REPORT. DUE TO THE ACUTE NEED OF ADDITIONAL PORT FACILITIES, THE PROJECTS WERE COMMISSIONED FOR OPERATION IN PHASES, AS AND WITEN THE RESPECTIVE COMPONFNTS OF THE PROJECTS WERE COMPLETED, AND HENCE THE ADVERSE ECONOMIC IMPACT HAS NOT TO BE RELATED TO THE PINAL COMPLETION DATES, SINCE INDIVIDUAL PHASES Or THE PROJECTS WERE COMISSIONED SEVERAL YEARS EARLIER, PUT INTO OPERATION, AND CONTRIBUTED SUBSTAN-

TIALLY IN WIPING OUT THE US$ Inn MILLION PER ANNUM SHI"PING SURCHARGE, PREVALENT DURING 1974-78 PERIG'. AS A RESULT OF THESE PROJECTS, WHICH WERE PRIMARILY FOR PORT tI)DERNISATION, THE WAITING TIME OF VESSELS OFF-PORT WAS REDUCED TO ZERO DURING 1961-83 PERIOD, AND HAS SINCE BEEN IAIN'AINED AS SUCH, DEMONSTRATING THE TREMENDOUS ECONOMIC IMPACT OF THE PROJECTS, WHICH APPEARS TO HAVE BEEN PLAYED

N:.v 2~b 9% - 18 - ANNEX Page 2 of 13

DOWN IN THE REPORTS. THIS CLARIFICATION NEEDS EMPHASIS, FOR CORRECTING AND SETTING RIGHT THE OTHERWISE ERRONEOUS ItPRESSION ONE DERIVES IN READING THE PP.EFACE IN ISOATION. THE CO?ISSIONING OF THE PROJECTS IN PHASES, FOi AUGHENTING BADLY NEEDED PORT CAPACITY, WAS A VERY REDEEWING FEATURE OF THE PROJECT PERFORUANCE AND OPERATIONS, ADVANTAGEOUSLY AVAILING MAXIMUM POSSIBLE BENEFITS AND ECONOMIC IMPACT o THE PROJECTS.

2) IT IS OBSERVED THAT THE INFERENCES DRAWN IN THE PROJECT EVALUATION REPORT, ARE AT SUBSTANTIAL VARIANCE WITH, AND CERTAINLY DO NOT CO-RELATE WITH THE DATA GIVEN IN THE IDA'S PROJECT COMPLEfION REPORT, OR KPT'S COMPLETION REPORT, AND AS SUCH, THE BASIS OF THE IMPRESSIONS, FINDINGS, & EVALUATION ARE NOT UNDERSTOOD. THIS WILL BE ILLUSTRATED WITH TYPICAL EXAMPLES IN KPT'S ITEMISED OBSERVATIONS WHICH FOLLOW,

3. THE ECONOMIC/INTERNAL RATES OF RETURN, AS STATED IN THE PROJECT EVALUATION REPORT, IN PARTICULAR POR CREDIT 492-PAK, ARE QUITE DIFFERENT FROM THE ANALYSIS FURNISHED BY KPT TO IDA, I.E. 40%, AND LATER CONFIRHED BY IDA AS ON THE LOWER SIDE AND WAS 84% IN THEIR ANALYSIS. THIS WILL ALSO BE EXPLAINED IN DETAILS LATER.

EVALUATION SUMMARY - PAGE - V - IMPLEMENTATION & EXPERIENCE.

4. THE SECOND PARAGRAPH STATES THAT THE CIVIL WORKS COMPRISED THE RECONSTRUCTION OF 4 CARGO LIGHTER BERTHS AT JUNA BUNDER .... AND PROCUREMENT OF FREIGHT HANDLING EQUIPMENT. THIS GIVES A WRONG IMPRESSION. THE PROJECT COMPRISED THE RECONSTRUCTION OF TWO 100-YEAR OLD LIGHTER BERTHS AND CONSTRUCTION OF TWO NEW BERTHS, ALONG THE JUNA BUNDER WATER-FRONT, TO FORM A COMPLEX OF 4 MEDIUM DRAFT 1iULTI-PURPOSE/GU?ERAL CARGO SHIPPING BERTHS.

5. KPT WERE READY WITH DETAILED ENGINEERING, TENDER DOCUMENTS & INVITATION TO TENDER, AT THE TIME OF CREDIT NEGOTIATIONS. THE PROJECT DELAYS WERE ATTRIBUT- ABLE TO REASONS FORCE-MAJEURE FOR KPT. THOUGH 15 INTERNATIONAL FIRMS WERE PREQUALIFIED FOR COMPETITIVE BIDDING,IIMEDIATELY AFTER SIGNING OF THE CREDIT 422-PAK, THEY HAD LATER EXPRESSED THEIR INABILITY TO TENDER BECAUSE OF THE IMPOSITION OF HERMES POLITICAL RISKS SURETY RESTRICTIONS, WHICH AFTER TREMENDOUS EFFORTS AND CORRESPONDENCE BY THE KPT AND THE IDA WERE FINALLY REMOVED IN THE FALL OF 1074, ONE YEAR AFTER DATE OF CREDIT 422-PAR EFFEC- TIVENESS. THIS WAS THE FIRST MAJOR REASON, BEYOND HUMAN CONTROL, WHICH DELAYED BOTH DIRECTLY & INDIRECTLY THE SHIPPING BERTHS AND BRIDGE WORKS PLANNED PROJECT SCHEDULE.

6. THE MOST UNPRECEDENTED PRICE LESCALATION, SINCE 1930, TOOK PLACE AFTER THE CREDIT NEGOTIATIONS IN 1973, DURING THE PERIOD 1974 TO 1977, WHEN STEEL PRICES SHOT-UP BY 200% (FROM RS. !000 TO RS. 6000/- PER TON) WITHIN 15 MONTHS, AND ALL OTHER MATERIAL & EQUIPMENT PRICES ESCALATED IN LARGE AND SOMEWHAT SIMILAR PROPORTIONS. NO HUMAN FORESIGHT, ANYWHERE IN THE WORLD, IDA INCLUDED, COULD COMPREHEND SUCH AN ESCALATION IN PRICES. WORLD-WIDE PROJECTS WERE FRUSTRATED DURING THIS PERIOD, AND THIS PROJECT WAS EXPOSED TO SIMILAR HAZARDS & DANGERS. IT WAS KPT'S FIRM AND DOGGEDLY DETERMINED EFFORTS TO CONTROL PROJECT COSTS, ITEM BY ITEM, WHICH INSTILLED DISCIPLINE, -19- ANNEX Page 3 of 13

OTHERWISE IT IS OUR KNOWLEDGE THAT ALL PROJECTS IN THE REGION, WITH 1972-7' ESTIMATES, REGISTERED AN INCREASE OF ABOUT 300 PERCENT. THIS

ASPECT OF UNPRECEDENTED PRICE ESCALATION APPEARS TO HAVE BEEN OVERLOOKED, AND NOT REFLECTED IN THE EVALUATION SUMMARY,GIVING A SOMEWHAT ERRONEOUS IMPRESSION OF THE WHOLE POSITION AND SCENARIO.

7. IN SUMMARY, THE HERMES SURETY RESTRICTIONS AND UNPRECEDENTED PRICE ESCALATION JOINTLY CONSTITUTED TWO MAJOR FORCE-MAJEURE HURDLES WHICH COULD HAVE INFACT FRUSTRATED THE DEVELOPMENT CREDITS. CORRESPONDENCE RECORDS AND REGULAR REPORTS TO THE IDA INCLUDING REPORTS OF THE IDA MISSIONS, WILL DEMONSTRATE THAT IT WAS KPT'S FIRM, WATCHFUL AND DETERMINED HANDLING OF THE SITUATION, WHICH KEPT THE PROJECTS BOUYANT AND ON-STREAM, DESPITE THE ODDS, TILL THEIR FINAL AND SUCCESSFUL COMPLETION, FULLY ACHIEVING THE SCOPE OF WORK, AND THE END OBJECTIVES. THE PROJECT DELAYS WERE FOR NO FAULT OF THE KPT OR THE IDA, AND THE EVALUATION REPORT GIVES AN INCORRECT IMPRESSION,

8. THE EVALUATION REPORT AGAIN GIVES THE ERRONEOUS IMPRESSION THAT THE KPT AND MINISTRY OF RAILWAYS DID NOT COORDINATE THEIR VIEWS ON THE RAIL OPERATIONS STUDY IN THE KARACHI AREA, AND AS A RESULT,THE RECOMMENDATIONS WERE NOT IMPLE- MENTED. THIS POSITION -.S QUITE INCORRECT. REFERENCE TO BANK'S CORRESPONDENCE, AND PAGE-9OF IDA'S CO)PLETION REPORT, WILL SHOW THAT KPT WERE IN NO WAY RESPONSIBLE FOR DELAY IN DRAFTING AND AGREEING TERMS OF REFERENCE FOR RAIL

STUDY IN KARACHI AREA. IN FACT, KPT ASSISTED THE IDA IN PREPARING THE DRAFT TERMS, FOR AND ON1 BEHALF OF THE RAILWAYS/GOVERNMENT, AND LATER HELPED IN ITS FINALIZA- TION. FURTHER, CONSULTANTS RECOMMENDATIONS WERE IMPLEMENTED BY THE RAILWAYS. THEY RELATED TO OPERATIONAL PERFORMANCE OF THE RAILWAYS, AND COORDINATION OF OPERATION OF PIPRI MARSHALLING YARD& THETWO PORT BASED RAILWAY YARDS. THEY DID NOT RELATE TO PLANNING/DESIGN OF KPT'S WEST RAILWAY YARD SCHEME, WHICH WAS CONSTRUCTED IN ACCORDANCE WITH THE PLANS PREPARED BY THE KPT, CONFIRMED AND APPROVED BY IDA'S SEPARATE CONSULTANTS, AND FINALLY BY IDA. THE EVALUATION REPORT GIVES AN ERRONEOUS IMPRESSION ON THIS MATTER ALSO.

PAGE - VI - PROJECT RESULTS.

9. CONGESTION CAME BACK TO KARACHI PORT IN 1973, NOT BECAUSE OF ANY PROJECT SHORT- FALL, BUT BECAUSE OF THE DOCK LABOUR BOARD LEGISLATION, WITHOUT CHECKS AND BALANCES, AND ALMOST OVER-NIGHT REDUCTION IN PRODUCTIVITY BY 70% DUE TO LABOUR UNION NEW PRACTICES. THESE HAVE SINCE BEEN SUBSTANTIALLY OVERCOME THROUGH A PROCESS OF PAINSTAKING NEGOTIATIONS, & REMEDIAL MEASURES COMPRISING, INTRODUCTION OF INCENTIVES SCHEME AND LAYING DOWN OF PRODUTIVITY NORMS - A NIGHT-MARE EXPERIENCE OF THE PORT, BUT WHICH HAD NOTHING TO DO WITH PROJECT PERFORMANCE. WITHOUT THESE PROJECTS, THE SITUATION WOULD HAVE BEEN DISASTROUS WITH SIMILAR EFFECTS ON THE ECONOMY OF PAKISTAN - AN UNACCEPTABLE POSITION BY ANY INSTITUTION, THE I,R.R. ON THE OIL JETTY/CHANNEL DREDGING ARE NOT CORRECTLY STATED AND ARE AT COMPLETE VARIANCE WITH THE POST-EVALUATION CARRIED OUT BY KPT AND SUBSEQUENTLY CONFIRMED BY THE BANK TEAM VIDE THEIR LETTER DATED 10.5.79. THE I.R.R.ONTHE CHANNEL DREDGING PROJECT, AS EVALUATED BY KPT WAS 40%, AND IDA WAS 84%. - 20- . ANNEX Page 4 of 13

10. ACCORDINGLY, THE IMPRESSIONS OF PERSISTENT DELAY, RATES OF RETURN AND HENCE CONTROLS ARE MOSTLY ERRONEOUS.

11. THE EVALUATION REPORT IS INCONSISTENT IN ITS COMMENTS ON TARIFFS & FINANCES.KPT'S TARIFF INCREASES IN 1979 WERE STRUCTURED FROM THE RESULTS OF A PRELIMINARY COST-BASED TARIFF PXERCISE USING REVALUED COST OF ASSETS. KPT IS IN A HEALTHY FINANCIAL POSITIONsAND ALL ACTIONS TAKEN BY IT TO MAINTAIN THIS ARE COMMENDABLE. ALL LOCAL CURRENCY FINANCING IS FROM THE PORTS OWN RESOURCES, AND KPT HAS NEVER DEFAULTED IN ITS LOAN/INTEREST REPAYMENTS.TO THE WORLD BANK OR SIMILAR AGENCIES.

12. THE OVERALL IMPACT OF THE PROJECTS WAS THE ELIMINATION OF SHIPPING SURCHARGE, ESTIMATED AT US$ 100 MILLION PER ANNUM, TO THE NATIONAL ECONOMY, AND THE IMRESSIONS OF THE EVALUATION REPORT ON PAGE VI & VII CANNOT BE SUPPORTED. ON THE INSTITUTIONAL SECTOR, RPT RAVE LAID GREAT EMPHASIS ON MANAGEMENT TRAINING, AND ALSO SET-UP A STAFF COLLEGE AS A REGIONAL TRAINING CENTRE, WITH THE HELP OF UNCTAD. BUT ACQUISITION OF MODERN MANAGE- MENT EXPERTISE IS NOT A SWITCH-ON SWITCH-OFF AFFAIR, AND COMES THROUGH HARD GRINDING WITH YEARS OF EXPERIENCE, AND EFFORTS ARE IN HAND FOR INSTILLING THIS IN THE MIDDLE MANAGEMENT. KPT RAVE ALSO SET-UP A SCHOOL FOR TRAINING OF DOCK WORKERS WITH THE HELP OF 10, AND TRAINING AT GRASS-ROOTS LEVEL IS ALSO BEING IMPARTED.

PERFORMANCE MEMORANDUM - PAGE - I - BACKGROUND.

13. PAGE-V OF EVALUATION SUMMARY GIVES THE IMPRESSION OF LARGE COST OVER-RUNS. BUT PARA-3 IN THIS SECTION STATES THAT FOREIGN EXCHANGE SPENT BY KPT WAS MINIMIZED WITH SAVINGS IN CONSTRUCTION COSTS, THE EVALUATION DOES NOT ADOPT A CONSISTENT APPROACH, AND TREATS MATTERS WITH NARROW ISOLATED OPINIONS & CONSEQUENTLY INCORRECT INFERENCES. KPT IS A PUBLIC SECTOR AGENCY, IS OBLIGATED TO FOLLOW ALL PROCEDURES PRESCRIBED BY THE GOVERNMENT, AND THE IDA UNDER RESPECTIVE CREDIT AGREEMENTS; AND DESPITE THE TIME CONSUMING PROCESS IMPLICIT IN THEIR WAE, MAINTAINED A HIGH DEGREE OPCONTROL& MINIMIZED THE INVESTMENT COSTS. ALL ACTIONS WERE TAKEN WITH PRIOR APPROVAL OF IDA, ON CASE TO CASE BASIS, DULY OPTIMISED. PROJECT DELAYS WERE NOT DUE TO THIS, BUT PRIMARILY DUE TO THE FORCE-MAJEURE REASONS EXPLAINED IN PARA-6 ABOVE I.E. HERMES SURETY RESTRICTIONS; UNPRECEDENTED GLOBAL PRICE ESCALATIONS AND THEIR DOMESTIC INFLUENCE; AND BREACH OF TWO MAJOR CONTRACTS BY NCC/CN.

14. THE EVALUATION REPORT IN PARA-6 AGAIN CONFUSES THE WEST RAILWAY YARD SCHEME WITH THE OBJECTIVES OF THE RAIL OPERATION STUDY IN THE KARACHI AREA. THE WEST RAILWAY YARD'S LAYOUT, DESIGN & CAPACITY WAS ANLAYSED ON A COMPUTOR PROGRAMNME, DULY VETTED AND CONFIRMED BY AN INDEPENDENT BANK'S CONSULTANT, PRIOR TO BANK'S ACCEPTANCE AND INCLUSION OF THIS PROJECT IN THE CREDIT SCHEMES. THE RAILWAY OPERATIONS STUDY IN KARACHI AREAS WAS TO IMPROVE OPERATIONAL PERFORMANCE AND STREANLINE PAKISTAN RAIL OPERATIONS IN KARACHI, INCLUDING COORDINATION WITH PORT BASED RAIL MARSHALLING YARDS. CONFUSION ON TIS EXISTS EDHROU0OUTIN THE EVALUATION REPORT. IT IS INCONCEIV- ABLE T0 MARSHALL IPt RAILWAY OPERATIONS FROM PIPRI YARD,WITHUnT PORT BASED WEST RAILWAY YARD, AND THE VERY NOTION IS INCORRECT AND STRONGLY REFUTED. -21- ANNEX Page 5 of 13

15. PARAS-7 & 11 OF THE EVALUATION REPORT INTRODUCE ANOTHER ERRONED. IMPRESSION ON THE CRUDE OIL TERMINAL. ONE OF THE MAJOR FACTORS FOR THE LOCATION OF OIL BERTH OP-IV WAS THE READY EXISTANCE OF THE INFRA- STRUCTURE/TRANSIT TANKAGE FARMS, WHOSE INVESTMENT COST WAS SEVERAL TIMES THE COST OF THE OIL TERMINAL. FURTHER THE 404RP ALL WEATHER NAVIGABLE ACCESS CHANNEL TO THE OIL TERMINAL, WITH MINIMAL CAPITAL & MAINTENANCE COST, AND THE GUARANTEED TECHNICAL SOUNDNESS AND ECONOMIC FEASIBILITY, WERE FACTORS FOR SELECTION OF THIS AS THE OPTIMUM SOLUTION.WHEN THE TOTAL SYSTEMS ANALYSIS IS CONSIDERED, THEN THE IMPRESSIONS IN PARA-7 TILL PARA-11 ARE UNFOUNDED.

10. THE POSITION STATED IN PARA 12 OF CONVERTING 4 BEISTING LIGHTER BERTHS INTO DEEP WATER BERTHS IS INCORRECT. TRE PROJECT RELATES TO THE RECONSTRUCTION OF TWO 100-YEAR OLD LIGHTER BERTHS, AND THE CONSTRUCTION OF TWO NEW BERTHS ALONG THE JUNA BUNDER WATER-FRONT,TO FORM A COMPLEX OF FOUR MEDIUM DRAFT MULTI- PURPOSE/GENERAL CARGO SHIPPING BERTHS. THE TWO KPT PROJECT HAVE ELIMINATED SHIPPING CONGESTION b WAITING TIME OF VESSELS TO ZERO SINCE 1983 - A 0MlEND- ABLE ACHIEVEMENT.

17. THE IMPRESSIONS GIVEN IN PARA 14 ARE AGAIN INCORRECT. THE THIRD AND FOURTH PROJECTS WERE A PART OF THE LONG-TERN DEVELOPMENT PROGRAMMB FOR PROVIDING ADDITIONAL HANDLING CAPACITY FOR DRY & LIQUID CARGOES Al THE PORT. THE MASTER PLAN PREPARED UNDER IBRD LOAN NO. 376-PAR DURING 198-70 ISTABLIBRED THAT THE WEST BAY OF KARACHI PORT HAD THE CAPABILITY OF DEVELOPING AN ADDI- TIONAL 100 SHIPPING BERTHS. THE FEASIBILITY STUDY PREPARED UNDIR UNDP GRANT PAK-55, WITH THE WORLD BANK AS EYSCUTIVE AGENCY, PROPOSED THE CONSTRUCTION OF NEW BERTHS IN THE WEST BAY. PORT OASIM IS PRIMARILY A BULK-CARGO ANDLING PORT. KARACHI IS THE GENERAL CARGO HANDLING PORT OF PAKISTAN, BEING MODERNISED, REMODELLED AND EXPANDED FOR UNITIZATION & CONTAINERISATION, KARACHI PORT HAS A SUPPORTING COMMERCIAL INFRASTRUCTURE,VALUD OVER US$ 3 BILLION, AND TO PUT IN GENERAL CARGO BEATHS/CONTAINER TERMINAL ELSEWHERE IS ECONOMICALLY INCONCSIVE- ABLE. THE EVALUATION OVERLOOKS KEY, WEIGHTY & CONCLUSIVE FACTORS i.ND IS HENCE INCORRECT IN ITS APPROACH.

II - PROJECT IMPLEMENTATION.

18. THE IMPRESSION GIVEN IN PARAS 19 AND 21 IS NOT CORRECT. RPT AND THEIR CONSULTANTS HAD ORIGINALLY NOT'RECOMMENDED PREQUALIFICATION OF N.C.C., CLEARLY OUTLINING THE SHORTCOMINGS IN THEIR CASE. N.C.C. MANAGED TO GET THEMSELVES PREQUALIFIED IN JOINT-VENTURE WITH CERISTIANI & NIELSEN AFTER VISITING WASHINGTON. IDA NEVER HELD THE FOREIGN CONTRACTOR, CHRISTIANI & NIELSEN, RESPONSIBLE FOR THE DELAY. IT WAS KPT WHO PINNED THEM (C&N) DOWN, AND IN THE PROCESS /DISCOVERED THAT THEY HAD SIGNED A SECRET CONSULTANCY AGREEMENT, WITH N.C.C., IN FLAGRANT DISREGARD OF THEIR COMMITMENTS TO THE WORLD BANK, AND IN OPEN BREACH OF oNTRACT SIGNED WITH THE KPT & APPROVED BY THE I.D.A. KPT INFORMED THE IDA IMMEDIATELY ON DISCOVERING THIS POSITION, THEREAFTER A SERIES OF - 22- ' ANNEX Page 6 of 13

KPT ACTIONS, IN CONCURRENCE WITH IDA,ENABLED COMPLETION OF THE WORKS, BY MOBILIZING OTHER AGENCIES, AND PREVENTED PROJECTS FROM BEING FRUSTRATED.

19. THE FIGURES GIVEN IN PARA 22 ARE WRONGLY QOTED, AND RELATE TO THE WHOLE SCHEME WITH CONrAINER PARKS AND FLYOVER. THE COST OF THE KPT RAILWAY MARSHALLING YARD COMPONENT IS $ 0.3 MILLION. THE FUNCTIONS OF THE KPT WEST RAILWAY YARD & THE PAKISTAN RAILWAYS PIPRI YARD ARE QUITE DIFFERENT, AND NOT COMPARABLE. THE KARACHI PORT TRAFFIC CANNOT, REPEAT CANNOT, BE MARSHALLED FROM THE PIPRI YARD LOCATED 20 MILES AWAY .WITTIOUT THE PORT RAILWAY YARDS. THE CONCLUSIONS DRAWN HAVE NO RELEVANCE, ARE INCORRECT, AND LACK UNDERSTANDING OF THE SITUATION.

20. PARA 23. THE BIDDING DOCUMENTS FOR THE OIL JETTY WERE PREPARED UNDER CREDIT 422-PAK. THE DELAY WAS DUE TO UNSATISFACTORY PERFORMANCE OF THE FOREIGN

CONSULTANTS, WHO FAILED TO PREPARE DESIGN & DOCUMENTS IN TIME, FURTHER DELAY WAS CAUSED BECAUSE OF THE HIGH TENDER BIDS RECEIVED, AND THE PAIN- STAKING EFFORTS MADE BYKPT FOR PRICE REDUCTION,AND RESOLUTION OF A FAIR & ACCEPTABLE PRICE, AND DROPPING OF ALL UNACCEPTABLE EXTRA-CONTRACTUAL

CONDITIONS WITH LARGE FINANCIAL IMPLICATIONS FROM THE RECOMMENDED TENDERER. RETENDERING BECAUSE OF THE MIDDLE-EAST CONSTRUCTION GLUT WOULD NOT HAVE RESULTED IN BETTER BIDS. KPT ZWORKED HARD TO MAINTAIN FINANCIAL DISCIPLINE & TO RESOLVE MATTER WITHIN THE

FRAME-WORK OF PROCEDURES PRESCRIBED BY THE IDA AND THE KPT BOARD.

21. THE IMPRESSIONS GIVEN IN PARA 25 ARE AGAIN INCORRECT. THE NEW TRAILING

SUCTION HOPPER DREDGER HAS BEEN SUCCESSFULLY USED FOR THE MAINTENANCE DREDGING OF THE NAVIGABLE APPROACH CHANNEL, AND STABILIZATION OF ITS REGIME.

IT WILL NOW BE USED FOR PROGRESSIVE CHANNEL DEEPENING, IN CONSONANCE WITH

FUTURE REQUIREMENTS OF SHIPPING. THE NUMBER OF 75,000 DWT TANKERS CALLING

ANNUALLY AT THE PORT IS ABOUT 60.THE ACTUAL ANNUAL ECONOMIC BENEFITS FOR DREDGING WORK ASSESSED IN THE ECONOMIC EVALUATION AMOUNTS TO US r 6.5 MILLION.

22. THE IMPRESSION GIVEN IN PARA 27 IS INCORRECT. NO CONTAINER CRANE WAS EITHER

INCLUDED IN THE CREDIT OR RECOMMENDED BY THE I.D.A.TOKPT. THE BASIS OF THIS INFORMATION IS UNKNOWN, AND DOES NOT CO-RELATE WITH THE COMPLETION REPORT PREPARED BY THEI.D.A.STAFFOR KPT.

TARIFF S

23, THE CREDIT AGREEMENTS REQUIRED THE KPT TO REVALUE THE ASSETS FOR TARRIF RESTRUCTURING AND THIS WAS DONE BY KPT. THE STATEMENTS IN PARA 32 ARE

INCORRECT AND THEIR SOURCES UNKNOWN. KPT ALWAYS RESPONDED POSITIVELY TO ALL SUGGESTIONS OF IDA, IRRESPECTIVE OF PROVISIONS IN THE CREDIT AGREEMENT;

AND THIS HAS BEEN AND WILL ALWAYS BE KPT'S MOTTO ON THE ROAD TO PROGRESS. - 23- ANNEX Page 7 of 13

RAILWAY OPERATIONS STUDY.

24. THE RPT AND THE MINISTRY OF RAILWAYS FULLY CO-ORDINATED THEIR VIEWS ON THE RAILWAY OPERATIONS STUDY IN THE KARACHI AREA.AS ALREADY RMPHASISEL, THE RAILWAY OPERATIONS STUDY IN THE KARACHI AREA WAS NEVER INTENDED FOR MODIFICATIONS TO THE WEST RAILWAY YARD. MARSHALLING OF KARACHI PORT RAILWAY TRAFFIC FROM PIPRI YARD IS CONCEIVEABLE, AS THIS IS ABOUT 20 MILES AWAY FROM KARACHI PORT. THE EVALUATION IN PARA 33 IS I' IRRECT AND ITS SOURCE IS UNKNOWN, AND IT CERTAINLY DOES NOT CO-RELATE WITH THE COMPLETION REPORT PREPARED BY THE IDA OR KPT.

25. KARACHI IS THE GENERAL CARGO PORT OF PAKISTAN AND HAS TO CATER FOR UNITIZED CARGOES AND CONTAINERS. QASIM IS THE BULK CARGO HANDLING PORT, AND IS TO PROVIDE SPECIALIZED FACILITIES FOR HANDLING OF ORES, BULK WHEAT AND FERTILIZER. KPT HANDLED WHEAT & FERTILIZER UNDER COMPULSION, AT GENERAL CARGO BERTHS, AS CONSTRUCTION OF (QASIM FACILITIES WAS DELAYED, AND THESE COMMODITIES ARE BEING GRADUALLY SHIFTED FOR BEING HANDLED THERE. IT IS INCORRECT THAT THE BANK SUPERVISION MISSIONS HAD IN ANY REPORT ADVISED KPT TO INSTALL BULK HANDLING FACILITIES; AND THE SOURCE AND BASIS OF THIS INFORMATION IS UNKNOWN.

26, THE CONCLUSIONS DRAWN IN PARA 36 & 37 ARE BOTH CONFUSED AND AGAIN INCORRECT. THE IMPROVISATION PLAN OF 1978-80 WAS IN FULL CONCURRENCE WITH THE IDA. AS A RESULT OF THE PROJECTS, GROWTH OF CONTAINER TRAFFIC WAS AS FOLLOWS:-

1974 TO 1978 - 5,000 TEUS 1978 TO 1979 - 22,000 TEUS 1979 TO 1980 - 40,000 TBUS 1980 TO 1981 - 60,200 TEUS 1981 TO 1982 - 89,500 TrUS 1982 TO 1983 - 124,200 TEUS 1983 TO 1984 - 140,400 TEUS 1984 TO 1985 - 169,400 TBUS 1985 TO 1986 - 244,100 TEUS

27, THE GOVERNMENT HAVE CARRIED OUT A COMPREHENSIVE FEASIBILITY STUDY ON THE INTRODUCTION & DEVELOPMENT OF CONTAINERISATION IN PAKISTAN THROUGH JICA, AND FURTHER ACTION IS BEING TAKEN IN ACCORDANCE WITH THE RECOMMENDA- TIONS IN THE REPORT. KPT HANDLED 240,000 TEUS DURING 1985-86 UNDER THEIR IMPROVISATION PLAN, & THIS AGAIN WILL DEMONSTRATE THAT THE CONCLUSIONS DRAWN TN THE EVALUATION REPORT ARE INCORRECT.

28. THE PRESENTATION GIVEN IN PARA 39 ON GENERAL CARGO HANDLING RATES IS OUTDATED. THE GENERAL CARGO HANDLING hATES ARE NOW 18 TONS PER HOOK PER HOUR, AND DEMONSTRATE THE RESULTS OF KPT'S CONCERTED EFFORTS IN IMPROVING PRODUCTIVITY AND PERFORMANCE, AND RESTORING TO PRE-DOCK LABOUR BOARD LEVELS. - 24- ANNEX Page 8 of 13

III - PROJECT RESULTS.

29. IT IS INCORRECT THAT THE PROJECT APPRAISAL DID NOT CONSIDER THE EFFECT OF INCREASING CONTAINERISATION ON CONGESTION. IN VIEW OF THE FORECAST CONTAINER TRAFFIC, THE PROJECT APPRAISAL EVEN INCLUDED ENGINEERING OF THE NEW CONTAINER BERTHS IN CREDIT 422-PAK, AND LATER DEFERRED AT IDA'J REUEST.

30. AS ALREADY EXPLAINED IN PARAS 8, 14, 19 & 24 ABOVE, THE EVALUATION REPORT IS COMPLETELY CONFUSED REGARDING THE FUNCTIONS OF THE PORT'S WEST RAILWAY YARD & THE PIPRI RAILWAY YARD, AND THE CONCLUSIONS DRAWN ARE THEREFORE NOT CORRECT.

31. THE I.R.R. WORKED OUT BY KPT FOR NAPIER ?OLE BRIDGE PROJECT, AND

FURNISHED TO THE I.D.A., VIDE OUR LETTER DATED 29.10.1977 WAS 33%, WHICH SHOWS THAT THE PROJECT WAS EcONOMICALLY VIABLE WITH A VERY HIGH RATE OF RETURN.

32. SIMILARLY THE I.R.R. WORKED OUT BY KPT FOR THE CHANNEL DREDGING PROJECT AND FURNISHED TO THE I.D.A. VIDE OUR TELEX DATED 21.4.1979 WAS 40%. IN REPLY, THE I.D.A. VIDE LETTER DATED 10.5.1979 STATED THAT THEIR ANALYSIS SHOWED THE X.R.R. AT 84%. THE I.R.R. FOR THE OIL JETTY, CAPITAL DREDGING AND MAINTENANCE DREDGING (I.E. WHOLE PROJECT) WORKS OUT TO 30% AND ANALYSIS INCLUDED IN KPT'S COMPLETION REPORT FURNISHED TO I.D.A. THE OBSERVATIONS IN THE EVALUATION REPORT ARE THEREFORE AGAIN NOT IN ORDER.

33. THE. OBSERVATIONS IN PARA 46 ON THE OIL TERMINAL ARE COMPLETELY INCORRECT, AND OVERLOOK THE FUNDAMENTAL FACTOR THAT JETTY IN ISOLATtON BY ITSELF HAS NO MEANING, AND THE SUPPORTING INFRASTRUCTURE EXISTING AT KARACHI PORT AND REPRESENTING AN INVESTMENT OF US $ 110 MILLION, AND THE ATTRACTIVE NAVIGABLE APPROACH CHANNEL TO KARACHI PORT FOR HANDLING 18,000 DWT TANKERS, ARE PARAMETERS WHICH COMPLETELY CHANGE THE PICTURE, AND ALSO YEILD 30% I.R.R. MAKING THIS A HIGH-PRIORITY SCHEME.

34. THE TWO PROJECTS REDUCED THE SHIP WAITING TIME AT KARACHI PORT TO ZERO, AND ELIMINATED THE $ 100 MILLION PER ANNUM SHIPPING SURCHARGE. THE GENERAL CARGO HANDLING PRODUCTIVITY WAS INCREASED FROM 4 TONS PER HOOK PER HOUR TO 18 TONS PER HOOK PER HOUR. THESE ARE LAUDABLE BENEFITS TO THE PROJECT. THE IMPRESSIONS DEVELOPED & BUILT-UP IN PARAS 53 & $4 OF THE EVALUATION REPORT ARE UNFOUNDED & WITHOUT SUPPORT.

35. THE REFERENCE TO GRAIN SILO FACILITIES & FERTILIZER FACILITIES, IN PARA 54 IS INCORRECT, AS THESE ARE TO BE LOCATED AT PORT QASIM, THE BULK CARGO HANDLING PORT. -25- . ANNEX Page 9 of 13

36. IN SUBSTANCE, IT WILL BE SEEN THAT THE EVALUATION REPORT DOES NOT CO-RELATE WITH THE DATA GIVEN IN THE PROJECT COMPLETION REPORT PREPARED BY THE I.D.A. OR KPT. THE SOURCE OF THE INFORMATION USED IN THE EVALUATION REPORT, AND THE INCORRECT INFERENCES DERIVED IS A MATTER OF SERIOUS CONCERN TO KPT, AND FRUSTRATES THE OBJECTIVES OF SUCH AN EVALUATION, RENDERING IT FRUITLESS.

BB - THE EXPERIENCES, PROBLEMS, LESSONS AND INFERENCES LEARNT BY KPT, ARE IN- CORPORATED VIDE ITEM10 OFTHE KPT PROJECT COMPLETION REPORTS, AND APPEAR TO HAVE BEEN MISSED OUT. IT IS REQUESTED THAT THEY MAY PLEASE BE ADDED AS KPT OR BORROWER'S VIEWS AND ENCLOSED WITH THIS TELEX, WHILE PRESENTING THE CASE TO THE BANK'S BOARD OF DIRECTORS.

WITH PROFOUND PERSONAL REGARDS,

AB ALAM, CHAIRMAN, KARACHI PORT TRUST, KARACHI-2 (PAKISTAN).

Post-copy in confirmation to Mr. Otto Maiss, Acting Director, Operations Evuluation Department, World Bank, Washington DC., U.S.A. A copy of the two appendices referred to in para BB on page 9 of the telex are enclosed for ready reference.

qureshi -26 - ANNEX Page 10 of 13

KARACHI PORT TRUST (PLANNING & DEVELOPMENT DIVISION)

THIRD PROJECT OF KARACHI PORT - I.D.A. CREDIT NO.422-PAK

PROJECT COMPLETION REPORT

EXPERIENCES, PROBLEMS, LESSONS, AND INFERENCES

I) This project was prepared on the basis of comprehensive investigations, well-conducted studies, reliable preliminary engineering and detailed design. Tenders for principal works were invited concu-rent with the date of effectiveness of the Construction Credit. Normally, this project should have been completed according to planned schedule. However, force-majeure and unforeseen factors prevented the accomplishment of planned objectives.

II) Despite overwhelming response from international firms to the prequalification notice, and the prequalification of 15 international firms of good repute, established experience and sound financial resources, only one tender was received due to imposition of 'Hermes' insurance surety restrictions covering political risks. The removal of these restrictions was time-consuming despite efforts of IDA and K.P.T.

III) Though all the extra-contractual conditions in NCC/CN's joint-venture tender, involving large financial implications and possibility of later disputes, were iropped by the Contractor, and joint-venture agreement arrived at between NCC and CN fulfilling IDA's mandatory stipulations, i.e. 50:50 joint-venture agreement, joint and several responsibility, sharing of profits and losses, etc., the joint- venture firms seriously defaulted by signing a secret internal consultancy agreement, in which CN acted as consultants to NCC. This position came to light, late during the contract, when CN were served with a notice to take-over and complete the delayed works. The parties had deliberately committed breach of contract, which in the ultimate refult led to delay in completion of work by four years.

IV) Unprecedented price escalation, which took place during the period 1974-78 due to OPEC price increase and global infiation, led to cost over-runs, but claims were minimised through well drawn-up contracts, clearly limiting and identifying the mechanics of payment for escalation to justified actuals and defining the Contractor's risks.

V) The large diameter pile or cylinder pier foundation, executed by the bentonite displacement method, provided an economical, efficient and elegant foundation solution, and is recommended for more extensive use on bridge projects over rivers and creeks. - 27 - ANNEX Page 11 of 13

VI) Major heavy civil engineering projects require proven construction experience, efficient equipment, trained personnel and sound management, & should not be entrusted to firms lacking these, no matter whatever the national or ex- ternal pressures, as in the end-result the project suffers with heavy economic losses.

VII) To achieve the best for money's worth, well prepared broad-based specifications and international competitive bidding minimises project costs, and is the most appropriate course for such infra-structure projects.

VIII) The foreign exchange content of this project was minimized through the maximum utilization of indigenous materials, personnel and resources, and only heavy civil engineering works involving capital-intensive plant and equipment were tendered for international bidding. This approach should be adopted to improve the economy of all developing countries.

IX) To miiimise the gestation period for projects, design preparation facility/funds should easily be made available for preliminary engineering and detailed design phase in advance of the Construction Credit. This would reduce the quantum of aid in the pipeline for the World Bank, and benefit the borrowing agencies by reduction of un-necessary payments in respect of commitment charges.

( AFTAB ALAM ) GENERAL MANAGER(P&D), KARACHI PORT TRUST. - 28 - ANNEX Page 12 of 13

KARACHI PORT TRUST (PLANNING 4 DEVELOPMENT DIVISION)

FOURTH PROJECT OF KARACHI PORT - I.D.A. CREDIT NO. 492-PAK.

PROJECT COMPLETION REPORT

EXPERIENCES, PROBLEMS, LESSONS, AND INFERENCES

I) The success of a project involving capital dredging, of an entrance approach chanr,!l to the port, in the open sea, and deepening of harbour navigable fairways, for the safe handling of large tankers and vessels, depends on the effi- cacy of designed layout, geometry and the orientation of the channel, for minimizing sedimentation due to littoral drift and wave agitated suspended sediment, and yet accomplishing safe navigation during rough monsoon seas. Cognisant of the pitfalls in such projects, KPT had carried out a comprehensive programme of hydraulic investigations, radio-active isotopes backed proto-type investigations and studies, laboratory analogues, and rigid boundary physical and wave refraction mathematical computor models. The total strategy and overall approach resulted in optimising the final channel design, navigationally safe during rough seas, and minimizing both capital costs and annual sedimentation infill and maintenance dredging costs. This was the cardinal achievement in the success and high econor ic returns of this project.

II) To minimize the maintenance dredging costs, the next key factor was to synchronise the date of building, delivery, trials and commissioning of the maintenance dredger with the date of completion of the capital dredging. This objective was foreseen and successfully accomplished on this project through proper planning and phasing of respective contracts and subsequent vigilant monitoring and control to achieve the critical matching dates.

III) The introduction of new and appropriate technology in developing countries should be supplemented and matched with corresponding ingredients of personnel training, planned maintenance and planned operations procedures. This component, which was envisaged, framed and implemented under the project, has paid dividends. Further, the planned maintenance and planned operations systems, devised on the basis of diagnostic documentation, specially framed and introduced for this project, have paved the way for proper up-keep and maintenance of the dredger and required productivity.

IV) Capital dredging, in view of its magnitude and related time-function, requires large capacity capital-intensive plant and equipment, and as such should be executed by contract from economic considerations. - 29- ANNEX Page 13 of 13

Maintenance dredging, in view of its comparatively limited magnitude and annual recurring time-function, large mobilization and retention cost of contractor's dredging equipment, large annual foreign exchange expenditu-e difficult to justify or secure annually from Government's resources, and heavy risks of claims in the hands of contractors, is economical and advisable for execution departmentally in developing countries.-

V) Marine oil terminal providing oil handliihg facilities to several users, should be equipped with common-user pipelines, of optimum size to maximize through-put rate consistent with tanker pumping capacity, and hence achieve minimum turn-round time of tankers. This concept was envisaged in the planning of this oil terminal and has paid dividends by providing maximum possible berth through-put potential per annum.

VI) To achieve the best for money's worth, well prepared broad-based specifications and international competitive bidding minimises project costs, and is the most appropriate course for such infra-structure projects.

( AFTAB ALAM) GENERAL MANAGER(P&D), KARACHI PORT TRUST. ,v

NtJ - 31 -

PROJECT COMPLETION REPORT

PAKISTAN

THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK and 492-PAK)

I. INTRODUCTION

1.01 Pakstan covers a land area of about 800,000 sq. km. It consists mainly of a flat plain stretching from the foothills of the Himalayas in the northeast to the Arabian Sea in the southwest and is crossed by five large rivers. The country's population, growing at about 3% per annum, is about 83 million and is concentrated in the fertile Indus River bastn. Karachi, the largest city and port, is also Pakistan's main commercial, financial and industrial center.

1.02 Pakistan made impressive progress in the Fourth and Fifth Plan periods covering the years from FY74 to FY83. Following a period of economic stagnation in the early to mid-1970's when growth in gross domestic product (GDP) averaged only 3-4% per annum, goods production 1.1% per annum, and exports were negligible, economic performance improved markedly. GDP growth between FY77 and FY81 averaged over 6% per annum, exports increased 11% per annum in real terms, and value added in industry rose 8.1% per annum. Recovery since 1977 was aided by several factors including favorable weather and absence of droughts, improved export demand, higher domestic demand, rising rural incomes and workers remittances from the Middle East. Restrain- ing influences on economic growth during the Fifth Plan period ending in 1983 included a sharp deterioration in Pakistan's terms of trade following a second round of oil price increases in 1979; world recession; the Afghan crisis; and a continued decline in foreign aid inflow in real terms. 1/

1.03 Karachi is the major port of Pakistan and handles all of the country's foreign trade and goods. A second port, Port Qasim to the east of Karachi, primarily handles coal and ores for a new steel mill, but is also now being used for rice and wheat shipments.

1.04 Total tonnage through Karachi has grown from under a million tons in 1955, to 3.8 million tons in 1964, to 5.1 million in 1972 and to 15.1 million by 1982. During 1983 to 1985 total tonnage averaged 14.8 million. Through- put per berth is one of the highest in the world for break bulk general cargo. Ship waiting time, substantial in the past, has been virtually eliminated. The port is financially sound.

1.05 The Association and the Bank have been involved in financing the expansion of the port since 1955 when Karechi Port Trust (KPT) secured a loan for reconstructing and equipping its 13 general cargo berths (Loan 126-PAK, US$14.0 million). A second loan was made in 1964 to re-equip and construct seven general cargo berths and an oil berth (Loan 376-PAK, US$17.0 million).

1/ "Pakistan: Recent Economic Developments," Report No. 4906-PAK, dated February 24, 1984. - 32 -

1.06 A Project Performance Audit Report (PPAR, No. 1612) on the Second Karachi Port Project was completed in May 1977. The PPAR revealed a number of problems. Late start of construction resulted from delays in appointing consultants and poftponed preparation and issuing of tenders. Lengthy local procurement procedures and changes in project scope also caused delays. Time lost in the employment of local contractors and the assigning of work to a large number of contractors were identified as other problems. Many of these delays were related to attempts by KPT to save foreign exchange through increased local expenditure, and encourage the local construction industry. Trhe attempts were, however, at the expense of early project :ompletion and an early start of benefit flows.

1.07 Some types of problems noted in the PPAR continued to exist in KPT and in the port. Congestion in the harbor, which increased during seasonal and emergency import periods, continued until recent years due to nationwide labor reforms which led to poor labor productivity in 1972 and beyond, and because of a tariff structure which made it cheaper for goods to remain in the port than to remove them for local storage. Delays to shipping led to freight rate surcharges for break bulk general cargo and heavy demurrage on bulk ships. Consequent delays in clearing urgently needed goods imposed a further burden on the economy. Reluctance by the port to secure mechanical handling equipment to reduce waiting time for bulk grain and fertilizer imports (since these commodities were to be shifted to installations at Port Qasim), helped depress operating results.

1.08 As in the earlier loans, the long delay of project implementation deferred the flow of project benefits to the country. This report will focus on the reasons for the delays experienced in completing major project items included in the two credits 422-PAK and 494-PAK.

1.09 In addition to the four port loans and a related engineering credit (S-9; US$1.0 million) the Bank Group has lent over US$460 million, net of cancellations, in the transport sector beginning in 1952, including three loans and credits for highways, four for ports, seven for railways, and four for gas pipeline operations. 1/

1.10 The information in this report is based upon discussions in the field, data drawn from Association documents and files and on a draft completion report and other material provided by KPT.

II. PROJECT PREPARATION AND APPRAISAL

2.01 The Third and Fourth Karachi Port Projects (Credits 422-PAK and 492-PAK) were prepared under an engineering credit. 2/ This credit provided

1/ Four railway projects were located in the former East Pakistan. A fifth gas pipeline was financed under an energy credit.

2/ Credit S-9, US$1.0 million. The credit also included design for four general cargo berths at Keamari but this was deferred in favor of increasing oil berthing capacity. - 33 -

for design and final engineering and preparation of tender documents for constructing four new berths and two transit sheds at West Wharf (Juna Bunder) and for reconstructing the port's main road access, the Napier Mole Road Bridge. The engineering credit also financed studies of remodelling of the West Wharf railway facilities; required marine oil terminal facilities; and the design of a management accounting system. These studies and designs formed the basis for the projects under review.

2.02 Final designs or study reports for all items were available in time for the appraisal of the third port project. During appraisal the Associa- tion concluded that construction of a new oil berth should be deferred. The third port project, therefore, excluded finance of the oil berth and associated dredging. When oil prices rose in 1973, the Government asked that construction of the new oil berth be included in the project so that larger, more economic tankers could be employed. The Association agreed, and, in order not to delay processing of the third project, undertook a separate appraisal of the oil berth, necessary channel deepening, and the procurement of a maintenance dredger as a fourth project.

2.03 The third port project (Credit 422-PAK) was appraised in May 1972. The appraisal recommended a credit of US$18 million for a US$34.2 million project. The project included:

(a) construction of four dry cargo berths, by reconstructing two old lighterage berths and adding two new berths along available Juna Bunder waterfront at the West Wharf, and provision of two transit sheds, open storage areas, and road and rail access, and other ancillary services;

(b) remodelling the West Wharf railway yard, including open storage sheds, a road bridge over railway tracks for port traffic, and ancillary works;

(d) provision of consultant services for:

(i) supervision of construction of the works noted in items (a), (b), and (c) above; and

(ii) detailed engineering of a marine oil terminal and of six dry cargo berths to be located in the Western Backwater. 1/

The credit was approved on June 6, 1973, became effective on December 14, 1973 and closed on June 30, 1981 after two one-year extensions. The anticipated project completion date was June 30, 1978.

1/ A master plan in which these berths were identified was financed by UNDP Project 55-PAK for which the Bank was executing agency. - 34 -

2.04 The fourth port project (Credit 492-PAK) was appraised in August 1973. The appraisal recommended a credit of US$16.0 million for a US$23.9 million project to include:

(a) construction of an oil berth for up to 75,000 dwt tankers at Keamari;

(b) contract dredging of an approach channel to 37 feet;

(d) deepening the approach channel to 40 feet, using the dredger provided by the project, and deepening the area at an existing oil berth; and

(e) consultant services (see also para 3.22) for:

(i) supervision of civil works construction, installation of navigational aids, and dredging of the approach channel;

(ii) specifications for the dredger and supervision of its construction; and

(iii) technical assistance for training in operating the new dredger and in evaluating the results of test dredging.

The credit was approved on May 16, 1974, became effective on October 18, 1974 and closed on December 31, 1981 after two one-year extensions. The anticipated project completion date was September 30, 1976 except for item (d) above, which was expected to be completed by June 30, 1979.

2.05 In the discussion which follows, each project is treated separately regarding its implementation. General conclusions, however, are drawn jointly from the experience of both projects.

III. PROJECT IMPLEMENTATION AND COST

A. Project Implementaton

1. Credit 422-PAK

(a) General

(i) Prequalification

3.01 All goods and services, except for the employment of local contractors by KPT to undertake ancillary works and remodelling of the West Wharf railway yard, were subject to international competitive bidding. With tender documents available for constructing the new Napier Mole Bridge and the Juna Bunder berths and transit sheds (the Juna Bunder project) and with a bill of - 35 - quantities available for the equipment required for the railway yard remodelling, KPT commenced prequalification of supply sources immediately after the credit was signed in July 1973. KPT consultants for the two major works were those who, after prequalification and selection in accordance with Association procedures, had been retained to prepare the tenders under project preparation credit, Creait S-9.

3.02 In January 1974, fourteen contractors were prequalified for construction of the Juna Bunder project. Tender documents stated that bids were due by April 1974. Fifteen international contractors for constructing the Napier Mole Bridge -were also prequalified in January 1974, bids for which were due by July 1974. Bids for railway materials were invited early 1975 (see para 3.18).

3.03 The rapid start on project implementation was, however, frustrated during the bidding process by the following events. Hermes insurance restrictions (see para 3.05) led to repeated requests by bidders for post- ponement of the bid opening date. Furthermore, a Middle East construction boom at this time provided alternative opportunities to bidders at attractive prices.

3.04 Among the firms prequalified for bidding on the Juna Bunder and the Napier Mole Bridge projects was a local company bidding as a joint venture with an international contractor. The local firm was formed in mid-1973 by the Government (50%) and a number of state owned or controlled companies (50%). After initial questioning by the Association concerning prequalification, a representative of the local company visited Washington on January 15, 1974. Following his visit, the Association agreed to prequalification of a joint venture between the local contractor and an acceptable foreign contractor having liability "jointly and severally", for completing any contract financed by the Association. No other conditions were imposed.

(ii) Bidding

3.05 During the bidding process it was learned by the Association that political risk insurance coverage for bank loans of contractors undertaking work overseas had been withdrawn by Hermes, the export credit insurance organization of the Federal Republic of Germany (FRG) due to a FRG dispute with the Government related to financial matters which did not directly affect KPT. Similar action was said to have been taken by other European insurance organizations. As five of the potential bidders were FRG firms and the remaining expected bidders were European and all could be expected to withhold bids in the absence of insurance, this would effectively preclude competition. In response to this situation the dates for bid receipts was extended to September 30, 1974 for the Juna Bunder project and to October 7, 1974 for the Napier Mole Bridge project. At bid opening only one bid was secured for each project: the bid of the joint venture, which, however, had not arranged a joirt venture agreement between the partners which was acceptable to the Association.

3.06 In November 1974, an Association supervision mission learned that adequate insurance cover had been reinstated on September 7, 1974. The Government had been informed earlier but had not informed the Association. - 36 -

It is considered that, in the circumstances, a further extension of the bid opening date for the two tenders might have ensured more competitive bidding, especially as a supervision mission in May 1975 noted that retendering would have been an acceptable alternative for both projects because a proper joint venture agreement had not been achieved.

3.07 On June 4, 1975, some nine months after bids were opened, the Juna Bunder and Napier Mole Bridge projects were let to the joint venture which had finally been formed.

(b) Implementation

(i) Juna Bunder Berths and Transit Sheds

3.08 When the single bid for the works was opened on August 31, 1974 for Rs 179.0 million, including 10% contingencies, it proved to be 60.0% greater than anticipated at appraisal but with the foreign exchange component showing only a 12.0% increase at Rs 71.8 million. KPT and the consultants recommended acceptance of a reduced bid arrived at after discussions with the bidder, and the Association agreed. The bid was held in abeyance until June 1975 during these discussions and awarded to the joint venture for completion in 30 months (January 1978) at a price of Rs 144.1 million, including a 10% contingency, and with a foreign exchange component of Rs 71.8 million. Thus the final price was 28.9% greater than estimated at appraisal with a foreign exchange component 12% greater..

3.09 Plant and imported materials were quickly ordered and piling al.d equipment arrived in December 1975. The contractors, however, had omitted to order temporary piling needed to support the pile driving rig staging from which the permanent piling for the new quay could be driven. After the temporary piles arrived in March 1976, piles were driven in unsuitable positions. The extractor purchased by the contractor without consultant's approval was too light and unable to withdraw the misallocated piles. At this time (May 1976) almost half the contract period had passed without work starting on the permanent structure.

3.10 Supervision of the project revealed that the contractor's responsibilities were poorly carried out and his site organization lacked expertise. He was unable to produce satisfactory results despite guidance and instruction from the KPT consultants. Supervision missions noted this situation but did not recommend discharge of the contractor on the grounds that the work, already much delayed, would suffer further delay.

3.11 Construction proceeded slowly during 1977, the first months of which were somewhat marred by strikes and civil disturbances. By June 1977 only about 30% of the work had been completed. When progress on works did not make further headway, KPT requested the foreign partner of the joint venture to take over and complete the works under the contract. It then came to light that, after signing a 50:50 joint venture agreement between themselves with sharing of profits and losses, the joint venture contractors had also signed a secret consultancy agreement under which the foreign contractor would provide only advisory services and staff to the local partner and be paid appropriate fees and expenses. Consequently, KPT's request to the - 37 - foreign contractor to assume responsibility went unheeded and work continued at a slow pace and then stopped in 1980 due to shortage of funds in the joint venture.

3.12 The financial condition of the local partner of the joint venture was reviewed within Pakistan by an official committee in February 1981. The committee appointed a new general manager to operate the joint venture and to complete the work. Additional cash advances were made to the contractor by KPT. Before the September 1981 date set by the Government for completion of the Juna Bunder works, the Secretary of the Ministry of Communications again intervened due to complaints by KPT. For lack of progress, several more completion dates were passed before the works were put into limited service in June 1982. After clearance of the contractor's equipment from the site and installation of drainage, salt and fresh water lines, lighting, and other ancillary services, the project was completed in July 1983.

(ii) The Napier Mole Road Bridge

3.13 The single bid of Rs 146.85 million including 10% contingencies was opened on September 30, 1974 which was 105% greater than the appraisal estimate of Rs 71.1 million. The foreign exchange component was 25% larger at Rs 35.06 million compared to Rs 28.0 million. After examination by KPT's consultants and a Government Committee of Experts in October 1974 and January 1975, when all technical contractual matters were resolved, a reduced bid of Rs 120.0 million with Rs 34.0 million of foreigp exchange was agreed in July 1975 between the joint venture and KPT. This contract price was 67% higher than estimated at appraisal, with a foreign exchange component increase of 21.4% over appraisal estimates.

3.14 In its request for approval of the lower, revised price for the works, KPT noted that it had achieved a substantial price reduction on the initial bid price and that further reductions were not likely. Furthermore the price was only about 15% greater than its consultant's revised and updated estimate and re-bidding would take some nine months and would likely result in an even higher price. The Association agreed with this view and the contract was signed in October 1975 for completion in 30 months, i.e. April 1978.

3.15 The Association accepted the reduced bid on condition that KPT and the consultants should be "wholly satisfied" that the joint venture had the resources of staff and equipment to carry out the works in the contract period.

3.16 Poor performance by the contractor slowed construction of the works which did not start until November 1976. Delayed shipment of a piling rig for 6 foot diameter piles, the absence of a qualified expatriate resident site engineer (a reflection of the fact that the engineering services contract was not yet signed -- see para 3.21), breakdown of concrete batching equipment, and poor communications between the contractor and KPT, resulted in the works falling substantially behind schedule. In October 1978 a supervision mission stated that the work on the bridge was two years behind schedule. Slow progress continued and in 1980 work stopped due to financial problems within the joint venture (see para 3.12). - 38 -

3.17 A series of meetings similar to those concerning the Juna Bunder contract involving revision of contract completion dates for the Napier Mole road bridge was held by the Government with the contractor, KPT and its consultants. Additional cash advances were made by KPT to the local partner of the joint venture at the request of Government, and when progress did not improve, it was learned that the cash advances had been diverted to a project in Iraq. KPT alerted Government and the contractor was ordered to set a firm completion date. The contractor promised completion within nine months but work dragged on for another eighteen months. Meanwhile KPT retendered for work on bridge revetment, an approach road and ancillary services and these were executed by other local contractors. Work was finally completed a:d the bridge inaugurated on June 8, 1982.

(iii) Remodelling West Wharf Railway Yards

3.18 Tenders were invited in early 1975 and orders for equipment such as track materials, sleepers, piping and valves were placed from June to December 1975 with various manufacturers from Belgium, FRC, Japan, Pakistan, Singapore and the UK. All tenders were awarded to lowest bidders conforming to specifications. These are summarized in Annex 1. Orders for paving services, track laying and ancillary works were placed by KPT with local contractors using KPT procedures agreed with the Association, and work commenced in May 1978. The first contract was for a 10-acre container park and approach roadway. It was completed by a local contractor in December 1979, virtually on schedule. In October 1979 the same contractor started with another area, a six-acre container park and part of the railway yard. This work was completed in late 1980. The final area, also contracted to the same local contractor was completed in September 1983. At appraisal these works were expected to be started simultaneously, and be completed in 18 months. However, the site was occupied by the Juna Bunder Berths contractor as a construction yard for pile preparation, concrete batching plant, workshops and stockpiling of materials. Consequently, the second and third contracts for railway yard work could only be executed when these sites were vacated. Therefore the works took 64 months and were completed 46 months after the completion date expected at appraisal.

3.19 Due to the sharp increases in costs experienced as a result of the oil price increase and the ensuing inflation, procurement of quay cranes and mobile equipment from the credit was cancelled. The Association agreed to the use of ships' gear instead of cranes for handling some cargo and to the provision by KPT of 190 units of mobile equipment. As a result one heavy lift crane, 12 mobile cranes 41 towing units, and 27 forklift trucks were financed through Pakistan-Bulgarian Barter No. 9 and No. 10 during 1979. Following the Government's desire to proceed with the development of Port Qasim, design of four berths to be built in the Western Backwater of Karachi and included n the project appraisal, were deferred until the economic effect on Karachi of constructing and operating Port Qasim could be ascer- tained. This deferral released some Rs 30 million of foreign exchange for other project uses. - 39 -

3.20 A summary of the timing of the main elements of project implementation is given in the table below:

Closing Date Period of Construction (Months)

Appraisal Actual Delay Arpraisal Actual Estimate Finish Months estimate Completion

Road Bridge 6/78 6/82 48 45 67 Juna Bunder 6/77 6/82 60 33 84 Railway Yard 11/79 9/83 46 18 64

(d) Engineering and Consulting Services

3.21 Consultants for assistance in bid evaluation and for construction supervision of the Juna Bunder and Napier Mote Bridge projects were retained by KPT soon after the credit had been approved. The consultants had been selected as design consultants in accordance with the Association's prequalification and selection procedures under Credit S-9. Their work commenced forthwith on the prequalification of contractors but betore they had signed formal contracts with KPT. Signing was delayed because the Government's Central Board of Revenue raised questions about the taxation status of consultant personnel. Consultants for the detailed design of the marine oil terminal, previously retained under Credit S-9, also started work without a contract. All contracts were eventually signed and the relevant work was completed.

(e) General

3.22 A number of agreements included in the credit documentation as side-letters were made between KPT/Government and the Association. These side-letters referred to the implementation of various studies viz% (i) railway operations in the Karachi area; to be completed by Government by March 31, 1975; (ii) KPT dredging operations; to be completed by December 31, 1974; (iii) a new management structure; to be completed by December 1973 and implemented by July 1975; (iv) cost-based tariffs aimed at accelerating stlip turn-around; to be introduced by July 1, 1975. An additional side-letter called for the implementation of the management system prepared under Credit S-9.

3.23 Delays in execution of consultant contracts and by Government in 4rafting and agreeing terms of reference for rail studies in the Karachi area were a source of problems between Government, the Association and the consultants. One dispute between the consultants and KPT is still unresolved. In cases where terms of reference or their interpretation was an issue, the Association made specific proposals for consideration or provided direct assistance to ensure a start on the work. - 40 -

3.24 One example is that of a railway operations study in the Karachi area. Its start was delayed while Government and the railway decided which agency should undertake and pay for the work and, in view of other studies which had been completed, what should be included in the terms of reference. The Association drafted a "scope of work" which, together with assistance from KPT, helped to resolve the impasse. Another example is the case of the study needed to develop cost-based tariffs. In this case the Association retained a consultant on its own account who, on one visit to Karachi, designed the basic elements of such cost-based tariffs and submitted them to KPT. When work was further delayed, the Association again sent its own consultant to provide assistance for a team from Karachi University so that they could commence actual tariff construction. 1/

3.25 The delays in carrying out various studies were deleterious to full implementation of the project. Action on the timed side-letters is summarized below:

Finish Dates

Agreed Actual Delay Date Date Months

KPT Dredging Fleet Study 12/74 12/79 60 KPT Audited Accounts within six for 76/77 on 8/79 20 months of for 77/78 on 7/80 19 June 30 (FY o.nd) for 78/79 on 9/81 21 for 79/80 on 9/82 21 for 80/81 on 3/83 15 New Tariff 7/75 part 7/79 48 Karachi Area Rail Study 3/75 2/78 35

3.26 A review of all actions on covenants and other undertakings is contained in Annex 2.

2. Credit 492-PAK

(a) Prequalification and Bidding -- Oil Berth

3.27 Prequalification of contractors by consultants was completed by late January 1975 and tender documents were issued to 17 bidders in May 1975 for a bid closing in August 1975. These tender documents incorporated a 7-1/2% local preference. Four bids were received from international contractors. In view of the unforeseen and unprecedented price escalation, all bids were

1/ The Association also carried out a staff research study on port pricing, utilizing Karachi as one of the examples. - 41 - held in abeyance while financing sources for channel dredging and dredger procurement were identified.

3.28 When the lowest bidder would not remove certain technical conditions, the pricing of which raised the bid price above that of the second lowest bidder, the contract was awarded to the second lowest bidder who removed all conditions of his bid. After examination by the consultants the contract was let, with the approval of the Association, on June 2, 1976 a few months after the completion date anticipated at appraisal. The lowest evaluated bid was about 30% higher than KPT's updated estimate and included 70% foreign exchange. The contract was let for Rs 104.64 million (Rs 73.25 million foreign exchange) or 69% greater than the Rs 62 million (Rs 36.70 million foreign exchange) estimated at appraisal.

(b) Pregualification and Bidding -- Channel Dredging

3.29 Consultants already prequalified and selected by the Association for UNDP PAK-55 project were retained in November 1976 since they were responsible for hydraulic investigation and sediment transport studies for entrance channels and harbor basins. Fourteen firms of international dredging contractors from four countries were prequalified in November 1977 when the final design was also completed. Tender issue was delayed while KPT sought bilateral aid to pay for part of the anticipated cost overrun. Tenders were issued in March 1978 and bids were opened on June 26, 1978. Fourteen offers from 10 firms in four countries were received and reviewed by consultants. In March 1979, having arranged for Netherlands bilateral aid of DFL 2.6 million to assist in the project, KPT recommended award of the dredging contract to the lowest bidder for a price of Rs 80 million following the withdrawal of extra-contractual conditions by the contractor. The Associa- tion agreed in April 1979 and the contract was signed on July 17, 1979. Of this price Rs 61.78 (US$6.1 million) was for deepening the channel to 37 feet and Rs 18.48 million (US$1.9 million) was for deepening near the oil berth to 40 feet. The bid for dredging was some Rs 23 million, or 40%, greater than the Rs 57.3 million which had been estimated at appraisal.

3.30 Design drawings and tender documents for the dredger, prepared by consultants, retained by those designing the channel deepening, were approved during January 1978. International competitive bids were received from nine prequalified shipyards and were opened on May 15, 1978. The bids were substantially in excess of available credit funds and it was decided to finance the dredger under French Credit 1976-77. After extensive discussions with the Government of France and the French bidder, the latter finally agreed to a price equal to that of the lowest evaluated bid received under international competitive bidding. The total bid was US$14.81 million equivalent of which US$3.921 million equivalent was for training, guarantee engineers, and a dredge master. The bid for the dredger was US$3.0 million equivalent, or 38%, higher than had been anticipated at appraisal. - 42 -

(d) Implementation - Oil "erth

3.31 The international contractors ordered piling and driving equipment which arrived in January 1977. The last pile was driven at the end of September 1977. Civil works, laying of steel pipes, fire fighting towers, loading arms and electrical and mechanical equipment on the causeway approach trestle and loading platfurm were properly scheduled and completed. After testing and completion of a pipetrack, the laying of pipes to connect the oil terminal to the refinery and storage tanks was completed. The works were commissioned on November 29, 1978 when a 38,000 dwt crude oil tanker discharged. The berth was completed 32 months later than anticipated at appraisal, due to the late start. A full 39 foot draft was not available for loading 75,000 dwt tankers until the completion of channel dredging in January 1981.

(e) Implementation - Dredging

3.32 After mobilization and installation of an electronic positioning system, outer channel dredging in Sections I and II was commenced in November 1979 and was well advanced prior to the 1980 monsoon period. Balance areas of the approach channel were completed after the 1980 monsoon. Reclamation of low lying areas, dyke construction, and dredging of the lower harbor (Section III) and a turning cycle was then completed. The new entrance approach channel was commissioned for handling 39 foot draft ships on January 1, 1981.

(f) Implementation - Dredger

3.33 The French shipyard commenced work on receipt of the contract and the dredger hull was launched in mid-March 1980. The completed dredger arrived in Karachi on December 15, 1980, and after final trials was accepted by KPT and commenced maintenance dredging work. The synchronizing of the completion of contract capital dredging and the arrival of the new dredger to undertake maintenance and the remainder of capital dredging is noteworthy.

(g) Summary

3.34 Due to unforeseen global price escalation, there were long delays in getting work started, mainly because of the difficulty of arranging bilateral finance, thus assuring financing of the project. The construction, once underway in the hands of the competent contractors, was undertaken in about the time estimated at appraisal. This is summarized in the table below. Details are given in Table 1. - 43 -

Period of Construction (Mont s)

Appraisal Estimated Actual Delay Appraisal Actual Finish Finish Months Estimate Completion

Oil Berth to 39' draft 3/76 1/81 58 20 30 to 37' draft 3/76 11/78 32 n/a n/a Channel Dredging 11/76 1/81 50 20 17 Dredger 11/76 12/80 49 23 21

(h) Engineering Services

3.35 The design contract for the marine oil terminal was signed in May 1975, although the consultants commenced work prior to this date. In December 1976 a contract for construction supervision was signed. The Lon- tracts for designing the dredging plan and for design of the dredger were signed in November 1976. After construction, disputes arose concerning claims by a contractor and by a consultant. Two disputes, one of which has been referred to arbitration, are still pending. In these instances the Association urged KPT and the claimants to seek a settlement through negotiation.

(i) Changes in Project Scope

3.36 The project appraisal noted that the entrance channel had a limiting depth of 29 feet. This, given the tidal range, limited the port to ships drawing not over about 33 feet (25,000 tons). The project envisaged dredging the entrance and approach channel to 37 feet through a contract and the purchase of a dredger capable of annual maintenance and progressive deepening of the channel eventually to 45 feet. The justification of this depth was uncertain at the time of appraisal. Funds for experimental dredging to test the 45 feet depth were, therefore, included in the project, and indeed, test dredging did establish the feasibility of this depth.

3.37 However, to accommodate broad beam oil tankers of up to 75,000 tons, the approach channel would have to be dredged to a depth of 40 feet only. Therefore, as broad beam vessels were expected to serve Karachi, the Associa- tion agreed with KPT's proposal of a contract for dredging being let to achieve a 40 feet depth in the outer channel and 37 feet in the lower harbor. Progressive dredging to a greater depth at a later date will be undertaken by KPT as circumstances require. - 44 -

B. Project Costs

(i) Credit 422-PAK

3.38 A cost overrun compared to appraisal estimates of 131% occurred for the project with an overrun of 50% in the foreign exchange component. Com- pletion of the Juna Bunder works cost 110% over the contract price. Comple- tion of the Napier Mole Bridge was at a price 27% grecer than contracted. Cost overruns, mainly in local currency, were paid by KPT (see paras 3.41 to 3.43). Details are shown in the table below and the relevant disbursement data is given in Annex 3.

(ii) Credit 492-PAK

3.39 For the project consisting of the oil berths, channel dredging and dredger acquisition, the cost overrun was 64%. Details are shown in the table below and the relevant disbursement details are given in Annex 4.

3.40 A summary of actual and expected project costs and contract amounts for both projects is given in Table 2. Substantial cost overruns were experienced with both projects. These overruns appeared in both foreign and local currency components. The major cause of the overruns was from price increases during the extended construction period. The project period covered years of rapid inflation associated with increased oil prices during which import prices doubled (1972-76) and local prices rose by 76%. 1/

1/ Pakistan's Wholesale Price Index (1969/70 = 100) rose from 170 in 1973/74 to 394 in 1981/82. - 45 -

Estimated and Completed Project Costs of Credit 422-PAK ------(US$ Million)------

Local Foreign Total Change

Dry Cargo Berths & Sheds - Appraisal 5.51 7.43 12.94 - Completed 19.30 11.34 30.64 +137 Remodelling RR Yards - Appraisal 5.63 2.85 8.48 - Completed 21.53 3.39 24.92 +194 Equipment - Appraisal 1.07 2.57 3.64 - Completed /a - 4.67 4.67 + 28 Napier Mole Bridge - Appraisal 4.38 2.88 7.26 - Completed 11.98 3.48 15.46 +113 Consultants - Appraisal 0.48 1.39 1.87 - Completed 0.48/b 2.44 2.92 +56 Re-finance of S-9 - Appraisal - - - - Completed - 0.45 0.45 n/a

Total Project - Appraisal 17.07 17.12 34.19/c - Completed 53.29 25.77 79.06 +131 /a Includes items in Category III(a) and II(b). 7- Estimated unchanged. 7c Contingencies distributed in ratio of item cost to total cost.

Source: KPT and Staff Appraisal Report. - 46 -

Estimated and Completed Project Costs of Credit 492-PAK ------(US$ Million)------

Local Foreign Total Change

Oil Berths and Hoses - Appraisal 2.61 4.16 6.77 - Completed 2.91 7.58 10.49 + 55 Dredging A&B Parts /a - Appraisal 2.47 4.46 6.93 - Completed 4.16 8.15 12.31 + 78 Dredger /b - Appraisal 2.29 7.13 9.42 - Completed 3.93 10.89 14.82 + 57 Consultants - Appraisal 0.15 0.61 0.76 - Completed /c 0.15 1.48 1.63 +114

Total Project - Appraisal 7.52 16.36 23.88/d - Completed 11.15 28.10 39.25 +64

Total both Projects - Appraisal 24.59 33.48 58.07 - Completed 64.44 53.87 118.31 +104

/a US$1.23 million provided by Netherland Credit (DFI 2.6 million). 7- Provided by French credit. 7c Estimated unchanged. 7T Contingencies distributed in ratio of item cost to total cost.

Source: KPT and Staff Appraisal Report.

3.41 The table below shows how the Third and Fourth Port Projects were financed, compared to appraisal estimates:

Financing Plan - Estimated/Actual (in US$'000s)

Port Project Estimate Actual Finance Source Estimate % Actual %

Third 34,190 79,060 IDA 34,000 59 33,967 29 Fourth 23,880 39,250 Foreign Credits - 0 16,050 13 Govt. Grant 2,900 5 - 0 KPT Resources 21,170 36 68,293 58

Total 58,070 118,310 Total 58,070 100 118,310 100

3.42 The above table shows that, upon completion of the projects, KPT had provided from its own resources about US$68 million equivalent towards total costs, rather than the US$21 million estimated at appraisal. At the time of completion, KPT's investments in Government bonds and other securities totalled Rs 290 million (about US$29 million). KPT's investment picture would have been considerably different had the projects been completed on time. - 47 -

3.43 Reference has earlier been made to financing of project items through barter agreements. These bilateral agreements were entered into by the Pakistan government. KPT was not affected by the nature of these agreements as it paid to Covernment in rupees the value of the materials imported under the barter arrangements.

C. Disbursements

3.44 Due to the delays in starting project components, disbursements stretched out four years after the last disbursement period estimated at appraisal in the case of Credit 422-PAK and over two years in the case of Credit 492-PAK. Estimated and actual quarterly disbursement schedules for each credit are given in Annexes 3 and 4. Only small amounts, US$4,709 for Credit 422-PAK and US$28,292 for Credit 492-PAK, were cancelled. A comparison of appraisal and final disbursement schedules is given in Annex S. - 48 -

IV. TRAFFIC AND OPERATIONS

A. Traffic

4.01 Total tonnage over KPT wharves (see Table 3) increased about 50% during the seven-year period 1972/73 to 1979/80 i.e. from 9.5 million tons to 14.6 million tons. Most of the increase was in petroleum products, fertilizer, rice and general import cargo. Exports of dry cargo, however, declined by 12%, showing the effect of reduced exports to the former East Pakistan. The table below shows that in 1979/80 (the year to which appraisal forecasts extend) the combined throughput of dry cargo and POL was very close to the appraisal forecast because the unexpected decline in dry exports had been more than offset by dry cargo imports. The table also shows throughput in 1984/85, the results of which are discussed in para 4.02 below.

Tonnage Handled by KPT (000's)

1971/72 ------1979/80------1984/85 Appraisal Actual Forecast Actual %+/- Actual Dry Cargo Imports 2,785 2,580 5,212 +102% 5,141 Exports 2,383 3,530 2,096 - 40% 1,533 Total 5,168 6,110 7,308 + 20% 6,674

POL Imports 3,512 6,520 5,535 - 15% 6,499 Exports 628 1,110 1,090 - 2% 290 Total 4,140 7,630 6,625 - 13% 6,789

Total Dry & POL 9,308 13,740 13,933 + 1% 13,463

Other Liquid Bulk Imports 87 - 511 761 Exports 174 - 212 674 Total 261 - 723 1,435

GRAND TOTAL 9,569 - 14,656 14,898

4.02 During the five years since 1979/80 (see Table 3 for details) total tonnage handled by KPT rose to 15.1 million tons in 1981/82 and subsequently fell siightly, levelling off at about 14.8 million tons. This small decline can be attributed to growth in traffic at Port Qasim as, in addition to coal, ore, and pig iron, Port Qasim now handles rice and occasionally wheat, two products which were formerly handled only by KPT.

4.03 Port congestion has now been virtually eliminated as a result of the projects, unitization of cargo and improved efficiency of KPT. Ship waiting time has decreased to negligible amounts since 1981/82. Turnaround time, the sum of waiting and service time, declined from 12.5 days per dry cargo ship - 49 -

in 1974/75 when the port experienced a surge of grain imports, to 6.2 days in 1982/83. A good part of this decline in recent years can be attributed to unitization, new labor incentives (para 6.04) and the introduction of road haulage services of the National Logistics Cell (NLC). NLC is operated by the Army and is charged with the dispatch of cargo by truck to inland points. Improved coordination between KPT and Pakistan Railway (PR) and a system of priorities for shipping also proved to be successful. Another important factor which helped reduce congestion was the introduction by KPT of penal charges for prolonged storage of cargo (para 5.01).

B. Productivity

4.04 Quay handling rates for bulk commodities have varied but have averaged a reasonable 3,500 tons per ship per day for wheat and 1,500 tons for fertilizer, usually bagged in the ship's hold before unloading. Under emergency conditions, wheat has been discharged at as much as 11,000 tons per day.

4.05 General cargo handling rates have also shown dramatic improvement since 1972/73, according to KPT statistics. The handling efficiency of gene,:al cargo imports and exports can be measured by tons per cargo hook-hour; the tonnage lifted out of or into the ship's hold per hour. From 4.7 tons per hook-hour in 1972/73, general cargo imports handled had risen to 12.7 tons per hook-hour by 1983/84, an increase of 170% in eleven years. General cargo export productivity,.similarly measured, increased 52% in the same period from 7.7 tons to 11.7 tons. This is primarily due to the projects and the growth of unitized cargo. Overall it can be seen that there has been a significant improvement in the productivity of labor operations. Manning norms and handling costs are currently under examination and discussion with the labor unions, and KPT expects that these efforts will further improve productivity.

4.06 The projects have added sizeable back-of-port container handling and storage areas to the port enabling transit areas to be kept cleared, and giving KPT sufficient resilience to accommodate traffic during peak periods.

4.07 Since 1977/78, total loaded container traffic at KPT has risen 32 times from 3,570 TEUs to 115,480 TEUs in 1983/84 with empties at less than 22% of loaded. With the growth of this more efficient system, and transfer of containers to the railway, to the Lahore Dry Port (an inland freight depot) and to the road network, pressure on port facilities will be further reduced, port efficiency will increase and congestion should remain low. A manual of procedures for the handling, berthing and operation of container vessels has been introduced by KPT which is providing effective control of this traffic.

V. FINANCIAL PERFORMANCE OF THE KARACHI PORT TRUST

5.01 KPT is financially sound and able to sustain a development program without resort to Government grants. Accounts for fiscal 1983/84 (subject to audit) show a healthy debt service coverage ratio of 2.8; a return on net fixed assets in use of 8.7%; a debt/equity ratio of 25/75; and an operating ratio of 82. Financial covenants in the Credit Agreements specify a minimum - 50 -

of 1.5 for debt service coverage and a 7% return on net fixed assets. In order to maintain a healthy position, KPT increased its tariffs substantially in 1979 and, at the same time, discouraged prolonged storage in transit sheds and open storage areas by introducing penal charges. The tariff changes also increased the share of port costs borne by ships which, hitherto, had been disproportionately low. Further tariff increases are expected in 1986, estimated at about 30% of revenues, and such changes will be largely based on the cost of services provided. Accounting staff have been strengthened and a management accounting system introduced. The work of the accounts department is being computerized in phases. One disappointing feature, however, is that the auditing of KPT accounts is now more than two years in arrears (para 5.06).

A. Tariffs

5.02 In 1959 and 1960, a study of KPT operations was undertaken by local consultants to determine the cost of various services and to establish a cost accounting system. Their recommendations were adopted only in part, and a revised and simplified tariff was introduced in 1964. However, this was not a cost-based tariff. Following the devaluation of the Rupee in 1972 from Rs 4.7 to Rs 9 per US$, KPT sought an ad hoc tariff revision which was approved by Government but soon eclipsed by rapidly escalating costs.

5.03 It was not until August 1979 that tariffs were again revised. This revision increased KPT revenues dramatically, with selectively higher increases for storage, and also charges against ships, as the table below illustrates:

OPERATING REVENUES (Rs million)

1978/79 1979/80 1980/81 1983/84 Rs % Rs % Rs % Rs %

Handling 129 39 227 36 245 39 277 36 Storage 141 42 254 41 198 31 237 31 Ship Services 25 8 100 16 122 19 137 18 Property Management 37 11 41 7 66 11 115 15

332 100 622 100 631 100 766 100

By 1980/81 storage revenue had fallen to Rs 198 million as consignees more quickly cleared their cargo from the port to avoid penal charges. This action helped reduce port congestion and ship waiting time. In 1983/84 storage revenues represented 31% of KPT's operating revenue compared to 42% in 1978/79; a notable improvement. Conversely ship services revenues in 1983/84 were 19% of total operating revenues compared to 8% in 1978/79.

5.04 As indicated in para 3.24 above, the Association retained a consultant to assist KPT in developing the basic information for a new tariff. This assistance undoubtedly helped KPT, but did not lead to the implementation of - 51 -

a cost-based tariff. As the 1979 tariff revision substantially increased KPT revenue, the need for further tariff changes could not subsequently be supported on the grounds of financial necessity. However, KPT's operating ratio has now risen to over 82 (it was 63 in 1980) and KPT plans to seek Government approval for a largely cost-based tariff revision in 1986 which is expected to increase overall revenue by about 30%. Since 1979 KPT has increased accounts staff and introduced computerized accounting, and so is better able to undertake more precise tariff revision work.

B. Management Accounting and Audit

5.05 A system of management accounting agreed during negotiations for Credit 422-PAK was introduced on schedule in July 1975 with monthly activity reports and quarterly accounts being prepared for management. The recent introduction of computerized accounting has also improved the capabilities of the accounts department. Audit reports up to 1980/81 consistently reported adversely on discrepancies between physical and accounting records for KPT's stores inventories. The recent computerization of stores records provided an opportunity for the reconciliation of these data, and it is anticipated that future audit reports will be less critical.

5.06 Commercial auditors were engaged by KPT in 1977 and slight progress was made in reducing the delay in prot!ucing audited accounts (see para 3.23). However, in 1982, in accordance with KPT Board's policy of requiring a change of auditors every five years, KPT appointed another firm to conduct the audit. As a consequence there has been a deterioration in progress and to date the latest audited accounts are those for 1981/82, the audit report of which is still not available to the Association. The current auditors expected to have completed the audit of 1982/83 accounts by December 1985 and the 1983/84 accounts by June 1986. However, these have been further delayed by about six months and were not available at the date of this completion report. Conceivably they could be almost up to date by early 1987 at which time KPT would be seeking another firm. The change might again result in further delays unless the choice of a new firm is announced well in advance of the effective date, so that the new auditors can recruit and train sufficient staff to handle the assignment expeditiously.

C. Accounts

5.07 Income and expenditure accounts of KPT for each year during the period 1979/80 to 1983/84 are summarized in Table 4, together with results of 1971/72, the year prior to the approval of Credit 422-PAK and, for com- parative purposes, 1975/76 chosen as representative of the project construction period. KPT's balance sheets for the same years are summarized in Table 5. In addition, appraisal forecasts are shown beside those years for which forecasts were made.

5.08 From 1975/76 to date KPT has achieved all financial targets embodied in the financial covenants agreed at negotiations. Debt service coverage has ranged between 2.7x and 4.5x and the return on net fixed assets in use has ranged between 6.7% and 22.7%, the higher figure occurring immediately after the tariff increases promulgated in 1979. Operating ratios ranged between 63 and 76 until 1983/84 when the ratio rose to 82. The current ratio has also - 52 - been adequate, never falling below 1.2:1. The debt/equity ratio peaked at 26/74 in 1982/83, subseq--ntly declining to 25/75 the following year. These results have been achieved in spite of substantial increases in personnel costs, which were more than offset by tariff increases in 1979 and the traffic growth which occurrcd up to 1981/82. As mentioned earlier, traffic has now levelled off just below 15 million tons and, in the absence of further substantial growth, XPT recognizes that tariff adjustments will probably be necessary in 1986, at which time KPT intends to bring its charges more closely in line with the cost of providir,g port services.

5.09 Brief summaries of Tables 4 and 5 are given below:

Income and Expenditure (Rs million)

Operating Operating Net Operating Net Revenue Expenditure Revenue Income

1971/72 125 80 45 48 1975/76 277 204 73 88 1979/80 622 391 231 217 1980/81 631 439 192 202 1981/82 704 507 197 116 1982/83 700 530 170 160 1983/84 766 628 138 145

Balance Sheet (Rs million)

Net Net Long Fixed Work in Invest- Current Term Assets Progress ments Assets Debt Equity

1971/72 669 - 239 101 266 743 1975/76 808 131 301 135 261 1,114 1979/80 1,062 403 323 54 435 1,407 1980/81 1,183 562 316 56 507 1,610 1981/82 1,319 738 472 95 640 1,984 1982/83 1,283 634 290 450 702 1,955 1983/84 1,633 286 301 477 644 2,033

VI. INSTITUTIONAL DEVELOPMENT

6.01 The port of Karachi has been administered, managed and operated under the Karachi Port Trust Act of 1886 which is the governing legislation. This act set up a board, the Trustees of the Port of Karachi, subject to the control of the Government. Ten trustees represent shippers, ship owners, chamber of commerce and industry (domestic and foreign investors), labor and Government. The Chairman, an eleventh trustee has a three-year term, the others two-year terms. KPT was organized, at the time of appraisal, into - 53 - five functional departments (civil engineering, construction, mechanical and electrical, traffic and port) and four service departments (there are now six), the most important of which were accounting and stores.

6.02 The need for better management accounting and cost-based tariffs indicated that a review of accounting practices should be undertaken. Such a review was carried out under Credit S-9 which prepared the two projects under review. The consultants undertaking the work proposed broadening the responsibilities of the chief accounts officer to include the development and maintenance of management accounts. To accommodate these changes and to simplify KPT's organization, departmental responsibilities should, the consultants recommended, be arranged into: operations, planning, development and research, engineering maintenance, personnel, procurement and supply, finance and acrounts, secreta&cial and internal audit, security and organization and methods. To undertake this and other recommendations, consultants recommended that additional accounting staff should be recruited and that new appointments be made. Given the then relatively low pay scale of KPT, and an exodus of trained manpower to the Middle East due to the oil boom, this proved to be impossible in earlier years and it is only since 1975, when KPT pay increases were introduced, that recruitment of professional staff, including accountants, has proceeded, and the new organization structure has been more effectively implemented.

6.03 Proposals for changes in the management structure of KPT were submitted by KPT to the Government in June 1975, but it was not until May 1977 that four new general managers - for engineering and development, operations, administration, and finance - were appointed. Supervision missions reported their view that these appointments to some extent only placed new labels on existing groups. However, the Association regarded the changes as evidence that the Government was agreeable to improving KPT's administration.

6.04 A number of improvements have indeed resulted. A personnel department was created and manned, and a comprehensive labor incentive scheme for dock workers was introduced to improve productivity. Under this scheme, a minimum tonnage for each of over 100 types of cargo has been fixed for handling in one shift. For any additional tonnage handled, extra payment at overtime rates is paid to dockworkers. These changes contributed to improvements in cargo handling noted earlier (paras 4.02 to 4.04). A planned maintenance and operations system was devised and manuals furnished to the respective departments. These have improved the opet-tional use of KPT craft, equipment and vehicles and helped control maintenance and repair costs.

6.05 The major institutional changes sought through the project were in the improved organization of KPT and its accounting practices. Prior to 1977 the Chairman of the Trustees, as chief executive, personally approved nearly all executive actions and even small expenditures of KPT's nine departments. Very litt'e delegation of power occurred. As the port grew, this centralized system because an inefficient way of managing the port.

6.06 More delegation within KPT does now occur and accounting improvements have been made. However, insofar as KPT's dependence upon governmental control or review is concerned, little has changed. KPT Board's financial - 54 -

powers have still not been enhanced. Proposals for small worka and operational expenditures have to be submitted to Government for sanction, a procedure which is laborious and time consuming. The government auditor continues, to some extent, to duplicate the work of KPT's private auditors, necessitating KPT maintaining certain records in an out-dated format. There is little change, also, in KPT's ability to amend its pay scales, and exercise reasonable autonomy in its day-to-day management and policies.

6.07 Most of the shortcomings could be overcome by expeditious review of the KPT Act of 1886. Its revision is not only long overdue, but has also been expected for some time now. The act is outdated and its early revision by the Government is strongly recommended.

6.08 The Government's policy that speedy assistance to the local contracting industry should be encouraged, probably did not, in the short term, provide net benefits to the country because of the long delay in project completion for Juna Bunder Berths and Napier Mole Bridge. These delays also affected most of the ancillary works, the start of which was dependent on progress of the major contracts. A phased building up of the local construction industry with emphasis on manning by competent professionals, and on the establishment of reasonable financial stability would have produced better results.

VTI. ECONOMIC RE-EVALUATION

A. Credit 422-PAK

7.01 The appraisal's economic evaluation divided the project into two components for analysis. One component consisted of the four proposd new general cargo berths, the associated railway marshalling yard, and new cargo-handling equipment. 1/ The second component consisted of construction of a new bridge to replace the structurally faulty Napier Mole road bridge.

7.02 The benefits of constructing the berths were derived from savings in ship waiting time and from a reduction in the volume of cargo handled by lighters. It was estimated at appraisal that by 1980 10,000 ship-days valued at US$20 million would be saved annually by the project. Without the project, lighterage cargo would increase to about 1.1 million tons per year and would remain at about 300,000 tons when the project was constructed. These savings in lighterage were estimated at about US$1.0 million per year. The estimated economic rate of return of the four berths and associated investments at the time of appraisal was 40%.

7.03 Benefits of constructing the Napier Mole bridge were derived from a comparison of road transport costs with and without the bridge. Extra costs

1/ Th economic evaluation treated the proposed railway marshalling yard and the proposed cargo-handling equipment as integral parts of the four-berth expansion, since without them the four berths could not approach their design capacity. The number of each type of equipment was based on normal requirements, given the mode of operation of the port. - 55 -

without the bridge would result from the longer journey needed to serve the port. These costs were estimated at US$2.1 million per year, compared to the US$6.5 n.1lion estimated for the cost of the new bridge. The economic rate of return on the bridge constructi ti was estimated at appraisal at 16%.

7.04 Re-evaluated project benefits and costs pertaining to the berth component of the project are presented in Table 6. Primarily due to factors such as increased containerization of general cargo, military assistance with port operations, and tariff revisions, port statistics available through 1982/83 indicate that average waiting time per general cargo vessel dropped from 239 hours in 1978/79 to 32 hours in 1980/81. It is significant to note that this reduction occurred prior to the completion of the project in June of 1982. During 1982/83, with the new berth completed, average waiting time per general cargo ship actually increased to 41 hours.

7.05 If average waiting times without the project had remained around 41 hours per vessel since 1982 (a reasonable assumption, given no further growth in port traffic and further containerization), then total waiting time for the 1,276 general cargo ships would be just under 2,200 days per year 1/. (In the absence of actual data, and assuming that the project would have reduced waiting times to zero, then the maximum vessel time savings attributable to the project would be 2200 days per year, less than a quarter of the 10,000 days estimated to be saved at appraisal). If the daily value of vessel time is assumed to be $4,000 per day (twice the daily value estimated for the vessel fleet at appraisal), annual benefits would be $8.8 million. These re-evaluated economic benefits and costs result in an economic rate of return for the berth component of the project of 9.4%, significantly lower than the 40% rate of return estimated at appraisal. The lower rate of return was primarily due to improvement in port operations that occurred while the project was delayed (7.04). While the full extent of operational improvement could not have been foreseen during the appraisal, the trend for increased containerization could have been foreseen. This might have resulted in a staged project, first constructing two berths and then evaluating the need for additional berths.

7.06 The re-evaluated stream of project economic costs and benefits pertaining to the construction of the Napier Mole bridge is presented in Table 7. In the absence of actual traffic statistics for the completed bridge, project benefits were assumed to be $4.2 million annually, double the value estimated at appraisal. 1/ The re-evaluated economic rate of return for the bridge component, based on actual project costs and estimated project benefits, is 14.6%, very c'ose to the appraisal's estimate of 16%. The re-evaluated economic rate of return of the project, including both the berth and bridge components, is 10.5%.

1/ This assumes increases in vessel operating costs due to inflation plus the trend towards the use of larger vessels with higher operating costs.

1/ This assumption may be conservative, due to the increases in dry cargo traffic from time of appraisal (7 million tons in 1981/82 vs. 5 million in 1973) and significant inflation since 1973. - 56 -

B. Credit 492-PAK

7.07 At the time of appraisal, the dilapidated condition of O.P.3 (built in 1910) urgently required its replacement. The potentiL for a berthing accident not only threatened port safety, but would cause serious disruptions to port operations that would have far-reaching consequences for Pakistan's energy sector and overall economy. For these reasons, the appraisal evaluation concluded that to do nothing was not a feasible alternative and the economic evaluation was based on a comparison of the project against the minimum cost alternative of replacing O.P.3 with a similar facility.

7.08 As the project called for the construction of a pier to accommodate tankers up to 75,000 dwt, it was thought to provide roughly three times the potential capacity of the minimum investment alternative. The project would then eliminate the need to construct two additional piers, and these avoided costs were included as project benefits. The other component of project benefits included in the appraisal evaluation was the reduction in tanker operating costs associated with the use of 35,000 dwt and 45,000 dwt tankers as compared with 25,000 dwt tankers. 1/ The economic rate of return was calculated at 23%.

7.09 Corresponding to the delays in the implementation of the project (see 3.34), some of the project costs and nearly all of the project benefits were postponed. The new oil berth, although completed and commissioned in Novem- ber 1978, was unable to accept the larger tankers anticipated in the appraisal until January 1981, when the channel dredging component of the project was completed.

7.10 Project bpnefits pertaining to the avoided cost of two additional berths were most likely obtained starting in 1979, the year after the new large berth was completed. Total liquid bulk cargo through the port in 1979 was 6.7 million tons, well in excess of the estimated 4.5 million ton total liquid bulk port capacity, assuming only the minimal investment for replacement of O.P.3. 1/ The Karachi Port Trust estimated the cost in 1979 U.S. dollars of the additional two berths at $12 million.

7.11 In the KPT economic re-evaluation prepared in September 1983, tanker freight rate savings were estimated at US$6.5 million per year. This estimate was intimated from a telex from the Pakistan Oil Companies/Refinery.

1/ Benefits relating to reductions in vessel waiting time and demurrage charges were not included, apparently as the benefit for avoided additional berths had already captured these benefits.

1/ For the project's one large oil pier to substitute fully for three small piers, the appraisal assumed it would be handling larger tankers (45,000 dwt) with unloading rates more than double that of smaller tankers (25,000 to 35,000 dwt). However, the port handled more than 7.3 million tons of liquid bulk cargo in 1980 (prior to competion of dredging), perhaps by using the new pier as multiple berths for the smaller tankers. - 57 -

The economic re-evaluation using actual project costs and these estimates of project benefits is presented in Table 8. The re-evaluated economic rate of return of the project is 21.7%, very close to the appraisal's estimate of 23%.

VIII. THE ROLE OF THE ASSOCIATION

8.01 The Association spent a good deal of time defining the project, and funds of Credit S-9-PAK were utilized in helping prepare the project. The likely problems in a third Karachi Port project were probably foreseen as a result of the experience with Loan 376-PAK. This loan was still underway in 1970, some six years after its effective date, when Credit S-9-PAK became effective, and in 1973 when Credit 422-PAK was negotiated.

8.02 However, in spite of careful definition of the likely sources of problems, set out by implication in the timed covenants and side letters to the credit documents, the Association was unsuccessful in influencing the speed of project implementation. In hindsight, the signing of consultant contracts prior to approval of tne contracts for construction and prior to approval of lists of prequalified bidders should have been insisted on. Had this been done, more adequate supervision by resident engineers would have been available for the Juna Bunder berths and Napier Mole bridge contracts which might have improved implementation.

8.03 When re-bidding of two major contracts, those for the Juna Bunder berths and Napier Mole bridge, could have been undertaken the Association did not insist that this be done. When the extended bid date for the Juna Bunder contract was reached without an adequate joint venture agreement between the bidders (paras 3.05 to 3.08) re-bidding should have been undertaken because the bidders had not met the Association's condition which allowed them to submit a bid. For the Napier Mole bridge, closer monitoring of the progress towards settlement of the political risk insurance matter (para 3.05) would have provided knowledge to the Association of reinstitution of insurance prior to the bid closing date. Extension of that date would have been possible.

8.04 In summary, one can say that the Association was successful in achieving a restructuring of KPT's organization and its accounting practices, both of which were long overdue; and in having KPT retain independent auditors. It is now apparent that further significant improvements to the organization are likely only if the KPT Act of 1886 is revised to provide port management with more autonomy in routine operations (paras 6.05 to 6.07). The Association's efforts to encourage the Government and KPT to increase the tariff on ships and storage of goods, which caused shipping to pay more towards its proportionate share of port costs, were successful. The results are to be seen in the reduction of shipping delays; in the clearance of cargo from transit areas; and in the financial improvement of KPT. However, some of the improvement was also the result of KPT's efforts in introducing incentives for labor and the role played by NLC in removing cargo (para 4.03).

8.05 The Association was not successful in having KPT complete the physical aspects of the project in a timely fashion, partly because of delays - 58 - in signing consultantso contracts and in negotiating contracts with successful bidders; partly because of the contracting practices noted in para 6.06; and partly because of the time consumed in arranging bilateral finance. It should be noted, however, that most bidders had included conditions in their bids which, if not withdrawn after lengthy negotiation, would have undoubtedly involved expensive claims against KPT at a later date. There- fore, it is conceivable that some of the time consumed in contractual negotiations saved KPT some money.

IX. CONCLUSIONS

9.01 The physical components of the two projects were successfully completed but involved delays of four to five years. In the case of t!he Third Port Project, completion of the works took up to two and one half times as long as had been estimated at appraisal. The Fourth Port Project, once started, was constructed iii about the time estimated at appraisal. Cost increases were substantial because of the effect of the global price increases following the oil price increase of 1973 and because of the effect of high prices received by contractors in the Middle East region.

9.02 The re-evaluated economic rate of return was 10.5% and 21.7% for the Third and Fourth Karachi Port projects, respectively.

9.03 Significant improvements in port productivity were achieved as a result of the projects, the introduction of more effective labor incentives, the work of NLC's road haulage fleet, and the effect of tariff changes on the transit storage of cargo.

9.04 KPT's financial performance has far exceeded that anticipated at appraisal due to tariff changes, increased traffic, and the growth of containerized cargo. KPT managers benefit from a timely flow of physical and cost information produced as a result of the new accounting systems introduced under the project, and recent progress made in computerizing financial and other data.

9.05 KPT has complied with all but one covenant to the credits, but with some delays. While revisions to the ports tariffs were eventually made in 1979, in order to achieve the objectives agreed, KPT has yet to complete work on a revised cost-based tariff.

9.06 The following lessons can be learned from these projects and may be of benefit in the future.

(a) joint ventures wishing to bid on Bank Group projects should be informed that their bids will be rejected as non-responsive unless accompanied by executed joint venture documentation embodying joint and several liability and adequate staff and financing;

(b) the subsequent discovery of any secret agreement between joint venture partners which seeks to void joint and several liability should ipso facto cause the termination of the contract with the borrower with appropriate penalties against the partners; and - 59 -

(c) a condition of disbursement should be that all consultants, contracts are effective and that resident engineers are ready to start work.

(d) given the low ERR of 9.4% (para 7.05) under reasonably generous assumptions in lieu of actual traffic data, it would appear that there was an over-investment in the third project - that perhaps two instead of four berths should have been built and that operational improvements might have been equally effective. - 60 -

ANNEX 1 Page 1

PROJECT COMPLETION REPORT

PAKISTAN

Credits 422-PAK and 492-PAK

Brief Summary of Covenants, Undertakings and Action Taken

Section Project Agreement Status

2.02 (i) BL rd to employ consultants: Consultants were retained. (a) to supervise construction of quay structure and transit sheds (i.e., Juna Bunder); and (b) construction of Napier Mole Bridge.

(ii) To inspect and certify progress Consultants reviewed design with Part III of project (West of yard. Equipment inspection Wharf Railway and Storage Yard). completed.

(i.i) To carry out Part V of project consisting of:

(a) detailed engineering for Draft contract negotiated Western Backwater; December 1974 but implementation kept in abeyance as suggested by IDA in view of Port Qasim project.

(b) study of KPT dredging Tender documents prepared for operations to be done by capital dredging made provision December 1974; for this study in accordance with agreed TOR. Consultants completed work in March 1980.

(c) assistance in implementation Consultants completed their of management accounting assignment June 30, 1976. KPT system; and staff are keeping records in the new format. - 61 -

ANNEX 1 Page 2

Section Project Agreement Status

3.01 (d) Measures to limit oil spill- Completed by December 31, 1981. age and dispose of any spillage.

4.02 Accounts to be audited, certified Audited accounts available copies to be sent to IDA within only upto 1981/82. On average six months of each year end. audited accounts have been 19 months in arrears.

4.03 No investment before closing date Complied with. in cargo handling or port facilities in excess of US$2 million per year other than the investment programs as from time to time agreed between KPT and the Association.

4.04 No new debt to be incurred unless Complied with. net revenue sufficient to cover service 1.5 times.

4.05 Earnings covenant requires return Complied with. of at least 4% on N.F.A. for FYs 1976 through 1981 and not less than 7% thereafter.

4.06 By July 1, 1975 to introduce and Tariff structure still under maintain new tariff structure review. Large increase in aimed at accelerating turn-around rates made in 1979. Further time of ships and to ensure amendments, based on costsp charges for several services will expected in 1986. be not less than direct costs of same.

Credit Agreement Status

2.09 Borrower (GOP) to pay KPT 40% Bridge construction financed of expenditures on Napier Mole solely from KPT and Bridge -- interest free, non- Cr. 422-PAK funds. payable cash grant. - 62 -

ANNEX 1 Page 3

Credit Agreement Status

3.01 (b) Borrower (COP) to relend Observed -- terms are same as $17.75 million of proceeds of for Credit 492-PAK (interest credit to KPT on terms satis- at 7-1/4%, repayment over 20 factory to IDA. Balance of years). $0.25 million to be retained for study of rail services in Karachi area.

3.03 COP to cause Karachi rail study The contract was signed and to be carried out. Study and work commenced October 1976. GOP's recommendations to be Inception report submitted. sent to IDA by March 31, 1975. Draft Study Report completed by June 1977. KPT comments sent to IDA February 22, 1978 and agreed with PR for implementation.

Schedule 3 of Credit Agreement Status

This sets out terms and condi- Complied. tions of the relending of credit proceeds from GOB to KPT--interest at 7-1/4% p.a.; repayment in half yearly installments over 20 years starting from December 1, 1978. KPT has the right to pre- pay without premium.

Side Letters Status

July 19P 1973: Agreed Investment No comment required. Program (1973-1978); see Section 4.03 of Project Agreement.

July 19, 1973: Letter confirming No comment required. that certain Reserve Fund balances are available for project expenditures and stating circumstances in which they would be used.

July 19, 1973: Karachi Rail Study No comment required. is not to duplicate work already done. - 63 -

ANNEX 1 Page 4

July 19, 1973: Confirms KPT's No comment required. intention to (a) adopt and operate a management accounting system, and (b) to reorganize KPT management structure. In both cases based substantially on consultant's report dated May 1972. Furthermore:

(i) By October 1, 1973, Board Implementation started will prepare schedules for July 1, 1975. implementation of management accounting system. Implemen- tation expected to be completed by June 30, 1975

(ii) By December 1, 1973, manage- Four general managers ment structure to be developed, appointed in May 1977 and Changes to be implemented by two new service departments June 30, 1975. created.

July 19, 1973: Refers to GOP's Oil pier constructed. Berths intention to construct fourth oil delayed due to Port Qasim pier and six to eight dry cargo development. Consultants berths in Western Backwater by report available. 1979. Letter also says there w.ll be no large investment at Phitti Creek (Port Qasim) without fully detailed report including evaluation of technical and economic factors. - 64 -

ANNEX 2

PROJECT COMPLETION REPORT

PAKISTAN

THIRD AND FOURTH KARACHI PORT PROJECTS Credits 422-PAK and 492-PAK

Brief Summary of Contracts Awarded for Materials, etc., re: West Railway Yards Project

Permanent Way and Track

- Five valid tenders received February 1975

- Contracts divided into components and let in June 1975 to lowest bidders from UK, Japan, and Pakistan

- Contract price C&F Rs 32.9 million

Hardwood Sleepers

- Nine offers from eight firms received February 1975

- Contract let to Singapore supplier July 1975

- Contract price C&F Rs 9,530,000 for 21,350 cu.ft.

Pressure Pipes

- Seven valid offers received October 1975

- Contract let December 1975 is only offer which covered the sizes specified in the tender

- Contract price C&F Rs 6,629,400

Control Valves and Hydrants

- 18 valid offers from 11 firms in 9 countries received June 1975

- Contract divided into components and let to lowest bidders from Belgium, FRG, and UK in December 1975

- Contract value less than US$100,OOC each - 65 -

ANNEX 3

PROJECT COMPLETION REPORT

PAKISTAN

Third Karachi Port Project (Cr. 422-PAK)

Cumulative Actual and Forecast Disbursement

Appraisal Fiscal Year Actual Estimate ------s 000------

1974 III 706 806 IV 757 2,470 1975 I 788 2,470 II -2,470 III -2,470 IV 900 2,470 1976 I 2,900 2,470 1978 IV 18,000 1978 I 14,200 1980 IV 17,400 1981 I 17,500 II III 17,910 IV 17,940 1982 I 17,950 II 18,000 - 66 -

ANNEX 4 Page 1

PROJECT COMPLETION REPORT

PAKISTAN

Fourth Karachi Port Project (CR. 492-PAK)

Cumulative Actual and Forecast Disbursement

Appraisal Fiscal Year Actual Estimate ------00 ------

1975 I - 25 II - 155 III - 635 IV - 1,710 1976 I - 3,460 II - 5,315 III - 6,735 IV - 9,025 1977 I 1,000 10,905 II 1,000 13,335 III 1,200 14,650 IV 1,900 15,085 1978 i 2,400 II 3,700 15,430 III 5,800 IV 6,600 15,685 1979 I 7,000 II 7,500 15,895 III 7,600 IV 8,100 16,000 1980 I 9,100 II 9,200 III 10,200 IV 12,200 1981 I 15,200 II 15,400 III 15,600 IV 15,700 1982 I 15,900 - 67 - PAKISTAN Annex 4 THIRD AND FOURTH KARACHI PORT PROJECTS Page 2 (Credits 422-PAK and 492-PAK) Progress of Estimated and Actual Disbursements (Millions of U.S. Dollars)

/- &

Credit 422-PAK Appaisal/ 80Estimate Credit 492-PAK9P

70 Estirrae

60 Credit 422-PAK I

Credit 492-PAK: 30I Actual 20I/ / 30- 40-- //--

0- T I Ill IV 1 11I l IV 1 I 1I 11 t I III W I it III V I

1974 175 1976 1977 1978 1979 1980 1981 1982 Year

Woroo Bank -266 - 68 -

ANNEX 5 Page 1

PROJECT COMPLETION REPORT

PAKISTAN

Appraisal and Final Disbursement Schedules

Project Works per SchedL.les Provision Expenditure % of Credit Agreement Made Incurred Change ------(in USs)------

Credit 422-PAK

I. Civil Works included in Part 1(a) 7,000,000 10,444,795 + 47

II. Equipment and Goods 5,700,000 4,672,441 - 18

III. (a) Consulting Services in respect of Parts I-V of the project 970,000 2,256,624 +133

(b) Consulting Services in respect of Part VI of the project (provided to Pakistan Railways) 250,000 173,711 - 30

IV. Refunding of the Engineering Services Credit S-9 PAK 880,000 447,720 - 49

V. Unallocated 3,100,000 - -

TOTAL 18,000,000 17,995,291

VI. Cancelled - 4,709

TOTAL 18,000,000 18,000,000 - 69 -

ANNEX 5 Page 2

Project Works per Schedules Provision Expenditure of Credit Agreement Made Incurred Change ------(in US$)------

Credit 492-PAK

I. Civil Works, Navigational Aids and Dredging included in Part A of the project 2,400,000 7,577,001 +216

II. Equipment and Materials: (a) the dredger provided under Part C of the project 6,000,000 - n/a

(b) other equipment and materials 500,000 - n/a

III. Contract Dredging included in Part B(i) and (ii) of the project 3,400,000 6,915,454 +103

IV. Consultant Services, including Technical Assistance under Part D of the project 600,000 1,479,253 +146

V. Unallocated 3,100,000 -

TOTAL 16,000,000 15,971,708

VI. Cancelled - 28,292

TOTAL 16,000,000 16,000,000 - 70 -

Table 1

PROJECT COMPLETION REPORT

PAKISTAN

THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK AND 492-PAK)

Actual and Expected Project Implementation

% of Works Beginning Completion Completed by Bid Receipt Contract Award of Work of Work Expected Com Component Actual Expected Actual Expected Actual Expected Actual Expected pletion Date

June 8/74 n/a 6/75 n/a 1/76 n/a 6/82 6/77 20-25 (est.) Bunder Road 10/74 n/a 9/75 n/a 1/76 n/a 6/82 6/78 15-20 (est.)

Oil Berth 32 feet 8/75 5/74 2/76 6/74 1/77 9/74 11/78 11/78 0-5

Channel 6/78 7/74 7/79 7//4 11/79 10/74 1/81 1/81 0

West Road Yard /a 6/75 n/a various 5/78 9/83 9/83 30-40 (est.) la As many project elements were the subject of a variety of contracts or were carried out in parts serially, no precise figure can be given. - 71 -

Table 2

PROJECT COMPLETION REPORT

PAKISTAN

THIRD AND FOURTH KARACHI PORT PROJECTS (CREDITS 422-PAK Alio 492-PAK)

Actual and Apraisal Estimates of Project Costs

Actual Cost as a Appraisal Proportion of Actual Cost Contract Estimate of Cost Appraisal Local Foreign Total Amount Local Forein Total Estimate Country US$ US$ Country US$ of Cost Contract Component CurrenSy US$ Equiv. Equiv. Currency US$ Eguiv. % Amount

Dry Cargo Berths & Shed 19.30 11.34 30.64 14.57 5.51 7.43 12.94 237 210

Remodelling PR Yards 21.53 3.39 24.92 n/a 5.63 2.85 8.48 294 n/a

Equipment - 4.67 4.67 n/a 1.07 2.57 3.64 128 n/a

New Bridge 11.98 3.48 15.46 12.13 4.38 2.88 7.26 213 127

Consultants 422-PAK 0.48/a 2.44/b 2.92 n/a 0.48 1.39 1.87 156 n/a

Oil Berth & Hoses 2.91 7.58 10.49 10.58 2.61 4.16 6.77 155 100

Dredging A /c & 8 4.16 8.15 12.31 8.00 2.47 4.46 6.93 178 154

Dredger /d 3.93 10.89 14.82 14.82 2.29 7.13 9.42 157 100

Consultants 492-PAK 0.15/a 1.48 1.63 n/a 0.15 0.61 0.75 214 n/a la Estimated unchanged. T Includes all consultants. 7c US$1.23 million equivalent provided by Netherlands aid is included 7- Provided by French credit.

NB: Contingencies distributed in ratio of item cost to total cost. PROJECT COMPLETION REPORT

THIRD AND FOURTH KARACHI PORT PROJECTS (Credits 422-PAK angd 492-?AKj

Actual and Forecast Traffic 1971/72-1984/85 (in 000's tons)

1975/76 1979180 Actual _ 1971172 Apo. App. Actual F st Actual Forecast Actual 189181 1981182 1 2183 1983184 I-84/85

IMPORTS Dry - Cement nia ala - n/a 612 444 1,302 647 871 722 Fertilizer 195 220 324 450 1,237 1,294 314 692 491 569 Wheat 918 200 1,452 - 654 308 242 213 322 819 Iron & steel 383 440 403 300 608 442 442 426 468 442 Other 1,289 1,450 1,503 1,830 2,101 2,343 2,594 2,814 2,860 2,589 Total 2,785 2,310 3,682 2.580 5.212 4.831 4,894 4,792 5 012 5.141

Liquid - P.O.L. 3,512 4,870 3,769 6,520 5,535 5,598 6,058 6,161 6,483 6,499 Bulk Other 87 n/a 273 n/a 511 608 637 755 917 761 Total 3,599 n/s 4,042 n/a 6,046 6.206 6..695 6.916 7.400 7J26

Total Imports 6,384 n/a 7.724 n/a 11.258 11,037 11,.589 11.708 1.4l 12401

EXPORTS Dry - Rice 414 520 799 680 1,106 1,257 956 606 262 135 Cotton 281 400 206 550 234 328 187 95 27 104 Cement 540 550 100 650 ------Fertilizer - - 3 - 6 21 43 146 215 259 Other 1,148 1,420 783 1,650 750 752 855 1,071 1,176 1,035 Total 2383 2890 1.891 3.530 2.096 2.358 2.041 1.918 1,680 1,53

Liquid - P.O.L. 628 940 383 1,110 1,090 994 1,069 512 280 290 Bulk Molasses 174 n/a 129 n/a 212 265 434 640 379 670 Other - nla - n/a - - 4 10 7 4 Total 802 n/a 512 Z/a 1.302 1,259 1 L507 L62 -_ 666 964 0 Total Exports 3.185 n/a 2,403 n/a 3,398 !,617 3 548 2,346 2,497

GRAND TOTAL 9.569 n/a 10. 127 n/a 14,66 4L,6 4 15. 137 141 14L890 M Comprising1 Dry 5,168 5,200 5,513 6,110 7,308 7,189 6,935 6,710 6,692 6,674

Liquid - P.O.L. 4,140 5,810 4,152 ,630 6,625 6,592 7,127 6,673 6,763 6,789 Bulk Other 261 n/a 402 n/a 723 873 1,075 1,405 1, 303 1,435 ------

Source: KPT and Bank StsfZT PROJECT COMWLETION REPORT

PAKISTAN

"BIRD AND FOURTH KARMHI PORT PROJECTS (Credits 422-PAK and 492-PAK)

Income and Expenditure Accounts 1972-1984 (in million Rupees)

1971/72 1975/76 1979/80 1980/81 1981/82 1982/831 1983/B4 Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual La Actual

Operating Revenues 125 196 277 248 622 263 631 320 704 340 700 766 Operating Expenditure 70 101 172 131 339 141 379 150 438 161 460 547 Depreciation 10 19 32 29 52 30 60 31 69 32 70 81 Total Operating Expenditure 80 120 204 160 39 17 1 439 181 507 193 530 628 Net operating Revenues 45 77 73 88 231 92 192 139 197 147 170 138 Interest on Investments 8 18 24 16 22 15 28 14 29 14 32 37 Other Non-operating Income 13 11 14 11 12 17 Net Revenue 53 95 11O 104 264 107 234 153 237 161 214 122 Interest on Loans 5 25 22 44 47 50 32 55 38 60 54 47 Exchange Loss 83 Net Income 48 10 88 60 217 57 202 116 101 160 145 Operating Ratio 64 61 74 64 63 65 70 65 72 65 76 82 3 Debt Service Coverage 3.8x 2.3x 3.Ox 1.5x 3.6x 1.7x 4.5x 1.8x 2.8x 1.7x 2.7x 2.8x Return on Net Fixed Assets 6.7 7.3 10.9 5.3 22.7Lb 5.2 14.6Lb 7.2 13.Ob 7.4 10.8Lb 8.7

/a Subject to audit. Lb After treating 40% of work-in-pr1ress as assets in use.

Source: KPT and Bank Staff

September 17, 1985 PROJECT COMPLETION REPORT

PAKISTAN

THIRD AND FOURTH KARACHI PORT PROJECTS (Credits 422-PAK and 492-PAK)

Summary Balance Sheets 1972-1984 (in million Rupees)

Tear Ending June 30 1972 _ 976 1980 1981 1982 1983 1984 Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Li Actual a Net Fixed Assets 669 1,160 808 1,705 1,062 1,855 1,183 1,977 1,319 1,996 1,283 1,633 Work in Progress - n/a 131 n/a 403 n/a 562 n/a 738 n/a 634 286 Investments 239 228 301 228 323 218 316 238 472 288 290 301 Current Assets 130 74 222 60 337 62 353 68 428 67 791 782 Total Assets 1,038 1,462 1,462 1,993 2,125 2,135 2,414 2,283 2,957 2,351 2,998 3,002 Less Current Liabilities 29 17 87 9 283 7 297 5 333 5 341 305 Capital Employed 1,009 1.445 1,375 1,984 1,842 2,128 2,117 2,278 2,624 2,346 2,657 2,697 Represented by: Long-Term Debt 266 411 261 690 435 777 507 829 640 797 702 664 Equity and Reserves 743 1,034 1,114 1,294 1,407 1,351 1,610 1,449 1,984 1,549 1,955 2,033

1,009 1,445 1,375 1,984 1,842 2,128 2,117 2,278 2,624 2,346 2,657 2,697 Debt/Equity 26/74 28/72 19/81 35/65 24/76 36/64 24/76 36/64 24/76 34/66 26/74 25/75 P3 Current Ratio 4.4:1 2.5:1 1,2:1 1.2:1 1.3:1_ 2.3:1 2.5:1 M La Subject to audit. Un

Source: KPT and Bank Staff

September 17, 1985 - 75 -

Table 6

PROJECT COMPLETION REPORT

PAKI STAN

THIRD KARACHI PORT PROJECT (Credit 422-PAK)

(Berth and RR Yard Components Only)

Reduced Capital Costs Is Waiting Reduced Maintenance Time Lighter NET Berths & RR Yard Costs AE Savings/c Costs /d BENEFITS

1975 2.00 -2.00 1976 12.40 -12.40 1977 6.40 -6.40 1978 4.50 -4.50 1979 7.00 -7.00 1980 5.40 -5.40 1981 9.50 -9.50 1982 11.30 -11.30 1983 4.10 1.25 8.80 1.00 4.45 1984 1.25 8.80 1.00 8.55 1985 1.25 8.80 1.00 8.55 1986 1.25 8.80 1.00 8.55 1987 1.25 8.80 1.00 8.55 1988 1.25 8.80 1.00 8.55 1989 1.25 8.80 1.00 8.55 1990 1.25 8.80 1.00 8.55 1991 1.25 8.80 1.00 8.55 1992 1.25 8.80 1.00 8.55 1993 1.25 8.80 1.00 8.55 1994 1.25 8.80 1.00 8.55 1995 1.25 8.80 1.00 8.55 1996 1.25 8.80 1.00 8.55 1997 1.25 8.80 1.00 8.55 1998 1.25 8.80 1.00 8.55 1999 1.25 8.80 1.00 8.55 2000 1.25 8.80 1.00 8.55 2001 1.25 8.80 1.00 8.55 2002 1.25 8.80 1.00 8.55 2003 1.25 8.80 1.00 8.55 2004 1.25 8.80 1.00 8.55 2005 1.25 8.80 1.00 8.55 2006 1.25 8.80 1.00 8.55 2007 1.25 8.80 1.00 8.55 2008 1.25 8.80 1.00 8.55 IRR 0.094

/a Annual capital outlays estimated from the Associations total financial disbursements (Annex 3) and KPT's Capital Expenditures Statement of August 19, 1985. These two sources were summed and allocated to the two project components based on the final distribution of project costs (3.40).

A Assumed to be two percent of project costs.

1c Derived from actual average waiting time of general cargo vessels at port in 1982/83 and daily vessel cost at $4,000 per day (twice value assumed in Appraisal Report).

Ld Assumed to be same as in Appraisal Report. - 76 -

Table 7

PROJECT COMPLETION REPORT

PAKISTAN

THIRD KARACHI PORT PROJECT (Bridge Component Only)

Reduced Vehicle Capital Maintenance Operating NET Costs /a Costs /b Costs Jc BENEFITS

1975 0.50 -0.50 1976 3.00 -3.00 1977 1.60 -1.60 1978 1.10 -1.10 1979 1.70 -1,70 1980 1.30 -1.30 1981 2.30 -2.30 1982 2.80 -2.80 1983 1.20 0.62 4.20 2.38 1984 0.62 4.20 3.58 1985 0.62 4.20 3.58 1986 0.62 4.20 3.58 1987 0.62 4.20 3.58 1988 0.62 4.20 3.58 1989 0.62 L..20 3.58 1990 0.2 4.20 3.58 1991 0.62 4.20 3.58 1992 0.62 4.20 3.58 1993 0.62 4.20 3.58 1994 0.62 4.20 3.58 1995 0.62 4.20 3.58 1996 0.62 4.20 3.58 1997 0.62 4.20 3.58 1998 0.62 4.20 3.58 1999 0.62 4.20 3.58 2000 0.62 4.20 3.58 2001 0.62 4.20 3.58 2002 0.62 4.20 3.58 2003 0.62 4.20 3.58 2004 0.62 4.20 3.58 2005 0.62 4.20 3.58 2006 0.62 4.20 3.58 2007 0.62 4.20 3.58 2008 0.o2 4.20 3.58

0-146

/a Annual capital outlays estimated from the Associations total financial disbursements n- 3) and KPT's Capital Expenditures Statement of Augu 19, 1985. These two sources wert summed and allocated to the two project cowponents based on the final distribt,tion of project costs (3.40).

Ak Assumed to be four percent of project costc.

I Assumed to be twice the value estimated at time of appraisal. - 77 -

Table 8

PROJECT COMPLETION REPORT

PAKISTAN

FOURTH KARACHI PORT PROJECT (Credit 492-PAK)

Capital Costs Freight Avoided Maintenance Rate Capital NET Oil Pier Dredginp Costs Savings Costs BENEFITS

1976 2.1 -2.1 1977 4.2 -4.2 1978 2.1 0.1 -2.2 1979 4.3 0.2 3.0 -1.5 1980 14.7 0.2 3.0 -11.9 1981 1.1 6.5 3.0 8.4 1982 1.1 6.5 3,0 8.4 1983 1.1 6.5 5.4 1984 1.1 6.5 5.4 1985 1.1 6.5 5.4 1986 1.1 6.5 5.4 1987 1.1 6.5 5.4 1988 1.1 6.5 5.4 1989 1.1 6.5 5.4 1990 3.1 6.5 5.4 1991 1.1 6.5 5.4 1992 1.1 6.5 5.4 1993 1.1 6.5 5.4 1994 1.1 6.5 5.4 1995 1.1 6.5 5.4 1)96 1.1 6.5 5.4 1197 1.1 6.5 5.4 1998 1.1 6.5 5.4 1999 1.] 6.5 5.4 2000 1.1 6.5 5.4 2001 1.1 6.5 5.4 2002 1.1 6.5 5.4 2003 1.1 6.5 5.4 2004 1.1 6.5 5.4 2005 1.1 6.5 5.4

IRR 0.217

Source: KPT updated Economic Evaluation, September 9, 1983. Revisions to KPT analysis include treatment of dredger capital cost and exclusion of demurrage savings benefits already captured in avoided berth costs, IBRD 10170R1

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