RESTRICTED ReportNo. PT-3a Public Disclosure Authorized TU xeponk for cfa u o by1 Ud WpXaY au* dP»*k ot pom It muynot be pubd, qd esor d t BanWGroup autk BancGoup dono aSp *_ f« thwaoarac comptenascf *. report. INTATIONAL BANK POR RECONSTRUCION AND DVELOPMT INTERNATIONALDEVELOPMENT ASSOCIATION Public Disclosure Authorized APPRAISAL OF THE ZIHUATANEJO TOURISM PROJECT MEXICO Public Disclosure Authorized December 7, 1971 Public Disclosure Authorized Tourism Projects Department CURRENCYEQUIVAIENTS Currency UUnit = Peso US$ 1.00 = 12.5o pesos 1 peso (Mexo) - us$ o.08 1 million pesos u US$ 80,000 UNITS OF WEIGHTAND MEASURES: ?ETRIC Metric: British/USEquivalente m2 = 3.28ft. 1 m = 10.76 sq. ft. 1 km = 0.62mi. 1 km2 = 0.386sq. mi. 1 ha = 2.5 acres 1 m ton = 0.98 lg ton 1.1 US sh ton PRINCIPALABBREVIATIONS AND ACR0TNY1SUBED IDB = Inter-American Development Bank INFRATUR= Fondo de Promocion de Infraestructura Turistica SOP é Secretaria de Obras Publicas SRm - Secretaria de Recursos Hidraulicos ILO = International Labor Organisation RAMSA = Radio Aeronautica Mexicana, S.A. ASA = Aeropuertos y Servicios Auxiliares NACOA Nacional de Combustibles de Aviacion FISCALYEAR January 1 - December 31 APPRAISALOF THE ZIHUATANEJOTOURISM PROJECT TABLE OF CONTENTS Page No. SUMARY i 1. INTRODUCTION 1 2. BACKGROUND 1 A. The Economy 1 B. The Tourism Sector 2 3. THE PROJECT 6 A. Background 6 B. Description 7 C. Fhysical Planning 9 Environmental Factors 10 D. Cost Estimates 11 Amount of the Loan 12 Diabursements 12 Procurement. 13 E. Execution 13 F. Organization for Operation 15 4. SUPPORTINGSERVICES 16 Housing 16 Training 17 5. JUSTIFIChTIOII 17 A. Market Demand 17 B. Hotel Development 19 C. Econonic Justification 20 Economic Return 20 Emiployment and Income E*fects 21 Direct Balance of Paymente Effect 22 6. FINANCIALASPECTS 22 7. RECCMENDATIONS 25 Th$s report is based on the findings of a projeot appraisal misaion consisting of Mesars. Sinmona, Vera, Duarte (Conaultant), Zetter- otrom, Thys, Willians, Menezes, Iizuka, Ru.fini (Central America and Caribbean Department) and Paraud. Desk evaluationa of certain elemente of the project were made by Mesars. Ribi, Le Moigne, Nalkaní and DeLima. -2- Table of Contenta (Cont'd.) STATISTICAL APPENDIX Page No. Tables 1 - 25 28 ANNEXES Annex No. Market Demand 1 Infratur 2 Airport Development 3 Water Supply, Sewerage and Storm Water Draínage Project 4 Economic Justification 5 CHARTS Chart No. Sahedules of Duplementation, Expenditures and Disbursement 1 MAPS Map No. Ixtapa-Zihuatanejo Tourism Project Location and Land Use 1 Existing Zihuatanejo Airport, Topographic Obstructions 2 Coacoyul International Alrport, Master Plan 3 Coacoyul International Airport, Approach Termndal Procedures, Airport Sfrfaces and Terp's Safety Areas 4 i o*¿sv APPRAISAL OF THE' JIHUATANEJOTOURISUI PROJECT STMIARY i. This report appraises a project to provide the infrastructures required for a new tourist resort near Zihuatanejoon MexicoWs Pacific coast (see Map 1). The resort would in ite first atage covering a períod of 8 to 9 years provide 3,500 hotel roorns and 500 single family houses, but its ultinate capacitywjould be about 10,000 hotel rooms and 1,500 houses. The project is one of two now being developedby the Federal Governnent. The Inter-AmericanDevelopment Bank made a loan of US$ 21.5 million in August, 1971, for the second, located on the coast of Yucatan. ji. Internationaltourism has developed rapidly in Mexico in the last decade. Visitor numbers increasedthree-fold over the decade to reach 2.2 million in 1970. Foreign exchange earnings from tourism increasedby 14% annually,more than double the growth in earnings from conmodity exporte. Tourismn is now Mexico's largest single source of foreign exchange earnings. iii. The principal destinations of foreign visitors, apart from bor- der towns, have been Mexico City and Acapulco. Acapulco is already becoming congested and it, like smaller tourist centers on the Pacific coast, suffers from serious deficienciesin infrastructurewhich can be put right only after careful planning ard with heavy investmente. To meet the prospectivegrowth of demand for beach based tourism -- traffic is expected at least to double by 1980 -- the Mexican author- ities selected t'jonew resorts for early development,while the neces- sary planning for Acapulco and other establishedcenters could be pushed forward. iv. The little torm of Zihuatanejois located on the Pacific coast about 180 km north-west of Acapulco. It lies on a deep bay surrounded by green hills. Mountains rise inland and beyond the bay extensive palm-fringedbeaches of fine sand stretch to the north and south inter- apersed with rocky headlands and with a number of emall islands off- shore. The focus of the tourism developmentwill be a beach about 5 km north-west of Zihuatanejo,where there ¡a apace to develop in a setting of great natural beauty, hotels and private homes shopping centers, golf courses, a marina and ancillary facilities. )The proposed project comprises three main components. The first includes the principal infrastructures-- roads and streets, water and sewerage systems, qlec- tric power and telephones -- needed to develop the resort itself.X/The secondconsists of the principal infrastructuresin the tawn which will be developed as a service center for the main resort, but also as a - ii - secondary tourist attraction. The third main component of the project wíll be an internationalairport about 10 km south-eastof Zihuatanejo, designed to cater for non-stop flights from major U.S. cities. The project includes, in addition, provision for training of hotel personnel and for further stud- les of tourist resort areas. v. The justification for the proposed investment in infrastructure ¡a the expectation that private investora will subsequently build hotela and homes. Investnent in hotela in Mexico has yielded attractive returns in the past, and a strong interest in the new development has been expressed by potential developera though no binding cammitmenta have yet been made. There are, however, risks involved in investing in a new resort which rapidly diminish once it ¡e established. In these circumatances, the Fed- eral Government has agreed that it will, if necessary, take steps, includ- ing the provision of finance, to ensure that 750 hotel rooms will be built and operating not later than 1976. vi. The project is estimated to cost US$ 44 million aquivalent, inclucí- lng contingencies. The proposed Bank loan of US$ 22 million would cover 50% of the total project cost. The balance of the required financingwould be provided by the Federal Government. vii. Contracts for constructionand equipment to be financed by the Bank would be awarded after international competitive bídding, except for small civil works contractswhere it ia proposed that national bidding only be required. The foreign exchange componentof the total project cost would depend upon the outcome of internationalbidding. Assuming, however, that Mexican contractorswere to win the major construction contracts, as is likely, the foreign exchange ccmponent of the total project cost would be about 30% or US$ 13.3 million. ViiI. As the project is part of a larger program of investments, includ- ing hotela, ita econmmic evaluation has been made in terma of this larger program. Net benefita would be measured by expenditures of visitors to the resort leas the cost of operating all the facilities, including the hotels, With an estimated economic life of the project of 25 years, the internal econamic return on the whole program would be 13.1%, if labor is valued at prevailíngwage ratea. Since the program would employ many unskilled workers who are now under-employedor unemployed,unskílled labor has been priced at 70% below currentwage rates. On this basis, the internal eco- nomic return would increase to 19.4%. Net foreign exchange earnings are estimated at US$ 36 million in 1980 and US$ 53 million in 1986 when all 3,500 hotel rocis are in full operation. ix. The project la suitable for a Bank loan of US$ 22 million eqt'iva- lent for a term of 25 yeara including a grace period of 5 years. The bor- rower would be Nacional Financiera, S.A. l:EXIcO APPRAISAL OF TIE ZIHUATANEJOTOURISM PROJECT 1. IIlTRODUCTION 1.01 In 1968, the Government of Mexico indicated an interest in obtain- ing assistance from the Bank in financing the infrastructures required for meti tourism developments. Early in 1969 the Government suggested that the Bank consider three sites for developmentalong the Pacific coast -- Puerto Vallarta$S4anzanillo and Zihuatanejo. Subsequently,in the course of project identificationand preparationmissions in 1969 and 1970, agreementwas reachedthat attention should be focussed on one project at Zihuatanejo,located on the coaut about 180 km north-west of Acapulco. 1.02 The project consists of the infrastructurerequired for the devel- opment of a new resort near Zihuatanejowhich in its first atage wifllcom- prise hotels with 3,500 roons and 500 private houses. The infrastructure includea an internationrlairport, roada and streeta, water and sewerage systems, electric power, telephones and ancillary services. 1.03 Due to its complexitythe project has required about two years for its preparation,during iuhichtime it has been substantiallymodified. For the samrereason, an unusual nunber of Bank staff were involved in ita evaluation. The appraisalmission itself consisting of Messrs. Sinmons, Vera, Duarte (Consultant),Zetterstromr, Thys, Williams, Menezes, Iizuka and Ruffini completedits field work in June 1971. Mr. Paraud had earlier evaluated the road elementa of the project. Deak evaluationsof certain elements of tlieproject were made by Mesera. Ribi, Le Moigne, Malkani and DeLima. 1.04 This would be the first Bank loan for tourism in Mexico. 2. BACKGROUND A. The EconopZ 2.01 lMexico has achieved a fast rate of economic graoth (7.1% p.a.) in the past ten years. Ita population of 50 million has been growlng rapidly, by 3.5g annually. The gross domestic product at current market prices was estimated at US$ 34 billion equivalent in 1970 and per capita income at about US$ 670.