Detailed Economic Analysis. November PNG: Maritime and Waterways Safety Project

Transcription

1 Detailed Economic Analysis November 2012 PNG: Maritime and Waterways Safety Project

2 CURRENCY EQUIVALENTS (as of 5 November 2012) Currency unit kina (K) K1.00 = $0.49 $1.00 = K2.06 ABBREVIATIONS EIRR economic internal rate of return navaid navigational aid NMSA National Maritime Safety Authority NPV net present value PNG Papua New Guinea SAR search and rescue SI sensitivity indicator NOTE In this report, "$" refers to US dollars unless otherwise stated.

3 A. Introduction I. ECONOMIC ANALYSIS OF THE NAVIGATIONAL AIDS 1. The proposed Maritime and Waterways Safety Project (the project) includes the installation or replacement of 132 navigational aids (navaids) located throughout Papua New Guinea (PNG) waters, together with the implementation of necessary institutional, environmental, and safety information initiatives to ensure public safety and long term system sustainability. The project will primarily serve local coastal shipping and regional trade and integration, which have grown considerably in recent years but which face high risks from (i) some heavily travelled but inadequately marked coastal routes, (ii) outdated and inaccurate coastal hydrographic charts and lack of automatic identification systems (hampering search and rescue efforts), and (iii) institutional weaknesses (hampering adequate navaids system maintenance and planning). The project addresses these risks. 2. The economic analysis of the project has considered a variety of development options. Firstly, alternative engineering solutions are evaluated to determine the preferred and least cost technology solution to meet the required safety and efficiency improvements for maritime navigation. The alternative technologies considered include different configurations for on-water navaids (fixed to the seabed vs floating) following a brief consideration of possible more radical developments of maritime safety infrastructure including mandatory universal pilotage. 3. Economic analysis and associated sensitivity analysis has been undertaken of the leastcost option s incremental costs and benefits over a life cycle of 25 years, comparing the withproject and without-project alternatives, presented below. The analysis includes the entire set of 132 new or replaced navaids (for which costs are equivalent) planned to be implemented under the project. A separate subproject analysis of navaids installed along specific routes has not been undertaken, as many of the benefits of maritime safety are national in effect, rather than site-specific. B. Least Cost Analysis 4. Alternative engineering solutions for the navaids component of the sector project are evaluated below to ascertain their suitability to meet the navigational improvement requirements of PNG. Overall, the fixed navaids network in PNG waters, currently installed and planned to be strengthened under the project, has no practical alternative, for two main reasons: (i) manual solutions such as mandatory pilotage throughout PNG coastal waters, apart from being infeasible with respect to current public sector capacity to provide such services, would also require navaids to be installed first; while high-tech solutions such as electronic charting in combination with mandatory electronic navigation systems installed on all vessels in PNG waters would also require navigational beacons (of a particular type) to be installed first; thus neither of these could be considered alternatives to navaids; and (ii) many vessel owners in PNG, especially of smaller vessels, would find a requirement to install electronic navigation systems financially onerous; moreover, all vessel operators along the coast, regardless of vessel size, will benefit from having sight of visual aids (lights and day markers) in addition to beacons and radar reflectors, as a means of confirming safe position. 5. Therefore, in practical terms, navaids alternatives for PNG are limited to different possible configurations of fixed navaids (incorporating lights, day markers, reflectors, and beacons). Two types of fixed navaid are considered below: (i) monopile type, in which a marker is set atop a steel pipe driven into the seabed, and (ii) floating buoy type, in which the marker is

4 2 set atop a steel buoy structure, that is attached to a mooring on the sea floor by a chain. 1 Both types would be protected from corrosion and have a design life of at least 20 years. 1. Alternative 1: Monopiles 6. A monopile is a steel pipe driven to a certain depth into the seabed and extending to a certain height determined by visibility needs above the sea surface, at the top of which is installed the marker apparatus. The pipe is protected from corrosion. Monopiles are limited in the depth of seawater in which they can be installed (up to a maximum of 15 meters, depending on the diameter of the pipe), but all 132 navaids planned under the project are expected to be on sites within such limits. 2. Alternative 2: Floating Buoys 7. A navaid buoy is a stabilized floating steel structure, with the marker apparatus installed on a small platform on top, moored to the seabed by a chain. These are often used in deep water, but can be installed in shallow water also. 3. Conclusions 8. Floating buoys are significantly more expensive to procure, install, and maintain than monopiles. Not including site survey costs (which are common to both alternatives), a typical monopile is estimated to cost kina (K)113,900 installed, and K40,000 per year to maintain, whereas the estimated costs for floating buoys are approximately K403,000 and K60,000 respectively. The present value of life cycle costs for a monopile is K425,000, vs K870,000 for a floating buoy. The monopile configuration has been selected for implementation under the project due to its significantly lower cost. C. Project Costs 9. The project costs for economic evaluation comprise civil works construction costs, lighting and battery equipment for navaids, costs related to establishment of the hydrographic system, expansion of the automatic identification system, community engagement activities, project management and sector institutional support, physical contingencies, and incremental operation and maintenance costs. The costs were derived from the feasibility study and were estimated in financial terms on the basis on unit rates for items of works that reflect experience in past contracts and international experience. The financial cost values have been adjusted to economic values by extracting taxes and duties and by applying conversion factors for local labor of 0.85 and 0.96 for technical non-traded components. Foreign traded goods are adjusted to their local values using a shadow exchange rate factor of 1.1. D. Project Benefits 10. Overall, benefits from the project primarily stem from two key improvements. Firstly, the project will result in significant improvements in the safety and efficiency of common coastal voyages due to improved marking of key routes and in fewer voyage restrictions (such as allowing voyages at night or during times of poor visibility). Secondly, there will be considerable improvements in maritime safety through the provision of updated and accurate hydrographic 1 When navaids are installed on land, a wide variety of configurations is possible. However, all of the 132 navaids planned under the project are to be installed over water.

5 3 charts to vessel operators, improved monitoring and regulation of coastal vessels (particularly those licensed to carry passengers), and improved electronic surveillance of coastal traffic, permitting faster and more effective search and rescue operations. The project will increase the total number of fixed navaids by the installation of 33 new navaids and replace another 99 existing navaids. Full implementation of the technical, institutional, and safety information recommendations of the proposed project will dramatically improve the sustained availability of the network and its effectiveness in protecting the public safety and the viability of coastal shipping. The key economic benefits resulting from the project are summarized below: improved safety for all vessels, both national and international, using common coastal routes in PNG waters and reduced maritime risks of accidents and losses of lives, goods, and equipment; increased passenger capacity and overall convenience resulting from safer, and potentially more frequent vessel services and improved delivery of goods and services to coastal communities that depend on maritime modes of transport; continued support to affected rural coastal communities through an expanded community engagement program; potential reductions in on-board cargo costs due to less-restricted transit through coastal waters; and much improved maritime safety information (hydrographic charts) and more effective search and rescue capacity (including an expanded automatic identification system). 11. In comparison with a land transport project, quantification of the above economic benefits is more difficult. For example, lighting a channel with navaids increases mariner confidence, and may increase vessel travel speed while navigating the channel as well as increase the frequency of voyages through the channel, but quantifying this benefit in real terms is a matter of considerable conjecture. Likewise, increasing the number and availability of navaids within the network from its present state will improve safety and have a significant positive economic impact, but quantification of the improvement is inherently speculative. 12. However, a practical approach has been devised to evaluate the project and demonstrate its economic viability based on an assessment of voyage cost risks (without the project) and of safety improvements. These assessments are presented below. 1. Reduction in Risks to Coastal Shipping 13. Currently, the coastal shipping industry suffers from (i) poorly-marked hazards along direct routes; (ii) inadequate hydrographic charts; (iii) poor institutional capacity within PNG to enforce vessel loading and safety standards; and (iv) lack of adequate electronic support within the National Maritime Safety Authority (NMSA) to mount effective search and rescue (SAR) operations. The proposed project will improve the marking of selected routes and improved hydrographic charts, enabling faster sailings and fewer voyage restrictions. Quantification of this benefit has been performed as follows: (i) estimating the indicative annual risks and associated costs to coastal shipping services in PNG, which include SAR operations, vessel loss or damage (including to the vessel itself and to on-board equipment and cargo), and potential loss of life due to avoidable maritime accidents; (ii) estimating overall risk reduction as a result of the project, and; (iii) performing an economic analysis to determine economic viability of the project gained from the benefit. These are presented below.

6 4 2. Costs of Risks to Coastal Shipping Sector, Without Project 14. The present risk facing the coastal shipping sector including national and international operators in PNG can be estimated as the sum of three economic costs: (i) the annual costs of the NMSA SAR operations, which increase with the risk of maritime accidents; (ii) the annual cost of vessel and material goods damage resulting from avoidable maritime accidents, and (iii) injury and loss of life associated with maritime accidents. 15. SAR operations in recent years have ranged from K K1.0 million per annum. The project will reduce this expenditure by (i) reducing the incidence of maritime accidents and (ii) improving (expanding) electronic surveillance of coastal traffic, reducing search times in the event of disasters. 16. The annual cost of vessel damage and material goods losses due to maritime accidents in PNG coastal waters is not presently known. A current without-project estimate of approximately K6 million per annum (less than 1% of estimated total local vessel annual operating expenditures) is used in the analysis below, increasing in the future at the reported average annual rate of vessel calls to PNG ports between 2007 and In addition, it is conservatively assumed that material goods losses (on-board equipment and cargo) associated with maritime accidents are equivalent to approximately 25% of the sustained direct vessel damage, well below reported international experience Recent NMSA maritime disaster records ( ) indicate that maritime accidents (involving 112 local and 26 international ships and 1,077 passengers) resulted in 36 confirmed deaths over the period and 60 missing and presumed dead, for a total of 96 fatalities in four years. It is therefore estimated that, without the project, deaths from maritime accidents will continue to occur at the rate of approximately 25 per year, increasing over time at the historical rate of population growth in PNG (2.0% per annum). This is a conservative assumption as the accident rate (and the associated fatalities) will in practice increase with the rate of increase of coastal shipping, a market phenomenon which exceeds the rate of population growth. 18. It is assumed that, without the project, the current reported fatality rate from maritime accidents increases steadily by the rate of population growth, i.e., reaching about 45 per year by The value of a human life to be used in analyses of this type is a controversial issue. For present purposes, the value of a year of a person s life saved is expressed as the earning potential of the average person, assumed to be K12,000 per annum (approximately $6,000), constant in real terms over the project life. This value encompasses a weighted average of all futures in terms of individual earnings potential (wages, subsistence, and remittances). The annual amount is applied to a person s 50 working years (ages 16 to 65) and discounted back to the birth of the person using a discount rate of 3%, resulting in a lifetime valuation of approximately K309,000 per life saved (approximately $154,500). This estimate is conservative: a number of studies of the valuation of human life in several countries (including one review of 68 studies conducted in 13 countries 4 ) provide considerably higher estimates. 2 PNG Ports. Calls of international and local vessels exceeding 10 meters in length to PNG ports increased at an average annual rate of 5.4% between 2007 and 2011, while cargo throughput at the same ports increased by 7.3%. 3 See, for example, Maritime Accident Review 2010, European Maritime Safety Agency, and FHWA Freight Performance Measures Page See Miller, Ted R., Variations Between Countries in Values of Statistical Life, Journal of Transport Economics and Policy, Vol. 34 Part 2, London School of Economics and University of Bath, May The review found that typical valuations of life in the studies were 120 times per capita GDP, which in the case of PNG would equate to about

7 5 19. It is noted here that, in the course of coastal maritime disasters, women and girls die in accidents disproportionately, because their water skills are usually not as good as mens' (because girls exposure to activities in the sea as children is less than boys ) and they are often kept below decks with children, making escape from a sinking vessel highly unlikely. Thus improved maritime safety will have a significant gender benefit in terms of lives saved. 3. Quantified Benefits 20. When successfully implemented over a 5-year period, the project will, through a combination of an improved navaids network, better maritime safety information, more effective SAR operations, and better monitoring and regulation of coastal shipping, effectively ameliorate the risks presently faced by the sector, and the annual costs associated with maritime accidents. It is assumed that full implementation of the project will result in at least a 50% reduction in SAR costs, due to improved surveillance capacity. In the first full year of operation of the improved navaids network (2018), savings associated with improved maritime safety are approximately K16.5 million, increasing to approximately K42.6 million per annum by 2042, as population and shipping services grow. The actual benefits are likely to be significantly higher than these figures indicate, as not all vessel movements are included (only those captured in historical NMSA records). 21. The analysis does not take into account the potential for a large maritime accident, such as a passenger ferry, international cruise ship, or oil tanker sinking, both of which could result in major economic costs and tragic human and environmental losses. Conversely, it can be argued that not all maritime accidents can be directly attributable to deficiencies of the navaids, hydrographic charts, SAR, or shipping regulation. The net effect therefore is that there have most likely been a greater number of accidents than those analyzed, which were in some way attributable to navaids deficiency, but that a proportion of those accidents would have occurred anyway, regardless of system effectiveness. For the purposes of analysis, it is assumed that the estimated losses per year of about K16.5 million (including the value of lives lost) from 2018, increasing at the rate of population growth for fatalities and at the rate of growth in vessel traffic for vessel damage and cargo losses, is a realistic estimate of costs that are avoidable by successfully implementing the project. This forms the core of the economic benefits relating to improved maritime safety of the project. 22. Lastly, the project will provide considerable support, in services and cash, to coastal communities. An expanded community engagement program, described in another section of this report, will provide training and awareness services (some of which will focus on women) to communities and will extend payments for land leases of the 132 navaids sites (K2,200 per annum per site) and payments for community asset protection services (K2,000 per annum per site, plus K500 per annum per site as a bonus for successfully protecting the site from vandalism 5 ). These payments, after the 132 navaids have been fully implemented, will constitute approximately a K590,000 annual cash injection into the affected coastal communities, money that will be spent cooperatively on community support activities. K600,000 (US$300,000) per life. See also Shanmugam, K R, Valuations of Life and Injury Risks, Environmental and Resource Economics, Vol. 16, No 4 (2000). 5 In addition to these payments, up to K20,000 will be paid for each navaid replacement site, in respect of lease payments not paid for those sites to date. In the economic analysis, only the payments for asset protection services are included in economic costs, as the other land related costs are rent payments for land that has no opportunity cost.

8 6 E. Calculation of EIRR and NPV 23. The calculation of economic internal rate of return (EIRR) and net present value (NPV) of the project, under the above assumptions, is summarized in Table 2, overleaf. It considers the economic project costs (capital and maintenance expenditures) in comparison with the economic benefits (improvement in transport efficiency and safety improvements) over the planned 25-year period. Results of the analyses indicate that, assuming these parameters, the calculated project EIRR is 14.7%, which exceeds the Bank threshold of 12% for project lending, with a net present value at 12% discount rate of K18.97 million. 24. Sensitivity analysis has tested adverse variations of 20% in the following key parameters: (i) initial costs; (ii) operation and maintenance costs; (iii) avoided SAR costs; (iv) avoided vessel damage costs; (v) avoided loss of life due to maritime accidents; and (vi) direct support to coastal communities. The analysis shows that the project overall remains economically viable (i.e., with positive NPV discounted at 12%) for all adverse variations considered separately, but drops below 12% when all adverse variations are invoked simultaneously (in this case, the EIRR falls to 11.1% and the NPV is K5.77 million when net benefits are discounted at 12%). The most sensitive parameters are found to be: (i) initial costs incurred, with sensitivity indicator (SI) of 1.6; 6 (ii) recurrent operation and maintenance costs, with SI of 1.7; (iii) vessel damage cost avoided, with SI of 3.8; and (iv) value of lives saved, with SI of 2.4. The remaining two benefit parameters, avoided SAR costs and direct support to coastal communities, are not significantly sensitive. The sensitivity analysis results are summarized in Table 1. Test Case Table 1. Sensitivity Analysis (all values are in millions of kina) Test Variation (+/- %) ENPV EIRR Sensitivity Indicator Basecase Parameter Switching Value Switching Value* (+/-%) Base (reference case) % Increases in Costs 1. Initial Costs (Kina m) 20% % % 2. Recurrent O&M Cost 20% % % Decrease in Benefits 3. SAR Costs -20% % % 4. Vessel Damage and Lost Cargo Costs -20% % % 5. Loss of Life due to Maritime Accidents -20% % % 6. Direct Income to Coastal Communities -20% % % Initial Costs Increased (+) and Benefits Decreased (-) 20% (5.77) 11.1% *A "Switching Value (+/-%)" of -100% indicates that reducing the parameter to zero does not reduce the EIRR below the 12% threshold. ( ) = negative, = no data, EIRR = economic internal rate of return, ENPV = economic net present value, O&M = operation and maintenance, SAR = search and rescue. 6 Indicating, for example, that a 10% adverse variation in this parameter reduces the NPV by 27%.

9 Years Investment (Navaids) Safety Information Table 2. Calculation of the Project EIRR and NPV Incremental Costs Maritime Safety Improvement Implementation Services Contingency Allowance Total Investment Costs O&M and Land Lease Total Costs Avoided SAR Costs Avoided VDLC Costs Incremental Benefits Avoided LL Due to Maritime Accidents DI to coastal communities Total Benefits Net Benefits (4.89) (25.29) (19.81) (14.54) (11.51) EIRR 14.7% NPVs ( ) = negative, DI = direct income, EIRR = economic internal rate of return, LL = loss of life, NPV = net present value, O&M = operation and maintenance, SAR = search and rescue, VDLC = vessel damage and lost cargo. Source: Asian Development Bank estimates. 7

10 8 F. Distribution Analysis 25. Though not specifically targeted as a poverty intervention, the project has a significant poverty impact, largely because there is a substantial portion of PNG poor among those who are bearing the risks of unsafe maritime transport that are being addressed by the project. A poverty impact ratio of 0.49 (indicating that 49% of the project net economic benefit accrues to the poor) has been calculated for the project, as shown below in Table 3. Table 3. Distribution and Poverty Impact Analysis 7 Economic Present Value NMSA Vessel Operators Coastal Communities Passengers Government/ Economy Costs Incremental Investment Costs Incremental O&M Costs Benefits Avoided Search & Rescue Costs Avoided Vessel Damage Costs Avoided Loss of Life Due to Maritime Accidents Direct income to coastal communities Net Benefits (104.72) Proportion Poor (%) 0% 10% 35% 25% 10% Net benefits to the poor (10.47) Poverty impact ratio 0.49 ( ) = negative, = no data, NMSA = National Maritime Safety Authority. 26. The project will also contribute to regional cooperation and integration contexts. The economic analysis estimated quantified benefits of all shipping services including international and national in PNG waters. The NMSA maritime disaster records ( ) indicate that maritime accidents involved 112 local and 26 international ships in four years. Hence, the safety benefits accruing the international shipping operators are about 20% of the safety benefits to all shipping operators, or K 15 million, over the planned 25-year period. 27. Although this simple estimation is based on the number of accidents, the number of international shipping services out of all shipping services in PNG may be considered as potential beneficiaries. NMSA says that there are about 45 ship movements per day (16,400 per year) transiting PNG waters in 2012 (this is pure international) and about 6,000 ship calls per year in PNG in 2006 (this is mixture of international and national; there had been no significant increase from 1988 to 2006). Assuming that all 6,000 ship calls are national shipping services and the number is stable, the percentage of international shipping services would be about 70%. Therefore, international shipping operators may get about 70% of the total safety benefits to all shipping operators, or K 52 million, over the period. 7 National Statistics Office Papua New Guinea: Census 2011, Preliminary Figures. Port Moresby.

11 9 G. Risks 1. General Economic Robustness 28. The sensitivity tests indicate that the proposed project is robust in relation to the main economic risks (an increase in capital costs or decrease in benefits). There are, however, other internal risks that should be taken into account including the following: The need to further strengthen the institutional organization for the management and operation of the navigation aids network, including the search and rescue capacity; and The need to mitigate the on-going problem of vandalism. 29. Significant progress in mitigating both of these risks was made in the implementation of the previous navaids project, 8 but further and continuing work is needed. These steps are integral to the project, since they are expected to strengthen the NMSA s capability to provide management and technical expertise and financial resources sufficient in the long term to sustain the network, and to use its resources more effectively to reduce maritime risks, damage costs, and loss of life. The institutional recommendations of the project are highly consistent with government policy. 30. Historically, one of the major causes of the low effectiveness of the existing navaids network has been the high level of theft or vandalism. The sustainability of an effective network requires a substantial and permanent reduction in the level of theft or vandalism. 31. A comprehensive program of community development has been implemented under the previous project and will be further strengthened under the proposed project. Local communities need to continue to be integrated into the navaids program to strengthen a process of mutual benefit and local ownership in the navaids network. Community development consists essentially of the following main steps: Resolution of the outstanding payments due to existing and future leaseholders; The introduction of new leaseholder arrangements; The implementation of community involvement programs, and; The establishment of local Core Groups with a direct responsibility for the local maintenance and monitoring elements of the navaids installations. 32. There appears to be a high level of acceptance to the community-based approach of the previous and proposed projects. It is anticipated that the continuing effort will be successful in substantially and permanently reducing the incidence of vandalism against navaids installations. 2. Non-Quantified Socio-Economic Benefits 33. In the private sector, the main direct beneficiaries from the proposed project will be local ship operators using the main PNG coastal routes and main ports, and passengers and cargo shippers using the operators services. Most of the benefits to these groups will be passed to the private sector of the general economy by passengers and through those engaged in export production and import activities. 8 ADB Project Completion Report: Papua New Guinea: Rehabilitation of the Maritime Navigation Aids System Project. Manila.

12 These economic development benefits will largely accrue to the cash economy, but will include some significant benefit to the rural subsistence economy of PNG. For the government, the project will contribute to the achievement of important economic and transport policy objectives. 35. The main non-quantifiable benefits from the proposed project are generated indirectly through the expected improvements in shipping and passenger services. They include: An increase in the general level of transport accessibility. Throughout PNG, the level of transport services is relatively low with much of the population living in isolated rural villages. Transport accessibility increases national integration and has important economic implications, including: (i) Assisting in the establishment of government administration in the main population areas and improving day to day delivery of government services; (ii) Assisting in the development of the private sector (marketing of cash crops, for example); (iii) Improving health, well being, and national social cohesion; and (iv) Inducing international shipping services such as the cruise ship industry. 9 Whilst per capita income is relatively high, PNG has a relatively low level of human development indicators. The richest 10% of the population account for 40% of total consumption and the poorest 50% for about 20% of total consumption. In the rural areas where 85% of the population live, the social indicators are particularly bad and females are worse off than men. The proposed project will have some indirect poverty reduction aspects (in addition to those indicated in the quantified distribution analysis, see Table 3) including: (i) Its role in bringing about greater transport accessibility; as a result, cash economy activities will further penetrate into the subsistence economy. These include the strengthening of marketing opportunities for coastal villagers and the improved delivery of goods and services (e.g., food, energy, building materials) that are inputs to local production processes; and (ii) Better access to health, education, and other social services. 36. The non-quantifiable benefits of the proposed project stem from its indirect role in creating greater access to transport particularly in the rural subsistence economy. In general terms the proposed project will assist in bringing about a reduction in poverty through its economic development impact. The on-going Community Engagement Program 10 provides work opportunities to local rural communities. 9 According to Radio Australia (25 September 2012), it is estimated that cruise ship operations by the company P&O injected more than $34 million directly into the Pacific economy and more than $20 million indirectly in Community Engagement Program (accessible from the list of linked documents in Appendix 2).