Lae Port Development Project (Additional Financing) (RRP PNG 40037-043) REVISED PROJECT COST ESTIMATES A. Revised Project Cost Estimates 1. The revised overall project cost breakdown is shown in Table 1. Table 1: Detailed Cost Estimates by Expenditure ($ million) 2007 2010 Increase 106.93 1.53 0.96 109.42 231.37 1.53 0.96 233.86 124.44 0.00 0.00 124.44 Land Acquisition Compensation and Relocation Livelihood and Social Protection HIV/AIDS Prevention Consulting 1. Support to PMU 2. Construction Supervision 3. Housing Construction Supervision 4. Audit Fees Sub Total (F) 1.49 0.31 1.50 0.75 1.49 0.31 1.50 0.75 0.00 0.00 0.00 0.00 2.94 6.00 0.50 0.13 9.57 2.94 6.00 0.50 0.13 9.57 0.00 0.00 0.00 0.00 0.00 Training Contingencies a 1. Physical for Port Facilities 2. Contingencies (A2, C and F3) b 3. Price Contingencies for Port Facilities Sub Total (H) Total Project Cost BEFORE Financial Charges 0.03 0.03 0.00 16.47 0.38 8.90 25.75 24.29 0.38 10.41 35.08 7.82 0.00 1.51 9.33 148.82 282.59 0.56 4.62 5.18 0.42 8.40 8.81 (0.14) 3.78 3.63 Total 154.00 291.40 PMU = project management unit. a Physical contingencies estimated at around 15%. b Price contingencies computed at 1.2% of foreign exchange and 3.2% on local costs. Note: Numbers may not seem precise because of rounding. Source: Asian Development Bank and Government estimates. 137.40 A. B. C. D. E. F. G. H. I. Item Civil Works 1. Port Facilities 2. Resettlement Housing Construction 3. Canoe Landing Site Development Sub Total (A) Financial Charges 1. Commitment Charge 2. Interest during construction (IDC) Sub Total (I) 2. The required additional financing results from cost overruns (input price increases and US dollar depreciation) and from design modifications to the overall project. The total cost of the overall project has increased by $137.4 million, from $154.0 million in 2007 to $291.4 million in 2010 (89%). The increase comprises $124.44 million relating to civil and other works, $9.33 million for contingencies, and $3.63 million for financial charges. The cost of civil and related works has increased from $109.42 million in 2007 to $233.86 million in 2010. The 2010 costs have been confirmed by the four conforming tender bids received and evaluated by the project executing agency, the Independent Public Business Corporation (IPBC). The cost increases excluding contingencies and financial charges result from several factors, as summarized in Table 2. 2 Table 2: Cost Increase Factors Factors $ million % a Input price increases 62.46 50% b US dollar Depreciation 38.17 31% Design Modifications 23.81 19% Total 124.44 100% a Design items included in the 2007 RRP. b Depreciation of US dollar against Kina ($1=K2.797 in the 2007 RRP compared with $1=K2.299 as of 30 June 2011). Source: Asian Development Bank and Government estimates. B. Cost Overruns 3. Input price increases. Since project appraisal in 2007, historically unprecedented economic developments in Papua New Guinea (PNG) as well as extreme economic fluctuations globally have combined to inflate the US dollar costs of port facility construction. Cost inflation during the 3 years of pre-construction project implementation raises the cost of the overall project as designed in 2007 by $62.46 million. The project implementation delay was due to relocation negotiations with people living on the project site. The time needed to reach agreement and execute the relocation plan coincided with a period of unusual growth and cost escalation in PNG. 4. The buoyant PNG economy, which grew at an average rate of 7% from 2007 to 2010, is facing severe supply-side constraints that are inflating prices across the economy. Cumulative inflation in PNG between the end of 2007 and the end of 2010 is officially estimated to be around 25% but it is widely recognized that official consumer price index data significantly underestimates actual inflation.1 Inflationary pressures have been particularly acute in the construction sector, with official figures showing that construction prices grew by 35% between end 2007 and end 2010.2 5. Capacity constraints in the construction sector result largely from the on-going construction of a $15 billion liquefied natural gas project and its spillover effects across the economy. The sector has shown limited capacity to expand in response to the massive increases in the demand due to port congestions, regulatory impediments, and perceptions that PNG offers a high risk operating environment due to the country’s poor law and order situation. Employers report shortages of skilled labor, and port and construction companies are operating at close to full capacity. In particular, strong demand for the limited supply of contractors in PNG is leading to rising contractor rates for engineering, construction, and transport services. Furthermore, these effects are particularly strong in the Lae area through which most supplies of construction material, equipment and processing pass to the gas extraction plant and pipeline. The official consumer price index in the Lae urban area grew by 33% between the end of 2007 and the end of 2010, well above the national average.3 1 2 3 International Monetary Fund. 2011. Country Report No. 11/117 Papua New Guinea: Papua New Guinea Staff Report For The 2011 Article Iv Consultation (Table 1 Selected Economic and Financial Indicators, 2007–11 table, page 22). Washington, D.C. assesses PNG’s official consumer price index. Survey data collected by the Bank of Papua New Guinea indicates average growth in rental prices of 16.5% between 2005 and 2010, but rental prices are not incorporated in the index calculation. Government of PNG (Department of Finance and Treasury). 2011. National Budget 2011. Port Moresby. Bank of Papua New Guinea. 2011. Quarterly Economic Bulletin Statistical Update, Table 9.3 (online). http://www.bankpng.gov.pg/. Accessed on 20/09/2011. 3 6. The unit rate cost increases are mostly associated with dredging and reclamation design items in the 2007 Report and Recommendation to the President. Increases are summarized in Table 3, along with an aggregation of rate cost increases for all other 2007 design items. Table 3: Construction Input Price Increases A. B. Civil Works Design Items Excavation Dredging and Reclamation 1. Tidal Basin - 47% rate increase 2. Yard area - 47% rate increase 3. excavate suitable material - 120% rate increase 4. dredge suitable material TSHD/CSD - 335% rate increase 5. dredge suitable material TSHD/CSD - 161% rate increase 6. other items Sub Total Other Design Item Categories Total Total Excluding FOREX Rise Element K million $ million 7.30 7.30 22.30 8.20 42.80 0.90 88.80 85.90 174.70 3.18 3.18 9.70 3.57 18.62 0.39 38.64 37.36 76.00 62.46 CSD = cutter suction dredger, FOREX = foreign exchange, TSHD = trailing suction hopper dredger. Source: Asian Development Bank and Government estimates. 7. The excavation, dredging and reclamation item increases were due to the revision of the dredging, excavation and reclamation method and the revision of rates based on the best estimates according to current ongoing excavation/dredging works around the world. Other design item category cost rate increases related to various items like structural steel and concrete and the impact of PNG inflation on non-imported items (energy, labour, and materials). 8. US dollar depreciation. The US dollar depreciation increases the overall project cost by $38.17 million. In the aftermath of the global economic crisis, the US dollar has depreciated against other currencies. The US dollar devalued 17.8% against the PNG Kina between the beginning of 2007 and the end of 2010.4 9. Design modifications. The port facility civil works cost increases relating to project design modifications are summarized in Table 4. Significant increases are the new design features for the wharf structure including the requirement for pile shoes in the amended design, slope protection and diversion of Mai creek. Other costs differences related to the inclusion of other ancillary/miscellaneous items, including improved engineering design and block cost estimates on the basis of further development of the port. 4 Depreciation of the US dollar against the Kina ($1=K2.797 in the 2007 RRP compared with $1=K2.299 as of 30 June 2011). 4 Table 4: Modifications to Preliminary Engineering Design Items Site Clearance and Site Investigation 1. Access road, supplementary boreholes, soil testing laboratory, waste management plan, environmental surveys B. Wharf structures 1. Sand filling 2. Re-enforcement of deformed high yield steel bars Grade Fe500 3. Steel pile "shoe" for all piles 4. Protective painting on steel piles 5. Change in pile size Subtotal (B) C. Slope Protection 1. Requirement for Geotextile Layer 2. Replace 5 kg rock with 40 kg rocks 3. Overall quantity increase and price increase in Amour stones Subtotal (C) D. Land Base and Ancillary Works 1. Diversion of Mai Creek Total Total Excluding FOREX Rise Element FOREX = foreign exchange, kg = kilogram. Source: Asian Development Bank and Government estimates. K million $ million 1.80 0.78 0.80 4.10 7.70 1.30 11.20 25.10 0.35 1.78 3.35 0.57 4.90 10.95 3.60 0.90 15.10 19.60 1.57 0.40 6.60 8.57 20.10 66.60 8.74 29.04 23.81 A.