Bolivia - Third Railway Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2065-BO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BOLIVIAN NATIONAL RAILWAYS WITH THE GUARANTEE OF THE REPUBLIC OF BOLIVIA FOR A THIRD RAILWAY PROJECT April 29, 1977 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EQUIVALENTS Bolivian Peso ($b) = US$0.05 US$1.00 = 20.0 ($b), 1 million ($b) = US$50,000 MEASURES AND EQUIVALENTS 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 ton = 2.205 pounds FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS COMIBOL Bolivian Mining Company ENFE The Bolivian National Railways MTCCA Ministry of Transport, Communication and Civil Aviation SOFRERAIL Societe Francaise d'Etudes et de Realisations Ferroviaires.(Consulting Firm; Paris, France) UNDP United Nations Development Program  FOR OFFICIAL USE ONLY REPORT AND REOJMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BOLIVIAN NATIONAL RAILWAYS WITH THE GUARANTEE OF THE REPUBLIC OF BOLIVIA FOR A ____ THIRD RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Bolivian National Railways (ENFE) with the guarantee of the Republic of Bolivia for the equivalent of US$35 million to help finance a program for the continued technical and financial rehabilitation of ENFE and for other trans- port related expenditures. The loan would have a term of 20 years, including four and one-half years of grace, with interest at 8.2% per annum. PART I - THE ECONOMY 1/ Introduction 2. A report entitled "Economic Memorandum on Bolivia" (1546-BO) dated March 23, 1977, was distributed to the Executive Directors. Country data sheets are attached as Annex I. Background 3. Despite the increasing importance of petroleum and natural gas exports, as well as significant mineral deposits, Bolivia remains one of the poorest countries in South America. The majority of its population is engaged in traditional agriculture. Only a small part of the labor force is employed in the modern sectors. The infrastructure is primitive and the road and rail networks cover only a fraction of the country. The combination of strong tra- ditional ties within the indigenous communities and geographic, health and educational obstacles to population mobility has perpetuated the demographic concentration on the inhospitable 3-4 thousand meter plateau, the Altiplano. About half of Bolivia's population lives a physically, culturally and econo- mically isolated subsistence existence in this region, which is rich in mineral deposits but limited in agricultural potential. 4. The 1952 revolution sought to put an end to the dual structure which had characterized Bolivia's economy since colonial times and to deprive the landowning and mining oligarchy of its economic base. This objective was only partially achieved. Progress was made in eradicating feudal relations, distributing the land and eliminating obstacles to social mobility. The agrarian reform and the nati. a.alization of large mines, however, were followed 1/ This section is reprinted from the President's Report on the First Education and Vocational Training Project for Bolivia (No. P-2028-BO), dated March 31, 1977. -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.  FOR OFFICIAL USE ONLY REPORT AND REOJMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BOLIVIAN NATIONAL RAILWAYS WITH THE GUARANTEE OF THE REPUBLIC OF BOLIVIA FOR A ____ THIRD RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Bolivian National Railways (ENFE) with the guarantee of the Republic of Bolivia for the equivalent of US$35 million to help finance a program for the continued technical and financial rehabilitation of ENFE and for other trans- port related expenditures. The loan would have a term of 20 years, including four and one-half years of grace, with interest at 8.2% per annum. PART I - THE ECONOMY 1/ Introduction 2. A report entitled "Economic Memorandum on Bolivia" (1546-BO) dated March 23, 1977, was distributed to the Executive Directors. Country data sheets are attached as Annex I. Background 3. Despite the increasing importance of petroleum and natural gas exports, as well as significant mineral deposits, Bolivia remains one of the poorest countries in South America. The majority of its population is engaged in traditional agriculture. Only a small part of the labor force is employed in the modern sectors. The infrastructure is primitive and the road and rail networks cover only a fraction of the country. The combination of strong tra- ditional ties within the indigenous communities and geographic, health and educational obstacles to population mobility has perpetuated the demographic concentration on the inhospitable 3-4 thousand meter plateau, the Altiplano. About half of Bolivia's population lives a physically, culturally and econo- mically isolated subsistence existence in this region, which is rich in mineral deposits but limited in agricultural potential. 4. The 1952 revolution sought to put an end to the dual structure which had characterized Bolivia's economy since colonial times and to deprive the landowning and mining oligarchy of its economic base. This objective was only partially achieved. Progress was made in eradicating feudal relations, distributing the land and eliminating obstacles to social mobility. The agrarian reform and the nati. a.alization of large mines, however, were followed 1/ This section is reprinted from the President's Report on the First Education and Vocational Training Project for Bolivia (No. P-2028-BO), dated March 31, 1977. -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.  -3- as a result of substantially higher loan disbursements to the public sector and increased foreign investment associated with hydrocarbon exploration. As a result, foreign exchange reserves rose by a record US$124 million. 7. The extreme dependence of the Bolivian economy on its foreign sector was once more brought into focus in 1975 and early 1976 as, with world eco- nomic recession, the country's terms of trade deteriorated and export volumes declined. Itineral exports fell by well over 20% as the weighted average of mineral prices declined by approximately 13%, and shipments of most minerals fell as a direct result of the recession and the unloading of speculative stock on international markets. The situation was exacerbated by the fact that exportable surpluses of crude petroleum were significantly reduced for the second year in a row due to falling production and rapidly rising domestic consumption of hydrocarbon derivatives. While the export picture was helped by a significant price increase for natural gas exports to Argentina, this could not compensate for the overall decline in export earnings. On the whole, merchandise exports in 1975 declined by 16%. On the other hand, growth of GDP and investment continued unabated as imports rose by about 36% in the wake of the start-up of new public investment projects and the liberalization of imports for consumer durables and motor cars earlier in the year. As a result, the balance-of-payments current account shifted from a surplus of US$150 million in 1974 to a deficit of US$190 million in 1975. Despite further substantial increases in disbursements of medium-term loans to the public sector, net foreign exchange reserves fell by US$54 million to US$134 million, or about 2.5 months of imports. The weakening of the balance of payments was accompanied by a deterioration of the fiscal situation. The Central Government's current surplus decreased to just about 1.7% of GDP, after reaching 2.6% in 1974, and increased borrowing from external resources and the domestic banking system was necessary to finance growing public invest- ment. However, some public utilities strengthened their financial situation due to increased rates. 8. The authorities, reacting to the weakening of the external accounts, took action late in 1975 to tighten trade restrictions. This resulted in a significant reduction of import growth to only 2.0% during 1976. This, toge- ther with a recovery in mineral prices and overall merchandise exports, helped reduce the current account deficit by about US$50 million. At the same time, Bolivia continued to attract substantial external capital inflows which enabled it to finance the current account deficit and recoup the foreign exchange reserves lost the preceding year. Conservative incomes policies applied since 1974 have resulted in a reduction of inflation to an annual rate of about 14%. 9. Economic growth prospects over the medium- to longer-term depend on the Government's ability to increase savings and stimulate investments particularly those for developing hydrocarbon, mineral and agricultural resources. Investment in minLng and hydrocarbons is accelerating. Inten- sified exploration for hydrocarbons by the state-owned petroleum company and private foreign companies is underway and may lead to significantly increased  -4- production and exports of crude petroleum and natural gas, which could permit an acceleration of economic growth towards the end of the decade. Recent exploration results have been fairly positive, i.e. a new oil field with immediate commercial potential was discovered at Montecristo near Santa Cruz and a private foreign concern made a gas strike in the Abapo-Izozog region in the southeast of the country. Fiscal performance has remained weak during the last two years, with the Central Government performance being adversely affected by the deficits of decentralized agencies and state-owned enterprises. However, the authorities are beginning to implement mining and income tax reforms so as to improve the yields, efficiency and equity of the tax system. Debt Service and Creditworthiness 10. Bolivia's external debt outstanding and disbursed at the end of 1976 amounted to US$1.0 billion. Service on external debt amounted to 18.8% of exports of goods and non-factor services net of investment income abroad. Average terms of external debt have worsened as 46% of the newly contracted public debt over the last two years has been from commercial banks. Between 1971 and 1976, average maturity has declined from 24 years to 14 years while the average interest rate has increased from about 4.4% to 7% and the grant element has fallen from 36% to 17%. Because of the heavy investment require- ments associated with development of the mining and hydrocarbon sectors and the large import content of these investments, Bolivia's trade gap and current account deficit can be expected to rise for the remainder of this decade. As a consequence, the debt service ratio is expected to increase to about 24% by 1980. However, as investments in these sectors come to fruition, exports will accelerate and import requirements of investment will decline. A gradual fall in the debt service ratio is therefore likely in the 1980s. In view of the nature and growing size of Bolivia's debt, prudence in selecting and utilizing external capital will have to be an essential element of debt management. 11. Bolivia enjoys a substantial resource base in agriculture, minerals and hydrocarbons, which has to be developed to sustain rapid economic growth and, in particular, to achieve a rapid expansion of export earnings in the foreseeable future. If production in the export sectors, particularly mining and hydrocarbons, can be increased and prices for major export products remain adequate, Bolivia can be considered creditworthy for moderate amounts of external lending on conventional terms. Nevertheless, some additional lending on soft terms (available from the Inter-American Development Bank's Fund for Special Operations and the USAID) is justified by Bolivia's poverty and its large and continuing external capital requirements. The country will require substantial external financing of investment to supplement the domestic savings effort at least until the early 1980s. The Government, in pursuing its progressive development policies, is making a serious effort to mobilize domestic resources and has prepared its first five-year economic plan. Imple- mentation of the underlying investment program will rcquire external assis- tance for high priority projects in excess of the foreign exchange component. Although substantially increased suppliers' a.d financial credits will prob- ably become available, prudent debt management requires that they should cover  - 5 - not more than about a third of the public capital inflows needed during 1977-80 for meeting a GDP growth target of 6% annually. The remainder should be obtained on softer terms from bilateral and international develop- ment financing agencies, including the Bank. PART II - BANK GROUP OPERATIONS IN BOLIVIA 12. Although Bolivia is an original member of the Bank, it did not obtain any Bank Group funds until 1964. Bolivia's tight budget constraints and restricted capacity to service external debt had limited Bank Group assistance until recently. Apart from a US$23.3 million Bank loan for a gas pipeline, Bank Group operations until FY75 were exclusively through IDA. Following Bolivia's emergence as a natural gas and petroleum exporter, albeit on a limited scale, IDA's lending was phased out with the Agricultural Credit I Project in June, 1975. By February 28, 1977, the Bank Group had approved 18 operations for Bolivia amounting to US$184.9 million, of which eight have been fully disbursed. Net of undisbursed balances, Bolivia's debt to the Bank and IDA in 1975/76 represented 7.9% of its public debt. The Bank's share of the service on this debt is about 4%. Both figures are expected to increase marginally by 1980. 13. Bank Group lending to Bolivia has assisted in the development of various sectors. US$27.2 million have been for agriculture where our lending has helped the Government to initiate long term progress for the development of a viable livestock industry, to increase agricultural production and to improve living conditions on the Altiplano, as well as to strengthen the Banco Agricola as a development institution. The five loans for power projects, totalling US$53.4 million, have been instrumental in modernizing the sector, expanding electricity services, stabilizing the electricity supply and setting up a regulatory agency. Also, a public power company was set up which has been operated in an efficient and financially sound manner. Two railway loans totalling US$40.0 million, of which US$3.3 million were cancelled when ENFE obtained funds from bilateral sources to purchase locomotives, have helped to improve the quality of management, efficiency of operations and financial condition of the national railways. Three operations, for a total of US$28.2 million, for medium- and small-size mining aim at increased production and improved sectoral coordination. A loan for a water supply and sewerage project of US$11.5 million is expected to improve services in the main mining cities and 70 rural communities. A recently approved loan of US$15 million for an education and vocational training project would assist Bolivia to develop its human resources in a more effective and rational way. Finally, the proposed project and an aviation development project, also being con- sidered by the Executive Directors, will assist Bolivia's efforts to develop agriculture in hitherto isolated areas and to provide efficient freight and passenger transportation.  -6- 14. Because of the narrow scope for private investment, IFC became active in Bolivia only in 1973 through an investment of US$400,000 in a firm producing cables and plastic products. With expanding opportunities for private investment, however, IFC has most recently agreed to take an equity participation of up to US$550,000 in Banco Industrial S.A. (BISA) in conjunction with a Bank loan of US$10.0 million for the same institution to assist in financing medium-sized industrial and mining enterprises, and US$337,500 in Banco Hipotecario Nacional to assist in the development of mortgage banking. The two IFC investments aim at contributing to the esta- blishment of a local market for long-term securities. Annex II contains a summary statement of the status of Bank Group operations in Bolivia as of March 31, 1977, and notes on the status of ongoing projects. 15. Remarkable progress has been made in achieving the goals set for Bank lending to Bolivia. On the macro-economic level, the Government has made important strides towards formulating a coherent and consistent set of overall economic policies. On the sector and project level, public services have been improved and the institutions strengthened. The financial positions of the railroads and power sectors compare favorably with that of similar entities in otlher developing countries. Also, during the last two years, the Govern- ment has established an excellent record in providing the required counterpart funds for Bank financed projects. Future Bank lending will continue to support Government efforts to establish infrastructure necessary for sustained economic development while simultaneously improving the distribution of the benefits of economic growth. In this context, Bank activities will focus on the less developed regions and the lower income strata of the population. At present two projects are at an advanced stage of processing: an urban project to finance urban upgrading, sites and services, employment generation schemes and supporting social infrastructure; and an agricultural project for the develop- ment of alpaca/llama husbandry to assist subsistence farmers in the Altiplano and improve their living standards. For the more distant future, further Bank projects in irrigation, agroindustries, highway maintenance, railways, electric energy, forestry, industry and mining are under consideration. PART III - THE TRANSPORT SECTOR General 16. Bolivia has an area of 1.1 million km2, which can be roughly divided into the barren highlands "Altiplano" in the western part of the country, where most of the country's population lives, the central valleys in the mid- west, and the sparsely populated lowlands to the east and north. High trans- port infrastructure costs, caused by difficult topography and sparse popu- lation distribution, make it necessary to use special care in determining the most appropriate modes of transportation and in selecting investment projects.  -7- Transport Modes 17. Bolivia's transportation infrastructure is relatively under-developed. The major transport modes have played, by and large, complementary roles to meet particular requirements: railroads, to haul most of Bolivia's export trade of bulky mineral products; domestic aviation, to transport passengers and perishable goods, in particular beef; highways, to carry mostly domestic freight and passengers; and waterways, to provide access to otherwise isolated towns and villages. The main features of the transport modes are discussed below, except for railways which are treated separately in paragraphs 24-28. 18. Highways. The present road system consists of about 37,600 km of highways of which 1,170 km (3%) are paved; 6,560 km (17%) are gravel and the remainder, 29,830 km (80%), are unimproved earth roads. The most important part of the network is located in the western and southern highlands and valleys, which occupy one-third of the country and are inhabited by 84% of the population. In contrast, the lowlands of the northern and eastern regions are serviced only by a few low standard roads. 19. Waterways. The river transport system is made up of an extensive network of inland waterways located in the eastern and northern parts of Bolivia, measuring about 1,-600 km. Minimum channel depths vary from 1.0 to 3.5 m, with seasonal variations of up to 9.0 m. The system consists of five main waterways and represents the only available transport mode in vast areas of the sparsely populated northeastern part of the country. Lake transport is limited to Lake Titicaca, the highest navigable lake in the world, which provides an alternative transport corridor to the Pacific Ocean through the Peruvian lake port of Puno, and from there by rail and road to the seaports of Matarani and Mollendo. In terms of ton-km of freight traffic, lake traffic is more important than river traffic. 20. Aviation. Air transport is a vital means of communication, despite its relatively high cost, and is likely to remain so for a long time, due to the topography and low population density of the country. There are approxi- mately 300 airports in the country, but only 30 have scheduled service provided by Lloyd Aereo Boliviano (LAB), the almost totally government-owned airline. Airports at the four major cities--La Paz, Cochabamba, Santa Cruz and Trinidad-- account for more than 80% of the regular passenger and 70% of the cargo traffic. Demand for air transport has increased rapidly during the recent past. Annual growth rates of 14.5% of domestic passenger traffic over the last five years, made possible through the introduction of new aircraft, has been concentrated in the four major airports. One of the main objectives of the proposed aviation project would be to facilitate further growth in domestic air transport by adding two airports for jet aircraft and two smaller all-weather airports for turbo-prop aircraft. 21. Pipelines. The state oil company operates 2,462 km of oil pipelines and 754 km of gas pipelines. The oil pipelines connect the major production fields near Santa Cruz to the Pacific seaport of Arica and to the Argentine border. The Bank-financed natural gas pipeline (Loan 635-BO) conveys gas to  -8- Argentina. Depending on the success of intensive exiloration 6ff6tts now underway and the confirmation of identified reserves; significanit new pipe- line construction, especially to Brazil, may be undertaken. Transport Planning and Coordinatinii 22. Transport planning anid co6tdination in Bolivia have historically been weak. In recognition of this deficiency and the substantial invest- ments required to upgrade the transport system in line with Bolivia's economic development, a National Transport Survey for Bolivia, financed by UNDP with the Bank acting as Executing Agency, was completed in 1969. It proposed a program for integrated transport development over the following ten years and among other things recommended the creation of a Directorate of Planning and Coordination which is now in the Mlinistry of Transportatidni, Communication ahd Civil Aviation (MTCCA). In 1972, the Bank assisted in the preparation of terms of reference for a UNDP-financed technical assistance program to streng- theh the Direct6rate. The ptogram 'was cancelled in 1976, after partial imple- metitation, due to lack of UNDP funds. In order to obtain better information on transport facilities and equipment, the Government decided to update the National Transport Survey and has requested financial and technical support from the Bank. The proposed loan includes the financing for the foreign exchange cost of consultant services for the Survey and the implementation of its policy recommendations (paragraph 36). 23. The Government's main transport strategy underlying its five-year (1976-1980) developmen't plat are as fdllows: continued rehabilitation and mfiddetri{zation of the -raiiway, syste-m, idirbveinent and expansion of the road netiwok to serve high priority sectors in the economy; modernization of air transport through improvement and re-equipment of infrastructure, parti- cularly in the north and northeast; and expansion of the river and lake fleet and improvement of river navigation and port facilities on Lake Titicaca. The five-year development plan calls for investments totalling US$475 million in projects already started and consists of US$266 million for highways, US$107 million for railways and US$102 million for aviation. The foreign exchange component is estimated to be about 62% of the total cost. Additional projects with a total cost of US$439 million are under study. A separate plan is being prepared by the Ministry of Energy and Hydrocarbons for the development of pipelines for the transport of natural gas and petroleum. The Government is currently reviewing these and other investment programs to ensure that they are within its financial capabilities and implementing capac- ity. The Government is considering, in this context, the eventual construc- tion of a highway, estimated to cost about US$125 million, between Santa Cruz and Corumba on the Brazilian border, practically parallel to the existing railway line between these cities. In view of the possible uneconomic dupli- cation of investments, the Government would refrain from constructing this highway until it had carried out an adequate study to determine its economic justification and the Bank had had the opportunity to comment on the study (Section 3.02 of the draft Guarantee Agreement).  -9- Railway Subsector 24. Except for petroleum and natural gas, most of Bolivia's freight for external trade, as well as a significant part of its domestic freight and passenger traffic, is transported by the railways. The railway system consists of about 3,500 km of meter-gauge railway lines (see Map) operated by ENFE except for the line from Machacamarca to Uncia (105 km) which is operated by COMIIBOL, the Government mining enterprise. The railways consist of two separate systems, the Western and the Eastern Systems, which are linked only by a long indirect route through Argentina. Railway traffic increased substan- tially between 1966 and 1976. Passenger traffic increased from 205 million passenger-km in 1966 to 370 million passenger-km in 1976 (6.1% per year), while freight traffic increased from 265 million ton-km in 1966 to 520 million ton-km in 1976 (7.0% per year). Because of the newness of the system and the rapid economic growth of the region that it serves, traffic on the Eastern System has increased between 1966 and 1976 at a remarkable pace of 15% per year for passengers and 27% per year for freight. Through 1981, freight traffic is projected to increase at about 3.7% per year on the Western System and 9.0% per year on the Eastern System; passenger traffic would increase by 3.6% per year on the Western System and 10% per year on the Eastern System. 25. The IJestern System was built between 1870 and 1920, largely to serve the needs of the mining industry to transport mineral products to the ports on the Pacific coast. The system consists of about 2,100 km of rail- way lines, linking the miain towns in the southwestern part of the country and providing access to the ports of Matarani in Peru, Arica and Antofagasta in Chile, and (via Villazon) to the ports in Argentina. About 63% of the freight traffic on the Western System consists of traffic for external trade. 26. The Eastern System which was built during the 1950s consists of two major lines totalling about 1,180 km. The Santa Cruz-Corumba line (643 km) connects with the Brazilian system, and the Santa Cruz-Yacuiba line (539 km) connects with the Argentine system. The railways are the only significant mode of surface transport in Eastern Bolivia, where most of the agricultural exports such as cotton, timber and sugar originate. About 85% of the traffic on the Eastern System consists of traffic for external trade. 27. In accordance with a 1967 agreement between the Governments of Argentina and Bolivia, an extension to the Eastern System, from Santa Cruz to the north, is being built by an Argentine-Bolivian Joint Commission. To date, a stretch of 104 km between Santa Cruz and Santa Rosa has been built and transferred to ENIFE. The two Governments recently decided to phase out the Joint Commission in the next few months, when the line reaches Yapacani. The Government would not start construction of any further extension of the line beyond Yapacani before carefully studying its economic justification. The Bank would comment on the selection of the consultants for the economic study and would also review and como.ent on its results (Section 3.04(a) and (b) of the draft Guarantee Agreement).  - 10 - 28. An ongoing preliminary feasibility study, carried out by Brazilian and Bolivian experts, for the inter-connection of the Eastern and Western Systems, is expected to be ready by mid-1977. The Government would refrain from making investments in this inter-connection before carrying out an adequate study demponstrating its economic justification and the Bank had had an opportunity to comment on the study (Section 3.05 of the draft Guarantee Agreement). Past Bank and IDA Projects 29. Following its creation in 1964, ENFE suffered from many managerial, financial and technical problems caused by badly maintained and overage equipment, inexperienced management, inadequate staff training, excess staff and an inadequate tariff structure. The technical assistance program financed by UNDP, which began in 1969, sought to solve these problems. The program, administered by the Bank, retained a team of French consultants (SOFRERAIL) which prepared a five-year (1973-77) investment and rehabilitation program which provided the basis for the First Railway Project in 1972. An IDA credit of US$8 million (Credit 346-BO) financed the foreign exchange component of the project, consisting of rolling stock, diesel shunting locomo- tives, spare parts, machine tools and materials for track rehabilitation. However, due to a sharp increase in international prices, the investment program could not be fully implemented. 30. In 1974, ENFE updated and extended the five-year investment plan to coyer the period 1975-79. The Secon4 Railway Project, financed by the Bank (Loan 1121-BO) with a loan of US$32 m'lNlion, consisted of the first two years of this program. In addition to the procurement deferred from the first project, the second project sought to improve the quality of ENFE's operations through track rehabilitation, related civil works, procurement and installa- tion of telecommunications equipment, and the purchase of cars and locomotives. The loan was later reduced to US$28.7 million when ENFE obtained a loan of US$3.3 million from a bilateral source for the procurement of diesel locomotives. 31. The first two railway projects also included measures to improve the financial condition of ENFE and to introduce modern engineering, commercial and managerial methods to its operations. As a result, ENFE's operations have improved significantly. Initial difficulties in executing the investment program (longer than expected lead time for deliveries, disastrous effects of a flood in January 1974, scarcity of financial and material reserves) have been overcome and good progress is being achieved. Except for track rehab- ilitation, the financial and operational targets of the second loan, included in ENFE's Action Program for 1975 and 1976, have been reached or surpassed. For example, actual working ratio for 1976 was 79% compared with the target of 85% and the actual average daily run of diesel locomotives reached 423 km compared with the target of 410 km.  - 11 - PART IV - THE PROJECT 32. The project was appraised by a Bank mission which visited Bolivia in October/November 1976. A report entitled "Appraisal of a Third Railway Project," No. 1466b-BO dated April 29, 1977 is being circulated separately to the Executive Directors. A loan and project summary is presented in Annex III. Negotiations were held in Washington on April 7-8, 1977. The Government delegation was headed by Ing. Mario Antezana, Undersecretary of Transport, MTCCA, and the ENFE delegation was headed by Ing. Armando Murillo, Investment Manager. Project Description 33. ENFE's third investment plan covering the period 1977-1981 comple- ments the investments under the two previous plans with its emphasis on track rehabilitation. Investments in each category of the plan are well balanced and justified. ENFE would not make any major changes in the plan without the agreement of the Government and the Bank (Section 4.05(c) of the draft Loan Agreement). The main part of the proposed project consists of investments in the above plan to be committed in 1977 and 1978 and technical assistance to ENFE mostly at the operational level. Also, in order to provide timely assistance to Government in its efforts to improve transport planning and coordination and to make effective use of scarce resources in the transport sector, the project includes the updating of the National Transport Survey, the implementation of its policy recomendations, and technical assistance for highway maintenance. 34. The proposed Bank loan would finance equipment and tools for rehabilitation of the track including earth moving equipment, telecommunica- tions equipment, equipment and materials for marshalling yards, freight cars, parts and repair units for locomotives, ferrobuses, freight and passenger cars and equipment and machine tools for workshops. Technical assistance to ENFE includes experts to train ENFE's personnel in modern operational and adminis- trative railway procedures. Consultant services would also be provided for the updating of the National Transport Survey and its implementation and for the technical assistance for highway maintenance; loan funds of US$2.0 million allocated for these services would be transferred from ENFE to Government under terms and conditions satisfactory to the Bank (Section 3.02 of the draft Loan Agreement). 35. Because of the importance of the institution building aspect of the National Transport Survey, the disbursement of the loan funds allocated for the Survey would be contingent upon the Government's assigning counterparts on a full-time basis to the consultants (Section 2.03(d) (i) of the draft Loan Agreement and Schedule 1, paragraph 4(b) of the draft Loan Agreement). The Government would also make arrangements so that at least five of these counter- parts would remain in the Directorate of Planning and Coordination of tITCCA after the completion of the survey (Section 2.03(d) (ii) of the draft Guarantee Agreement). There is a possibility that UNDP may be able to finance part of the updating of the National Transport Survey and all of the implementation phase, in which case these items would be carried out as a Bank-executed UNDP project.  - 12 - Project Cost and Financing 36. Based on March 1977 prices, the cost of the proposed project is estimated to be US$55.7 million with a foreign exchange component of US$35.0 million. ENFE's investments and technical assistance, net of contingencies, are estimated to cost US$44.6 million with a foreign exchange component of US$28.7 million. The consultant services for the transport survey, its implementation, and the highway maintenance program are estimated to cost US$2.6 million with a foreign exchange component of US$2.0 million. To these estimates are added physical contingencies calculated at 5% for local cost items and 1% for foreign cost items, and price contingencies calculated as follows: for local costs, 8.4% for 1977, 8.0% for 1978, 7.4% for 1979 and 7.0% thereafter; for foreign costs, 7.5% for 1977 through 1979 and 7.0% thereafter. Details of project cost items are shown in Annex III. The cost of consultant services for ENFE (200 man-months) has been estimated at about US$9,000 per man-month and is based on the cost of consultants currently retained by ENFE; those for the transport survey and its implemen- tation (200 man-months) and the highway maintenance program (72 man-months) have been estimated at a rate of about US$8,000 per man-month. The proposed Bank loan of US$35 million would finance the foreign expenditures for imported goods and technical assistance, while funds for local expenditure would derive from ENFE's internal cash generation and from Government contributions. It is noted that during the period 1977-1981, ENFE would require financial resources of US$145.1 million, of which 78% would be for investments and the remainder mostly for debt service. The needed funds for the period 1977-1981 would derive 35% from INFE's internal cash generation, 19% from the proposed Bank,loan, 11% from the ongoing Bank loan (1121-BO), 7% from Government, 13% from bilateral sources already contracted and the remaining 15% from foreign sources yet to be arranged. The Borrower 37. ENFE was founded in 1964 to take over the main trunk lines of the Western System formerly owned by the Bolivian Railway Company (owned by British shareholders), and the branch lines owned by the Government. In 1967, the Eastern lines were also transferred to ENFE's ownership. In 1974, as part of an agreement with Peru, ENFE took over the Guaaui-La Paz line (96 km). In March 1976, the Santa Cruz-Santa Rosa line (104 km), built by the Argentine- Bolivian Joint Commission, was handed over to ENFE. 38. ENFE is governed by a Board of Directors chaired by the Minister of Transport, Communications and Civil Aviation. The other six members of the Board are representatives of the Ministries of Transport (1), Industry and Commerce and Ifining and Metallurgy (1), National Planning Council (1), Labor (2) and the General Manager (non-voting). The General Manager is appointed by the President of the Republic and acts as chief executive and refers most policy decisions to the Board. 39. Until the end of 1974, EIFE went through a difficult period arising from consolidation, management reorganization and mounting financial prob- lems. In January 1975, the Government took important measures to strengthen  - 13 - ENFE by appointing a new and energetic General Manager, giving him unprece- dented backing, reducing union participation in the management and authorizing a series of cost reduction measures. 40. While the Western System has achieved good progress in operations due to the various measures initiated under the previous project, the Eastern System has not progressed as much, notably in track rehabilitation, due to the lack of effectiveness of the eastern management. The Government recently provided the Bank with a realistic plan of action for improving the management of the Eastern System. 41. In accordance with Bank loan conditions for the Second Railway Proj- ect, ENFE has undertaken a staff reduction program, mainly through attrition. The number of ENFE's total employees decreased from 6,401 in 1973 to 6,047 in 1976 and is expected to decrease further to 5,740 by 1981. The main problem with ENFE's staff now is not that of quantity, however, but of quality. The salary levels did not permit ENFE to adequately recruit and retain its engi- neers and technicians, especially in the context of an acute shortage of skilled personnel in Bolivia. The Government recently authorized ENFE to improve wages for engineers and technicians and to recruit young engineers by offering them the possibility of a career in the railways. ENFE will also utilize the training facilities of the National Manpower Development Service (FOMO), an agency supported by a recent Bank loan, for the training of its employees, especially the technicians and mechanics. 42. Substantial tariff increases combined with higher volumes of traffic in recent years have increased ENFE's revenues significantly. Since 1975, ENFE has been able to generate net revenues, to pay all debt service charges and even to reduce Government contributions for investments. ENFE's operating ratio has surpassed the target for 1975 set at the time of appraisal of the Second Railway Project (Loan 1121-BO). In order to maintain its present sound financial condition, ENFE would not incur any debt with a term of over one year without the Bank's agreement unless net cash generated from operations in the year when such debt was incurred was at least 1.5 times debt service requirements (Section 5.05 of the draft Loan Agreement). The Government would provide ENFE with additional funds, should the need arise, to carry out the project (Section 2.02 of the draft Guarantee Agreement). In order to protect ENFE's financial condition, the finances of the Santa Cruz-Yapacani railway and any addition to it (paragraph 27) would be kept separately and Government would reimburse ENFE for any losses from the operation of the line. Any additional cost for upgrading this line to ENFE's operational standards would be financed by the Government (Section 3.04(c), (d) and (e) of the draft Guarantee Agreement). 43. ENFE's current accounting system is satisfactory. As agreed in the Second Railway Project, ENFE would have its accounts and financial statements audited by independent auditors acceptable to the Bank, and furnish certified copies not later than six months after the end of each fiscal year starting from 1977 (Section 5.02 of the draft Loan Agreement). ENFE would also revalue its fixed assets at least once every three years and thereafter provide promptly to the Bank a full report prepared by independent auditors (Section 5.04 of the draft Loan Agreement).  - 14 - Tariffs 44. The present rate policy is to relate tariffs to operating costs. Whenever there is a need to increase tariffs, ENFE submits the proposal to MTCCA for approval. In 1975, freight rates covered full costs while passenger fares covered marginal costs fully on the Eastern System but only about 95% of marginal costs on the Western System. In February 1977, Government approved ENFE's request to raise passenger fares by an average of 10%. ENFE also started, in 1976, sales promotion activities to attract more traffic by providing discounts for higher volumes of freight traffic. The results of this approach has been fruitful. 45. The present tariff structure would provide a rate of return on net fixed assets of 1.3% on revalued assets in 1977 and 2.1% in 1981. These rates are considered satisfactory because (a) they show that ENFE is able to transfer the cost of railway service to the users on a sound commercial basis; (b) they enable ENFE to meet most of its financial needs; and (c) they de- crease the burden on the national budget. These rates of return are based on expected reduction in ENFE's operating costs by about 17%. Whenever there is reasonable cause to believe that, because of rising costs, ENFE would not be able to meet the financial goals specified in the revised Action Program (paragraph 46), ENFE would promptly take all actions, including tariff increases, necessary to attain such goals (Section 5.06 of the draft Loan Agreement and Section 3.03 of the draft Guarantee Agreement.) Project Execution 46. ENFE would carry out the project, except for the items to be carried out by Government consisting of the updating of the National Transport Survey and its implementation phase and the technical assistance for highway main- tenance. ENFE would carry out the civil works for the Western System under force account while the civil works for the Eastern System is expected to be carried out by local contractors under ENFE's supervision. The progress achieved by ENFE's management and staff in the execution of the First and Second Railway Projects indicates that ENFE is well qualified to execute this project. Based on the good result achieved under the earlier Action Program (paragraph 31), a revised Action Program for the period 1977-1981, designed to expand and improve on the earlier one, has been prepared. For example, under the revised Program, working ratio would gradually improve from 78% in 1977 to 73% in 1981, operating ratio from 95% to 91%, freight car availability from 86% to 92% and the average daily run of diesel locomotives would reach the maximum distance of 450 km as early as 1978. It is expected that during the implementation of the proposed project, ENFE, with the assistance of consult- ants, would be able to achieve the targets of the revised Action Program and thereby achieve the objectives of the project. Procurement and Disbursement 47. ENFE would award contracts for goods estimated to cost less than the equivalent of US$50,000 but more than US$5,000, after soliciting quotations from at least three suppliers, up to a total of US$500,000. Coods estimated  - 15 - to cost less than US$5,000 could be purchased under local procurement proce- dures. Also, with the Bank's approval, ENFE would procure certain critical spare parts on the basis of direct purchase from the original equipment manufacturers (Schedule 4, paragraph B of the draft Loan Agreement). All other goods financed under the proposed loan would be procured under inter- national competitive bidding, in accordance with Bank Guidelines. Local bidders would be granted a margin of preference of 15% or the applicable customs duties, whichever is lower. 48. Disbursement from the Bank loan would be made against appropriate documentation for 100% of foreign expenditures for imported goods and for technical assistance. As shown in Annex III, most of the disbursement would take place during Bank FY78 and FY79. The loan is scheduled to be fully disbursed during the second quarter of FY81. Project Benefits and Risks 49. ENFE's Investment Plan (1977-1981) is a coordinated program of rehab- ilitation and modernization designed to enable the railways to efficiently carry the traffic which has been forecast for the period. If the Investment Plan were not implemented, declining quality of service and diminishing capability to move traffic would result in diversions to more expensive road transport and, in areas where roads do not exist, in the failure of traffic to move at all. The main benefits of the Investment Plan are the avoidance of (a) higher railroad operating costs for traffic that would remain on the railroad; (b) higher costs of transporting by road the freight and passenger traffic diverted from railroads; and (c) losses to the economy where the railway is the only means of transportation. Benefits not quantified in the economic evaluation include: reduced accident costs, reduced inventory costs for goods in transit, reduced breakage and spoilage of cargo, and savings from elimina- tion of railway closures due to bad weather; the evaluation performed is there- fore conservative. The economic rate of return for the Investment Plan as a whole, based on the costs, including physical contingencies and replacement costs, and on quantified benefits, would be 18%. 50. ENFE is well qualified to implement the project and the risks of the project from the technical point of view are no greater than those normal for projects of this type. Although significant delays in project implemen- tation were encountered during the execution of the First Railway Project, these were partly beyond the control of ENFE's management or the Government. The delays were relatively quickly overcome and considerable progress has been achieved under the Second Railway Project. Careful preparation of the scope of the present project and the new Action Program which takes into account ENFE's capacity for project execution are expected to minimize any potential causes of delays in project execution. The project is not expected to have any adverse environmental effects. 51. The justification for the investments in the Western System depends on the continued flow of traffic on the Arica-La Paz line. In the recent past, the Chilean section (Arica-Charana) has not been adequately maintained and there is a risk that the traffic on the line would be impeded if the  - 16 - line were not kept in an adequate operating condition. Hence, failure to keep the line in an adequate operating condition would be an event of suspension regarding the loan funds allocated for the Western System (Section 6.01(b) of the draft Loan Agreement). The Bolivian authorities recently informed the Bank that their negotiations with the Chilean National Railways for the ade- quate maintenance and operation of the Arica-Charana Section were progressing smoothly and that they hoped to reach agreement by mid-1977. We have been assured by ENFE that it would use its best efforts to conclude such an arrange- ment expeditiously. PART V - LEGAL INSTRUMENTS AND AUTHORITY 52. The draft Loan Agreement between the Bank and ENFE, the draft Guarantee Agreement between the Republic of Bolivia and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. Features of the draft Loan and Guarantee Agreements of special interest are referred to in paragraphs 23, 27, 28, 33, 34, 35, 42, 43, 45, 47 and 51 of this report. 53. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 54. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments April 29, 1977  ANNIZ Page L of TABLE IA BOLIVIA * SOCIAL INDICATORS DATA SHEET LAND AREA fTHOU xmil Ls R T: M .- - ----........--.-.-.--.. -.- T-*TIL a BL30LIVIA REFERENCE COUNTRIES t1970) 3TCTL m0V8 MOST RECENT A3RTC* 30h.2 1960 1Q90 ESTIMATE CAMEROON HONDURAS PERU* SNQ PER AtTA (1S3) .2.0.0 10. 20..0 20 , 2; 0..0 S 20 ,0 .................... "O"JLATIN A"ID VITAL STATISTTCS ............................... *OPULATIIN (MrD.Y9, 4ILL1ON) 3 8 4,9 S,6 6.6 2.5 13.3 23PULAT1tN DENSITY PER 51JARE EM 3.0 #40 5.0 10.0 22.0 10.0 DER q3, 4, AORICJLTURAL LANn 13.0 17.0 18.0 43.0 S9.0 45.0 VITAL *TATTSTICS CR WDE SIRTH RATE iT0OU, AV) 46.6 44.a 43.7 42.1 51.S 42.9 Ce IDE E^ATM RATE 1/TWOU,AV) 22.5 I9.7 18.0 23.9 19.1 14.7 IVFA4NT 4RTALITy RATE (/THOU) 154 0 , , , 65.I, LIAE EV,ECTAA:Y T ETRIM tYRS) 42.3 aS.5 4e69 41.0 49., 58.0 1t0S5 QE