Cameroon - Fourth Railway Project

Document of The World Bank FILE Copy FOR OFFICIAL USE ONLY Report No. 2353-CM CAMEROON FOURTH RAILWAY PROJECT STAFF APPRAISAL REPORT June 19, 1979 Western Africa Projects Department Ports, Railways & Aviation Division 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 EQUIVALENTS Currency Unit = CFA franc (CFAF) US$1 C CFAF 220 CFAF 1 million = US$4,545 FISCAL YEAR July 1 - June 30 (FY1979 = July 1, 1978 - June 30, 1979) SYSTEM OF WEIGHTS AND MEASURES Metric Metric British/US Equivalents 1 meter (m) 2 3.28 feet (ft) t cubic meter (m ) = 1.31 cubic yards (cu yd) 1 kilometer (km) 2 = 0.62 mile (mi). 1 square kilometer (km ) = 0.386 square mile (sq mi) 1 metric ton (m ton) = 2,204 pounds (lb)  CAMEROON FOR OFFICIAL USE ONLY FOURTH RAILWAY PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. TABLE OF CONTENTS GLOSSARY I. THE TRANSPORT SECTOR .............. ..................... . 1 A. General ........................................ .... ... 1 B. The Transport System ............................... 2 C. Transport Policy, Planning and Coordination ........ 5 II. REGIFERCAM ............................................... 7 A. Organization and Management .......... . .............. 7 B. Staff and Training .................................... 7 C. Accounts, Costing, Budgets and Audit ................ 10 D. Property ...................................... il1 E. Operations ................................ 13 F. Traffic .............. .... e............. 15 IIl. THE PLAN AND THE PROJECT ................................ 19 A. Regifercam's Investment Plan ......... .. ............ 19 B. The Project ................... ..................... 20 C. Cost Estimates ............................................ 26 D. Project Execution, Procurement and Disbursement .... 27 IV. ECONOMIC EVALUATION ..................................... 29 A. General ............................................ 29 B. Project Benefits ........... .. ............ ......... 30 C. Total Project Costs and Benefits ................ ... 32 D. Sensitivity Analysis ...... ........................ 32 V. FINANCIAL EVALUATION ....... ............................. 33 A. Past and Present Position ................ . ......... 33 B. Future Financial Position ..... ..................... 36 C. Sensitivity Analysis ...... ......................... 39 VI. AGREEMENTS REACHED AND RECOMMENDATION ........... ........ 41 This report has been prepared by Messrs. H. Apitz (Financial Analyst), A. Defalque (Railway Engineer), and M. Dick (Economist). This document has a restricted distribution and may be used by recipients only in the performance of their officiai duties. Its contents may not otherwise be disclosed without World Bank authorization.  -2- ANNEXES 1. Description of the New Douala Station 2. Supporting Tables Table 1 : Railway Property: Motive Power Table 2 : Railway Property: Passenger Coaches Table 3 : Railway Property: Freight Cars Table 4 : Summary of Railway Operating Statisties Table 5 : Freight Traffic 1973-78 Table 6 : Future Freight Traffic Table 7 Future Freight Traffic: Sensitivity Analysis Table 8 Project Solution (Wagon Distribution) Table 9 Existing Facilities plus Provisional Marshalling Yard (Wagon Distribution) Table 10 Marshalling Yard: Daily Wagon Movements (Southbound) Table 11 : Number of Locomotives Requiring Workshop Attention during the Year Table 12 : Additional Locomotive Requirements if Workshop/ Running Shed Construction not Implemented Table 13 Project Costs and Benefits Table 14 : Investment Program FYs1979-81 and Investment Forecast FYs1982-85 Table 15 : Future Borrowing Table 16 : Income Accounts FYs1973-78 Table 17 : Balance Sheets FYs1973-78 Table 18 : Sources and Applications of Funds FYs1979-86 Table 19 : Income Statements FYs1979-86 Table 20 Balance Sheets FYs1979-86 Table 21 : Ratio Statement FYs1979-86 Table 22 : Sensitivity Analysis: Sources and Applications of Funds Table 23 : Sensitivity Analysis: Income Statements Table 24 : Sensitivity Analysis: Balance Sheets Table 25 : Sensitivity Analysis: Ratio Statement 3. Financial Benefits FY1985 4. Documents Available in the Project File. CHARTS 1. Organization of Regifercam 2. Track Characteristics, Main Line MAPS 1. Cameroon Transport Map (IBRD 14058) 2. Railway Facilities in Douala Area (IBRD 14059) 3. Workshop Extension (IBRD 14060) 4. Douala, New Station and Marshalling Yard (IBRD 14197)  GLOSSARY - GLOSSAIRE AfDB African Development Bank Banque Africaine de Developpement CCCE Caisse Centrale de Cooperation Economique CIDA Canad1an International Agence Canadienne de Develop ment Agency Developpement International CPCS Canadian Pacific Consulting Societe d'etudes et de Services (Consultants, Canada) Consultation du Canadien Pacifique (Consultants Canada) DOT Operations Department Direction Operations de (Regifercam) Transport (Regifercam) FAC French bilateral aid Fonds d'Aide et de agency Cooperation FED European Development Fund Fonds Europeen de Developpement GDP Gross Domestic Product Produit Interieur Brut KfW German Aid Agency (FRG) Kreditanstalt fur Wiederaufbau MT Mechanical Engineering Direction Materiel et Department (Regifercam) Traction (Regifercam) m/t-km Million of ton-kilometers millions de tonne- kilometres OCCR Consultants (France) Groupe International Ingenierie. Recherche. Gestion OFERMAT Office Francais de Cooperation pour les Chemins de Fer et les Materiels d'Equipement ORT Consultants (Switzerland) Organisation, Reconstruc- tion, Travail. Consultants (Suisse) Regifercam Cameroon Railways Regie Nationale des Chemins de Fer du Cameroun  GLOSSARY - GLOSSAIRE (Continued) SCET-International Consultants (France) Societe Centrale pour l'Equipement du Territoire International SEE Canandian Export Financing Societe pour l'expansion Agency des Exportations SOCOTEC-CECOBA Consultants (France-Cameroon) Groupement SOCOTEC-CECOBA, France - Cameroun SOFRERAIL French Society for Railway Societe Francaise Studies and Operations d'Etudes et de Realisations Ferro- viaires TRANSURB CONSULT Consultants (Belgium) Transurb Consult (Belgique) USAID US Agency for International Agence Internationale Development de Developpement des Etats-Unis V.B.T. Permanent Way Department Direction Voies, Batiments (Regifercam) et Travaux (Regifercam)  CAMOEROON FOURTH RAILWAY PROJECT STAFF APPRAISAL REPORT I. THE TRANSPORT SECTOR A. General 1.01 Cameroon covers a roughly triangular area of 475,000 km with a coastline of about 280 km. It borders on six countries--Nigeria, Chad, Central African Empire (CAE), Congo, Gabon and Equatorial Guinea--and occupies a strategic position for transit traffic of landlocked Chad and CAE. 1.02 Cameroon has mountains in the west and in the center, dry savannah plains in the north and extensive forest areas in the south and southeast. Along the coast, the rainy season lasts 220 days with an annual rainfall of 5-6 m. In the central mountainous areas, the annual rainfall is about 1.5 m during a rainy season of about 135 days. By contrast, the rainy season in the north lasts 50-75 days, with an average annual rainfall of only 0.85 m. The variety of topography, climate and soil types has influenced the distri- bution of population and creates different transport problems from region to region. 1.03 According to the 1976 census, Cameroon has a population of about 7.7 million, growing2at an estimated 2.3% per year. IJhile the average density is 16 persons per km , the distribution is uneven.2 The highest concentration is in the western highlandg with 75 persons per km and the lowest in the east with only 4 persons per km . About 18 major ethnic groups inhabit the country and are widely separated. The transport system is thus of paramount importance in promoting communication and a sense of national unity. Urban areas are growing rapidly: The commercial center and port of Douala had 480,000 inhabit- ants in 1976 compared to 190,000 in 1965. About 340,000 persons lived in the capital of Yaounde in 1976, a threefold increase in ten years. Urbanization creates a strong demand for passenger transport, since urban dwellers tend to keep their ties with families in rural villages. 1.04 Gross domestic product (GDP) at market prices was estimated at CFAF 618 billion or US$2.5 billion in 1976. Betwen 1971 and 1976, although GDP in real terms grew about 2.5% per year, GDP per capita remained practic- ally unchanged at US$330. The Fourth Development Plan (FYs 1977-81) has set a target growth rate of 6% per annum. Agriculture is the most important sector and provides the livelihood for about 75% of the population. Agricul- tural production and agro-industries are expected to grow, spurred by rela- tively favorable prices predicted for the main export crops -- cocoa and coffee. In addition, forestry exploitation should expand with the opening of new areas at Deng Deng (near Belabo). An oil refinery and tanker terminal at Port Limboh (near Victoria) are being planned, while off-shore oil exploration has begun close to Victoria.  1.05 Cotton bales from north Cameroon are transported more than 1,500 km by road and rail for export through the port of Douala. Cocoa and coffee from the western highlands and the central mountainous areas are carried by trucks or by railway about 200-300 km to Douala. Palm oil, rubber, and tropical fruits are produced in the coastal area and require only a short transport haul to be exported. In 1977, timber exports amounted to 560,000 tons of which 70% went through Douala and 30% through Kribi. The average rail distance for timber exports through Douala is 390 km. Expansion of timber exports depends in part on road improvements in the forest belt which stretches from the Atlantic coast to the eastern frontier and covers 37% of Cameroon's area. A study of forestry road development financed under the Second Highway Project is now under review in the Bank. 1.06 In addition to agriculture, the Government is giving priority to transportation under the Fourth Development Plan in order to promote foreign and regional trade, expand access to agricultural areas and facilitate food marketing. This policy is basically sound as large areas are still isolated and many others are served only by rudimentary infrastructure. The Plan aims at a transport investment of CFAF 176 billion (US$800 million in FY1975 constant prices) or 35% of total public sector investment. This compares with about CFAF 130 billion on the same price basis under the Third Plan (FYs1972-76) which represented more than half of the total public sector investment. However, even this relatively reduced program is rather ambitious and depends substantially (62%) on foreign contributions. B. The Transport System 1.07 The transport infrastructure in Cameroon comprises 57,000 km of roads; 1,153 km of railways; and one principal port, two minor ports and one seasonal river port. There is an international airport at Douala and 13 smaller airports. The transport system is export-import oriented and focussed on Douala. Foreign trade through the port of Douala flows principally along *the Transcameroon corridor (Douala-Yaounde-Ngaoundere-Maroua-Chad border) and the Douala-Bafoussam-Foumban corridor. Railways 1.08 The railway comprises two main lines emanating from Douala: the 913 km Transcameroon line to N'gaoundere and the 160 km western line to Nkongsamba together with short branch lines to Kumba and Mbalmayo. In FY1978 freight traffic totalled 1.3 million tons, over 90% of which was on the Transcameroon line, and about 1.7 million passengers (1.4 million on the Transcameroon line). Details of the system and its operations are given in Chapter II. Roads and Trucking 1.09 The road network comprises about 2,300 km of paved, 7,000 km of gravel/laterite roads, and 48,000 km of earth roads and tracks. About 29,000 km of roads are classified mainly according to traffic levels for maintenance budgeting purposes.  - 3 - 1.10 While the density of the road network averages 0.12 km per km 2 which is similar to that of Ghana, Nigeria and Ivory Coast, it varies con- siderably within the country. It is greatest in densely populated areas of high economic activity: the coastal/southwestern region along the Douala- Bafoussam corridor, the central region around Yaounde, and the northern region around Maroua. The most important trunk roads -- the Douala-Bafoussam- Foumban road and the northern section of the Transcameroon route -- have recently been or are being paved. 1.11 Although there has been a great effort to build and rehabilitate paved roads, in recent years the overall condition of the road network has deteriorated somewhat due to low initial construction standards, insufficient maintenance and increasing traffic. Gravel and earth roads, which account for 92% of the classified road network, are frequently impassable during the rainy season. In the dry season, corrugated and stony road surfaces and deep potholes cause excessive wear to vehicles. Consequently, the Govern- ment is now giving a higher priority to improving road maintenance than in the past. 1.12 The Ministry of Transport registers new vehicles but does not record retirement of vehicles from service. The fleet is estimated at about 62,000 vehicles, of which about 55% are cars, 35% trucks and vans, 6% buses and 4% specialized vehicles. From 1971 to 1975 (the latest date for which informa- tion is available), new vehicle registrations increased at an average of about 6% p.a. 1.13 Cameroon's road transport industry comprises many small, local firms, owning only one or a few trucks. Para-statal enterprises such as SODECOTON and CAMDEV operate their own fleets of trucks. A large segment of truck transport is carried out by trading companies as part of their business. A number of firms, both local and foreign specialize in international freight transport, one-third to one-half of which is allocated to Cameroon by interna- tional agreements with Chad and CAE. There are three truckers' unions, one each for the southern, center and northern regions. Only the northern one is active and its main purpose is to allocate to its members its quasi-monopoly over Cameroon's share of international freight transshipped at the end of the rail line at Ngaoundere. There is no effective control over tariffs or entry into the industry. Modal Distribution of Traffic 1.14 On a country-wide basis road transport is the dominant transport mode, linking Douala and Yaounde with provincial centers and serving regional and local trade. While road transport is also predominant in the Baffoussam corridor, the railway currently carries most of the freight traffic in the Douala-Yaounde corridor. This is particularly true in the rainy season, when the road between Edea and Yaounde is often impassable. The railway has suffered some shortage of rolling stock and motive power capacity in recent years, which has tended to suppress traffic. This situation is being remedied,  - 4- but the increase in traffic which this, together with the anticipated improve- ment in the growth of the Cameroon economy, is likely to generate will place strains upon the capacity of marshalling and locomotive maintenance and repair facilities. The proposed project is designed to overcome these problens. 1.15 Competition between road and rail for freight traffic is based on freight rates which reflect economic costs, with road-user charges making an adequate contribution to highway investment cost and rail tariffs for freight traffic substantially reflecting operating costs. Thus the future level of competition and the distribution of traffic will be primarily deter- mined by changes in relative costs, which in turn depend to a large extent on the relative speed at which road development in the corridor takes place. This is dealt with in detail below (paras. 1.21 to 1.25). Air Transport 1.16 Cameroon Airlines (CAMAIR) provides domestic services between Douala, Yaounde and 12 other domestic airports and international services between Douala and West Africa and Europe. The fleet consists of one Boeing 707, three Boeing 737's, and one de Havilland Twin-Otter. On domestic ser- vices, CAMAIR carries about 75,000 passengers annually with traffic concen- trated betwen Douala and Yaounde. In FY1977 CAMAIR realized an operational surplus of CFAF 287 million (US$1.1 million) after taxes and depreciation. Ports 1.17 Douala is the principal port, handling over 90% of Cameroon's for- eign trade. In 1977 Douala port traffic was 2.5 million tons, of which imports accounted for 1.7 million tons including 0.4 million tons of petroleum pro- ducts. Exports of 0.8 million tons included 0.4 million tons of timber and 0.3 million tons of other agricultural products, mainly cocoa, coffee, bananas and cotton. Since 1969 traffic has grown at 4.7% p.a. with imports increasing at 7.8% p.a. and exports at 2% p.a. The port is operating at close to full capacity, and a major project (the Second Douala Port Project) is underway. This will expand port capacity principally by construction of a new log port and container berths. Additionally, the channel is being dredged from its pre- vious 5 meter depth to 7.5 meters, with benefits both in the size of ship which will be able to enter and the extent to which fully laden ships can enter at all states of the tide. Another project is being prepared, which would expand capacity at the adjacent industrial port of Bonaberi. A study will also be undertaken of the feasibility of constructing a new deepwater port at the Rocher du Loup (near Kribi) the object of which would be to provide Cameroon with a second major port capable of evacuating timber, agricultural and possi- bly mineral exports from southern Cameroon and contributing to economic devel- opment in the Kribi area. The port of Victoria about 80 km from Douala has been losing traffic to Douala and now handles insignificant volumes; in 1977, it handled 2,300 tons of traffic, solely exports. The lighterage port of Kribi handled 178,000 tons of exports, mainly logs, and 9,800 tons of imports in 1977. A small river port is located in Garoua on the Benoue river, navig- able below Garoua from mid-July to mid-October. In 1977, it handled 14,000 tons of cargo.  1.18 The Cameroon National Port Authority (NPA), an autonomous public corporation, is in charge of port operations in Cameroon except the private logging port of Campo. The Port Authority is financially self-supporting, and the financial covenants under the Second Douala Port Project are being met. C. Transport Policy, Planning and Coordination 1.19 The Ministry of Transport (MOT), created in 1970, is responsible for transport sector management, including (a) reviewing, coordinating and screening transport investment proposals prepared by other ministries and public agencies, (b) formulating transport policies, and (c) approving the tariffs of Regifercam, CAMAIR and NPA. However, the Ministry has neither the qualified staff nor the authority to perform its functions adequately. The Ministry of Economy and Planning (MINEP) has carried out some transport plan- ning in the framework of overall development planning, but its limited re- sources, sufficient when investment decisions consisted mainly of ranking high-priority projects on the principal transport routes, are inadequate for the more sophisticated investment choices between major transport modes in the same corridor. The Ministry of Equipment and Housing (MINEH) is respons- ible for road planning and has just started to direct its attention to this task. 1.20 The Bank has had a continuing dialogue with the Government on the need for strengthening transport sector management. At first, attempts to reinforce the organization and machinery for transport planning and policy making met with limited success. Recent developments imply a change in the Government's attitude. A Planning and Coordination Unit (PCU) has been created within MOT and two economists have been or are being recruited for three years each under the Technical Assistance Project (Credit 673-CM, US$4.5 million, June 1977). One economist will be seconded to MINEP to help ensure coordina- tion and integration of investment decisions in transport with closely related sectors such as agriculture and forestry. The other economist is already seconded to MOT to stimulate and coordinate the work of the PCU. The Third Highway Project (Loan 1515-CM, US$16.5 million, April 1978) will provide the PCU with another economist/statistician for three years and four fellowships for Cameroonians to study abroad. Furthermore, the Government has requested advice from the Bank on carrying out an overall transport sector study. The study would be undertaken by Cameroonian professionals and expatriate experts financed under ongoing transport projects, with Bank staff providing technical assistance during field missions. 1.21 So far the Government has been preoccupied with completing the Transcameroon road/rail axis and improving some key domestic roads. It has thus tended to take a project-by-project approach to investment. The result has been a road construction program without clearly defined priorities, in excess of financial resources, and with inadequate project preparation and evaluation. Road maintenance has received little attention, and in the absence of good roads there has been strong support for a railway infrastruc- ture investment program which may turn out to be excessive in relation to the railway's long-term role. The net result has been a lack of a blue-print  for long-term transport development systematically related to the country's resource base and developing demand for transport services, a concentration on high cost projects, and a lack of adequate thought to execution of major projects in stages. 1.22 The absence of a master plan for infrastructure development is parti- cularly noticeable in the Douala-Yaounde corridor. In mid-1977 a feasibility study of transport improvements in the corridor, carried out under the Second and Third Railway projects, demonstrated that a combination of partial railway realignment with road upgrading to paved standard would be the economically optimal solution. However, because of a combination of factors caused by unusually bad weather in 1976, the Government pressed for the immediate con- struction of a four-lane expressway instead of a two-lane paved road. After protracted discussions with the Bank, the Government agreed to limit its first stage plans for highway investment in the corridor to a two-lane road, though on a different alignment and at a higher cost than that featured in the corridor study calculations. The proposed road is the subject of an ongoing feasibility study. The proposal assumes donor funds will be available to enable the Government to award several contracts simultaneously, commence work in 1980 and finish in 1982 or 1983. 1.23 At the same time, as a result of discussions between the Government and the Bank on proposals for realignment of the mountainous Edea-Maloume section of the railway (122 km), the Office du Chemin de Fer Transcamerounais (OCFT), responsible for railway construction, has prepared draft terms of reference for an updated study and requested Bank comments. The Bank's response has suggested expansion of the study to examine all feasible alterna- tives to full realignment and to ensure that all relevant economic factors (including the construction of the Douala-Yaounde road) are taken into con- sideration. The Government agreed during negotiations that it will carry out a study to determine the optimal economic solution for improving the Edea- Maloume section and will not undertake any capital investment on this rail section, unless it is economically justified. As requested by the Government, a letter outlining the recommended methodology for the above study has been sent to the Government. 1.24 If the Douala-Yaounde road is built according to the timetable noted in para. 1.22, the full force of road competition will be felt by the railway before the railway has had time to reestablish consumer confidence in its ability to provide efficient and reliable service as a result of the substan- tial investment already underway (including the proposed project). The economic and financial analyses contained in this report fully reflect these pessimistic assumptions. 1.25 Forestry development is critical to the justification of the pro- posed project and in the wider context of southern and southeastern Cameroon development. A two-phase study on forestry transport requirements financed under the Second Highway Project was recently completed and is being reviewed by the Government and the Bank. The main conclusion is that a lack of trans- port is the major reason why Cameroon forestry development has failed to  expand rapidly in recent years. The Bank forestry sector review mission which recently visited Cameroon concluded that, in addition, Government policy on development of the sector was unclear and this uncertainty was an inhibit- ing factor on growth of production. The Government has decided in principle to appoint a forestry economist to advise on policy matters but no appointment has yet been maue. Successful progress on both transport and policy aspects will be necessary to achieve a satisfactory forestry development policy, and the Bank will continue to monitor progress. II. REGIFERCAM A. Organization and Management 2.01 Regifercam is a public sector corporation functioning under Gov- ernnent guidelines as stipulated in a 1974 presidential decree. The Board of Directors consists of twelve members, mostly Government representatives, including the corporation's general manager as chairman. The board has the dual function of implementing Government policy and supervising the railway's management which is headed by the general manager and two deputy general managers, all appointed by presidential decree. Regifercam operates with a reasonable degree of independence in its day-to-day operations. 2.02 Regifercam's internal organization (Chart 1) has undergone several changes in recent years and is now satisfactory in its essential features. The railway has succeeded in finding Cameroonians for its entire top and middle management, with the exception of one deputy general manager. The quality of management has improved, due inter alia to technical assistance provided under two preceding Bank projects and by the Canadian International Development Agency (CIDA). There remain, however, critical areas of organ- izational and personnel weakness. Substantial technical assistance and management training has, therefore, been included in the proposed project, in particular in the fields of planning and control and through the establishment and staffing of Organization and Methods Units in the technical departments. B. Staff and Training 2.03 Regifercam's total staff increased considerably (34%) over the past five years, stabilizing in 1978 at about 5,200 employees. While this increase in staff was partly justified by the opening in 1974 of the last section of the Transcameroon line (293 km) and has remained below the in- crease in traffic units (passenger-km and ton-km), productivity is rather low (less than 170,000 traffic units per employee) 1/. No conditions on staffing were included in previous loan agreements. To control this tendency 1/ Excluding staff working under investment budget and trainees.  - 8 - to overstaffing, following Bank recommendations made on several occasions, Regifercam is preparing a manpower plan with the assistance of consultants Canadian Pacific Consulting Services (CPCS), under CIDA financing, and Organisation, Reconstruction, Travail (ORT, Switzerland), under Bank financ- ing. The primary objectives of this plan are to determine numbers of rail- way staff proportionate to the actual operational needs and ensure a better matching of job requirements and staff qualifications. The railway agreed during negotiations to submit the draft plan to the Bank for review by June 30, 1980, to implement it over a five-year period after this review, to submit to the Bank annual progress reports, and to limit any staff in- crease to what is absolutely necessary for railway operations until the plan is finalized. Regifercam's staffing over the past six years is shown in the table below. Regifercam Staff End of Fiscal Year 1973 1974 1975 1976 1977 1978 1. Operations Permanent staff 851 865 915 908 882 834 Auxiliary staff 2,812 2,980 3,124 3,255 3,494 3,723 Subtotal 3,663 3,845 4,039 4,163 4,376 4,557 2. Investment programs Permanent staff 21 13 12 10 22 27 Auxiliary staff 136 303 269 680 676 587 Subtotal 157 316 281 690 698 614 3. Trainees 104 108 112 123 107 94 Total, nationals j,924 4,269 4,432 4,976 5,181 5,265 4. Expatriates Technical assistance 37 39 36 28 34 37 Instructors /a 8 8 5 5 4 8 45 47 41 33 38 45 /a French nationals serving for periods of up to two years as a substitute for military service. 2.04 Present technical assistance provided by OFERMAT (France) is generally good, both at the level of the Deputy General Manager for Studies, who is an experienced railway engineer, and at the middle supervisory level. However, there is a lack of adequate support at the management level in the main technical departments and the project's technical assistance component is designed to overcome this weakness. Regifercam agreed during negotiations to consult annually with the Bank on the railway's expected technical assis- tance requirements and on measures necessary to meet them.  - 9 - 2.05 The railway has had a formal training program since 1952. Bank reviews of Regifercam's training problems in 1975 and 1977 showed that its training program needed to be revised. Under the Third Railway Project, Regifercam appointed consultants (ORT) who designed a training component for the proposed project. 2.06 ORT's tasks included the following: (a) manpower inventory; (b) job descriptions (jointly with CPCS's team); (c) recommendations for the organization of the personnel, training and psychology divisions; (d) quantitative and qualitative evaluation of recruitment and training needs; (e) appraisal of the resources to be made available to the training division and to be included in the proposed project; (f) work program for the setting up of a training scheme and the organization of a training department; and (g) recommendations for curricula. 2.07 The design of the training component of the proposed project is based on ORT's report, dated November 1978, which calls for the retraining of about 50% of Regifercam's staff and for the hiring and training of about 200 new recruits annually in two-year courses, mostly to replace staff leaving the railway. It provides for the improvement of the existing Douala training facilities with some new construction, the purchase of furniture and training equipment and material, and the provision of technical assistance (194 man- months) to finalize the design of the training programs and start their imple- mentation, to initiate the proposed reorganization of the railway training division, to assist the railway in improving staff recruitment and management, and to train counterparts who are to take over the management of all railway training activities after the end of the implementation phase. On the basis of the consultants' preliminary recommendations, improvements in staff manage- ment techniques, mainly through rationalizing the hiring system and reducing the present high level of absenteeism, will be instituted by the railway during 1979 (para 3.17(c)). Regifercam recently introduced psychotechnic methods to improve the selection of candidates, particularly for jobs where safety is at stake, which have already produced useful results.  - 10 - 2.08 The most urgent need of the railway is a substantial improvement in operations and management control with emphasis on the training of key personnel of the various departments of the organization. The formal vocational training scheme for managerial skills executed by the railway in 1978 is not sufficient to achieve this goal and must be complemented by daily on-the-job training which is, in fact, the main objective of the tech- nical assistance component of the proposed project (para. 3.17(b)). 2.09 A detailed review of Regifercam's training problems and of the Bank's involvement in training during the previous Cameroon railway projects is con- tained in the project file. C. Accounts, Costing, Budgets and Audit 2.10 Regifercam's financial statements are in general based on sound accounting principles, conforming to procedures recommended by the Organization Commune des Etats Africains et Malgache (OCAM). Valuation and depreciation of assets are discussed later in this report (para. 5.05). Cost accounting was introduced several years ago under the Bank's Second Railway Project, and the costing system has since been considerably improved. Assisted by consultants financed under the Third Railway Project (SOFRERAIL, France), a new plan of accounts has been introduced and the costing system is expected to produce detailed and reliable results for FY1980. The proposed project provides for continuation of ongoing technical assistance in this field and the railway has appointed qualified counterparts. 2.11 Regifercam prepares an annual operating budget, entitled "Forecast Operating Account", which is a sufficiently detailed and thoroughly prepared document containing an annex on capital investment to be financed from the railway's own resources. However, a comprehensive investment budget does not exist. Regifercam has agreed to: (a) produce, beginning with FY1981, a comprehensive investment budget and a corresponding financing plan covering all railway-related investment irrespective of the source of financing; and (b) submit, beginning FY1980, its draft operating and investment budgets to the Bank for review at least 30 days before con- sideration by Regifercam's board, but in any event not later than one month before the beginning of the fiscal year covered by the budget. The same will apply, mutatis mutandis, to any amendments to the original investment budget proposed to be made during the year. 2.12 Medium- and long-term planning, including technical and economic studies, and budgeting and control are the principal functions of the deputy general manager for studies. The organizational framework is reasonable, but there is a shortage of qualified manpower. Technical assistance in this area  - il - is being financed under the Third Railway Project and its continuation has been included in the proposed project. In September 1978, Regifercam provided two qualified counterparts and is expected to provide one or two more as needed during 1979. The railway is presently instituting a formal budget control system for all operating expenses, giving a monthly comparison of actual versus budgeted expenses per type of expense and department and estab- lishing rules for dealing with budget overruns. A report, covering execution of the budget during the first four months of FY1979, was submitted to the Bank and shows satisfactory progress in implementing the system. 2.13 A department for internal audit was recently instituted and a director appointed. Additional staffing is underway. The railway's accounts have been audited by a Government-appointed "Commissaire aux Comptes" whose reports, however, have not reflected adequate auditing standards. The rail- way signed a contract with auditors acceptable to the Bank for the FY1978 audit and agreed to submit to the Bank, not later than six months after the end of each fiscal year, a report by auditors acceptable to the Bank. D. Property 2.14 A description of railway track, structures, equipment, and other property is presented in Annex 2, tables 1 to 3, and Chart 2. Track and Signalling 2.15 The railway had 1,170 km of main line in 1977. The realignment of the Yaounde-Maloume section (102 km), put into service in April 1978, shortened the distance between Douala and Yaounde by 17 km. The realignment of the Douala-Edea section (84 km), which started at the end of 1978 (under financing from KfW, FED, CCCE, FAC, CIDA and USAID), will result in a further reduction of 13 km by 1981. The track on the Yaounde-Ngaoundere section (completed in 1974), was built to high technical standards and is in good condition. Between Douala and Yaounde, the Douala-Edea section needs a complete track renewal, which will be carried out during the realignment, and the Maloume-Yaounde section is new. The middle section (Edea-Maloume) is being partly rehabili- tated by Regifercam's own forces using salvaged material. The works consist of the replacement of concrete sleepers with steel sleepers on a 42 km zone (km 103 to km 145), continuation of the replacement of 30 kg rails on about 11 km between Edea and Makondo (km 104), and important subgrade repairs on a dozen spots scattered along the whole section. On 38 km of the Western line, between Nlohe and Nkongsamba, rails are very old (German 20-kg rails) and their replacement with salvaged 26-kg and 30-kg rails is planned for 1979-80. 2.16 A sophisticated new multiplex communication system was put into service in December 1978 between Douala and Yaounde with six interconnected automatic telephone exchanges and a telex network. This system is supple- mented by physical safety circuits using traditional technology. An elec- trical signalling system will be installed in the stations between Douala and Yaounde starting in October 1979 under CCCE financing coupled with a  - 12 - suppliers' credit. This system is to be completed by October 1981 and also provides for remote control of switches. Properly maintained, the new com- munication and signalling systems will enable Regifercam to improve sub- stantially its operations on the Douala-Yaounde line. Rolling Equipment Transport Capacity 2.17 The previous Bank projects provided for the purchase of necessary motive power and rolling stock to meet traffic requirements and replace obsolete equipment. The locomotives and rolling stock were sufficient to cope with traffic demand for the planned period, i.e. through FY1977. In December 1976, railway management and the Bank calculated that additional boxcars and gondolas were needed to increase the transport capacity of the railway, and Regifercam ordered 160 boxcars and 50 gondolas under CCCE financing. This equipment has been delivered. In December 1977, Regifercam and the Bank once again reassessed the need for additional motive power and rolling stock. This led Regifercam to request financial assistance from CIDA and SEE for the purchase of 20 mainline locomotives of the 2000-HP range, 150 flat cars for timber, 240 boxcars and 60 gondolas. This equipment is expected to be delivered in 1979-80. The identification of the needs was made in time but delays in securing financing and in delivery have resulted in the transport capacity shortage now being encountered. Locomotives 2.18 At the end of 1978, Regifercam had 47 mainline locomotives, 9 rail- cars and 31 shunters (Annex 2, Table 1). Of this fleet, three 12- to 13-year old CC-2400 locomotives will be withdrawn from service on the main line, because they are too costly to maintain and have numerous breakdowns. Of the 15 older locomotives of the class BB-300/500, 10 are 23 years old but still in good condition and these locomotives will be used on the Western line or for service trains and shorthaul passenger trains. In FY1980, with the addition of 20 Canadian mainline locomotives (CC-2200), Regifercam will have 73 mainline locomotives 1/ of which 58 or 79% are less than 10 years old. This is a substantial increase both in number of units and hauling capacity (55%) and the average age of the mainline motive power will be considerably less than it was in 1977 (7 years against 13 in 1977). The railcars are rather old but Regifercam intends to develop a passenger transport plan which will provide for more passenger trains to be hauled by locomotives of the class BB-1200 and also by BB-900 locomotives which are being delivered. 2.19 The average shunter age is about 10 years (31 units). Heavy train shunting will be carried out by some of the new BB-900 locomotives, the light shunting work being performed by about 20 existing 400 HP shunters whose useful life can be expected to extend beyond 1985. 1/ This total includes the BB-900 locomotives which will be used for both light mainline service and heavy shunting in the main marshalling yards.  - 13 - Passenger Rolling Stock 2.20 Out of a total of 91 passenger coaches, about 25 are nearly 30 years old, and 15 to 20 of these should soon be written off. On the basis of the Bank's passenger traffic forecasts for FY1981 and past statistics, the purchase of twelve second-class passenger coaches of large capacity (88 seats) would be necessary. However, Regifercam is seeking bilateral aid for the purchase of 31 passenger coaches, including about 11 first-class units. In January 1979, the railway submitted to the Bank a passenger transport plan, as requested by the appraisal mission. This plan provides for: (i) the re- duction of passenger service on the Western line, including the closing of stations with very low traffic, and (ii) the improvement of ticket inspection along the line and in the stations. These measures are being implemented. In addition, the plan calls for the renewal of 20 second-class passenger coaches which are obsolete. The mission feels that this number is overestimated and the issue is under discussion with Regifercam's management. Freight Cars 2.21 As detailed in Annex 2, Table 3, at the end of 1978, of a total of 1,541 freight cars, 332 are due to be written off. In 1978/79, 160 boxcars, 50 gondolas and 2 well wagons were delivered under CCCE financing, assembled in Douala and put into service. Additionally, the railway plans to buy with Canadian financing 150 80T flatcars (timber), 240 boxcars and 60 gondolas. In 1980, the number of freight cars will therefore be increased by about 20% and the load capacity of the fleet by 40%, since 40T boxcars and gondolas will replace old 20/30T cars and the 80T timber flatcars will more than offset 110 30T flatcars due to be scrapped. The total capacity of the fleet was about 56,600 tons at the end of 1978 and will be about 79,000 tons in 1980. Service Vehicles 2.22 Regifercam has 15 service coaches for inspection, on-the-job train- ing along the line and breakdown trains, and 144 service freight cars used mainly by the Permanent Way and Mechanical Departments. Most of these vehicles are old but have limited use and hence are adequate for this purpose. 2.23 In summary, the railway has maintained its infrastructure assets well by timely renewal. However, it has given less priority to its capacity requirements, particularly in the last one or two years, with the result that there has been a tendency for demand to exceed capacity. This problem is being rectified. As future rolling stock requirements should be evaluated on the basis of the actual condition of existing equipment, Regifercam sub- mitted to the Bank, in March 1979, such an evaluation with forecasts of equipment to be written off and proposed measures for the rehabilitation of disabled vehicles. The evaluation is being reviewed and will be discussed with Regifercam during coming supervision missions. E. Operations 2.24 A summary of operating statistics (1973-1978) is presented in Annex 2, Table 4.  - 14 - 2.25 In general, operations have improved slightly over the past five years, but the efficiency indices are still on the low side. The availabil- ity of motive power is slightly under 75%. The average gross load per freight train has not increased sign'ficantly despite the introduction of more power- ful locomotives (4B-3600). Wagon turnaround time has not improved remaining at about 11 days. Operations are badly hampered by numerous incidents and accidents, such as derailments on the main line (44 per year in 1976-78), in the stations and spurs (284 per year in 1976-78), and rail breakages (242 per year), causing traffic stoppages and train delays. This situation is expected to improve slightly with the opening to traffic of the realigned Maloume- Yaounde section and the introduction of better communications, but the basic problems are still poor operational management, mainly in the Operations and the Mechanical departments, lack of discipline, and inadequate staff training or retraining schemes. 2.26 Due to cost overruns on the previous projects, mainly on the con- struction of the Japoma bridge, management assistance programs provided under these projects were delayed and transferred to the Third Railway Project. During the implementation of the Management Study under the latter, remedial actions were undertaken in the DOT and MT Departments, where critical weak- nesses had been identified. In the DOT Department, better systems for moni- toring motive power and for rolling stock management and utilization were introduced and the railway safety regulations were revised with the assistance of the consultants. In the MT Department, new maintenance rules and proce- dures have also been defined, and the consultants are training staff to implement these new procedures under a separate contract financed by CCCE which should be completed by the end of 1980. Although some noticeable results have been obtained, particularly in terms of locomotive availability and number of locomotive failures, it is clear that much remains to be done to bring railway operations to satisfactory standards of efficiency. Plan of Action 2.27 A plan of action to improve operations was submitted to the Bank by Regifercam's management and agreed upon during negotiations. The plan indicates the operational targets they will try to achieve during the next four years and enumerates the means by which the plan of action will be implemented. The plan of action was incorporated in the Loan Agreement. Management Assistance 2.28 Actions undertaken by consultants SOFRERAIL under the Third Railway Project to improve railway management and operations were not as successful as expected. This was due to several factors including: (a) the lack of counterparts for the consultants' experts; (b) the railway's failure to promptly implement feasible physical improvements to the facilities recommended by SOFRERAIL;  - 15 - (c) the inadequacy of the maintenance facilities for rolling equipment to permit immediate substantial improvements; and (d) the consultants' tendency to concentrate on actions aimed only at limited improvements of existing methods and proce- dures, due chiefly to the lack of qualified counterparts. In the DOT and MT departments, the work of the SOFRERAIL experts under the Third Railway Project was completed by mid-1978, except for short follow-up missions performed later. SOFRERAIL's final report on these activities was received at the end of 1978 and was used in finalizing the technical assis- tance component of the proposed project (para. 3.17). F. Traffic Background 2.29 In recent years, a shortage of motive power and rolling stock has limited Cameroon Railways ability to meet traffic demands, particularly those for cement and timber. This has led to suppression of traffic estimated by the railway as equivalent to about 15% of current demand. This will be over- come by locomotives and rolling stock being delivered in FYs 1979-1980. However, the railway is unable to marshall wagons efficiently and to service locomotives punctually. The impact of these deficiencies would increase substantially as traffic grew if appropriate investments were not made to increase marshalling and service capacity. The project will ensure that this capacity will become available as soon as possible and will be in service during FY1982. Traffic Analysis 2.30 During the Third Plan (FYs1972-76) GDP grew at less than 3% p.a. *compared with over 7% p.a. during the Second Plan. Improved agricultural producer prices and the effects of a substantial increase in investment in the mid-1970's should enable a GDP growth rate of about 6% p.a. to occur during the 1980s. Railway freight traffic, which grew by nearly 9% p.a. from FY1974 to FY1978, should increase by a further 7% through FY1979 despite continued weakness in timber traffic (Annex 2, Table 5). Passenger Traffic 2.31 Transcameroon passenger traffic increased sharply in FY1975 after completion of the line to Ngaoundere. Since then it has been virtually static. However, Regifercam believes that due to fare avoidance the statis- tics under-record the number of passengers actually carried and steps are being taken to eliminate this. Western line passenger traffic has declined mainly as a result of increased road competition, in turn partially due to road improvements.  - 16 - Passenger Traffic by Fiscal Year Transcameroon 1972 1973 1974 1975 1976 1977 1978 1979 (est.) Numbers ('000) 1,167 1,046 1,082 1,405 1,432 1,373 1,300 1,412 P-km (million) 168 145 154 232 228 230 216 234 West Numbers ('000) 711 670 600 551 425 351 390 400 P-km (million) 52 48 46 49 32 27 30 30 Total Numbers ('000) 1,878 1,716 1,682 1,956 1,857 1,724 1,690 1,812 P-km (million) 221 193 200 281 260 257 246 264 Freight Traffic Growth FYs1979-83 2.32 Freight traffic forecasts are based upon the following: (a) a best estimate which reflects the improved prospects for the Cameroon economy (para 2.30) and the fact that during the course of FY1979 thru FY1982 Regifercam will be provided with substan- tial additional capacity in the form of motive power, rolling stock, and the wagon marshalling and locomotive repair facili- ties provided under the proposed project; (b) a sensitivity estimate which takes into consideration (i) the uncertainties regarding the prospects for major Cameroonian exports, in particular timber, discussed below; (ii) the possibility that the economies of neighboring countries, in particular Chad, which generate demand for rail services, will perform poorly, and (iii) the operational shortcomings of Regifercam which will take some time to overcome. The sensitivity analysis assumptions could well be realized and consequently they are given particular attention in the economie and financial analyses. Best Freight Traffic Estimate FY1979 to FY1983 2.33 An increase of about 41% in total freight tonnage is expected (Annex 2, Table 6). This is mainly accounted for by five commodities: timber, construction materials, aluminium/alumina, petroleum and traffic from the new paper mill scheduled to commence operations at Edea in FY1981. The forecast timber traffic increase is compatible with short-term demand projec- tions made by logging companies, and indeed it is widely believed that railway timber traffic could be increased to about 600,000 tons per annum given ade- quate railway capacity. The demand for transport of construction materials reflects an increasing requirement for cement in north Cameroon and Chad, supplied by Cameroon's main cement works at Douala, which is currently being expanded from a capacity of 330,000 tons p.a. to 1,115,000 tons by 1984. The  - 17 - increase in petroleum traffic is largely accounted for by the opening of a new depot at N'Gaoundere which will result in substitution of rail transport for road transport via Bafoussam. The increase in alumina/aluminium transport will result from expansion of Alucam production under an IFC project presented to the board in April 1979. Freight Traffic Growth after FY1983 2.34 Construction of the Douala-Yaounde road to heavy duty paved standard could begin in late 1980, with a construction period of two or three years. The alignment envisaged is some 15% shorter than that suggested by SOFRERAIL/ OCCR (about 230 km compared with 273 km), due to prospective adoption of an alignment on the Douala-Edea section reducing this distance to about 65 km. As a result, the Douala-Yaounde transit time by truck can be expected to be reduced to about three hours. Under these circumstances, railway traffic is likely to decline during the first year in which the road is open (assumed FY1984) and subsequently to be increasingly confined to long-distance bulk and semi-bulk commodities. Thus total traffic will probably not recover to the FY1983 tonnage until about FY1988. Beyond FY1988, growth of railway traffic is likely to resume at a rate largely determined by economic growth in north Cameroon, Chad and CAE and the growth of timber traffic from the Belabo area. A trend rate of 3% p.a. for timber and 2% p.a. for other freight traffic is forecast for FYs1988-2001. Traffic growth characteristics for the main commodity groups are analyzed below. Timber 2.35 Regifercam's timber tonnage is forecast to increase by over 50% between FY1979 and FY1983. The FY1983 forecast is well below those produced by consultants Centre Technique Forestier Tropical, Paris ("Etude des Trans- ports Forestiers", December 1978). However, growth of production has been slow in recent years and a cautious approach is therefore appropriate. The establishment of additional sawmilling capacity at Belabo should increase the ratio of processed timber to log traffic on the railway to about one-third (log equivalent), compared to about one-fourth in recent years. After FY1983 road competition is expected to divert some timber traffic but as Regifercam sources will be to a large degree concentrated on Belabo, which is not served by road, a further slow growth in timber traffic is expected. Timber Traffic ('000 tons) Fore- cast Calendar year: 1973 1974 1975 1976 1977 1978 1983 Douala Port logs 403 319 214 328 750 (2nd Port Project) wood products 76 84 70 81 190 Fiscal Year: 1974 1975 1976 1977 1978 1983 Regifercam logs 335 152 261 284 275 430 wood products 57 56 57 56 55 100  - 18 - Agricultural Exports 2.36 Agricultural exports are forecast to increase in volume by 50% between FY1979 and 1983. This primarily reflects greater cocoa production through producer price increases, further growth in cotton traffic, expansion of sugar refinery capacity at Mbandjok (Km 389), and increased oil seed production. Miscellaneous Southbound Traffic 2.37 This category includes return packaging, miscellaneous agricultural products and a small volume of semi-finished goods mainly from north Cameroon. The total volume is likely to grow about the same rate as GDP. Paper Products and Alumina/Aluminum 2.38 Production is expected to commence at the Cellucam plant near Edea in FY1981. Under the most favorable circumstances full production of about 120,000 tons p.a. could be achieved by FY1985; however, a more modest forecast of 100,000 tons is employed in view of possible delays in reaching full capac- ity. Alumina/aluminum traffic should increase to about 260,000 tons p.a. as a result of Alucam expansion (para. 2.33). Other Traffic 2.39 Other traffic is forecast to increase by about 10% between FY1979 and FY1983. This is a much slower rate than experienced from FY1973 to FY1978, but a conservative approach is adopted in view of (a) uncertainty about the rate of growth of construction, which will determine the volume of cement traffic; and (b) the probability that northbound general freight traffic will expand less sharply than in recent years when food imports substituted for domestic crop production, which was adversely affected by weather conditions. Freight Traffic Forecast (est.) Fiscal Year 1978 1979 1980 1981 1982 1983 1984 1989 Best Estimate '000 tons 1359 1395 1520 1699 1836 1978 1875 2302 m/t-km 555 594 634 708 796 935 887 1150 Sensitivity '000 tons 1359 1359 1436 1480 1524 1570 1411 1725 Estimate m/t-km 555 594 629 667 707 750 665 813 Sensitivity Freight Traffic Estimate FY1979 to FY1983 2.40 The sensitivity forecast calls for a growth in traffic about half the best estimate rate and about two-thirds of that recorded in the period of slow economic growth since FY1974. A major feature of this sensitivity  - 19 - analysis is the assumption that if paper and aluminium/alumina traffic, for which future production and traffic levels are known with a high degree of precision, are excluded, no increase in tonnage is predicted. However an increase in the average distance and thus ton-km should occur as Regifercam concentrates increasingly upon long haul traffic, particularly of timber. The growth in ton-km for freight traffic excluding aluminium/alumina and paper would be about 5% p.a. compared with over 8% during the previous five years (Annex 2, Table 7). Passenger Traffic Forecast 2.41 Passenger traffic is expected to continue to grow slowly until the Douala-Yaounde road is paved. Thereafter, railway passenger traffic could decline sharply as the difference between the transit time by road and rail widens sharply -- by road it could be reduced to under three hours, well under half the time than by rail. During the road construction period, it would be reasonable to expect some detrimental effect on rail passenger traffic. Thus the timing of road development is critical to the traffic forecasts below, which assume road construction beginning FY1981 and being substantially completed by FY1983. 2.42 Passenger traffic, in fact, has little bearing on the project. The need for marshalling facilities is independent of it, while only 14% of the demand for workshops/sheds will be attributable to passenger operations in FY1983. Project benefits are, therefore, virtually insensitive to the accuracy of passenger traffic projections. Passenger Traffie Forecast Fiscal Year 1978 1979 1980 1981 1982 1983 1984 1985 (est.) Transcameroon Numbers ('000) 1,300 1,412 1,400 1,456 1,412 1,404 1,223 1,223 P-km (million) 216 234 234 244 239 234 209 209 West Numbers ('000) 390 400 400 400 400 400 400 400 P-km (million) 30 30 31 31 31 31 31 31 Total Numbers ('000) 1,690 1,812 1,800 1,856 1,987 1,804 1,623 1,623 P-km (million) 246 264 265 275 270 267 240 240 III. THE PLAN AND THE PROJECT A. Regifercam's Investment Plan 3.01 Regifercam's Investment Plan and the corresponding financing plan (cf. Annex 2, Tables 14 and 15) cover FYs1979-81 and are part of the  - 20 - Government's national plan. Forecasts for the years until FY1985 have been established and discussed with Regifercam for the purpose of this report. Regifercam's planning function is being strengthened under the third project, and the proposed project provides for continuation of the corresponding technical assistance (para 2.11). 3.02 Total railway investment planned for the three-year period amounts to CFAF 45.9 billion ($209 million). It focusses on: (a) providing sufficient transport capacity to meet expected demand; (b) upgrading and modernizing existing infrastructure; and (c) improving operational efficiency. 3.03 The investment plan is, in general, well balanced and adequate to achieve the above objectives. Most components are economically well justified. The justification for the planned purchase of passenger coaches for an estimated CFAF 2.4 billion is, however, not obvious and is being studied in more detail by the railway before making a decision. This decision will be subject to the Bank's approval under existing and proposed covenants. 3.04 Financing of the essential items, including the proposed project, has been secured or is in an advanced stage of negotiations. Financing of the passenger coaches and the planned new Douala passenger station building has not yet been secured, but is under discussion between the railway and potential donors (Japan, France, and African Development Bank (AfDB)). B. The Project Background 3.05 Freight traffic will increase by one third from FY1979 to FY1982. There will be sufficient line capacity to carry forecast traffic and the capacity of the port of Douala is being almost doubled under the Second Port Project. However the following constraints exist: (a) motive power and rolling stock capacity is insufficient and old equipment must be renewed; (b) marshalling and auxiliary facilities in Douala must be relocated and their capacity increased; (c) maintenance capacity for locomotives, rolling stock and track maintenance equipment must be adjusted to handle higher traffic volumes; and (d) efficiency of both operations and management needs improvement. France and Canada are financing needed locomotives and freight cars. The proposed project is designed to resolve the other constraints by financing selected major items included in the railway investment plan.  - 21 - 3.06 The project comprises five main components: (a) the new Douala marshalling yard including the infrastructure of a passenger station, (b) the provision of railway equipment, (c) the expansion of the workshops and the construction of the new maintenance facilities at Yaounde, (d) the provision of technical assistance for improvements in operations and management, and consulting services for feasibility and engineering studies and works super- vision, and (e) training. Objectives 3.07 The objectives of the proposed project are: (a) to increase the capacity and the efficiency of the traffic handling facilities of the Douala area by grouping in one central location all the operations now carried out in four different stations, in order to meet the needs until 1985 and provide potential for further capacity increases at low marginal cost; (b) to provide Regifercam with adequate locomotive and rolling stock maintenance facilities to enable it to handle the additional equipment being procured; (c) to improve the efficiency of management and operations through management assistance for the administrative and technical departments, including preparation of further workshop expan- sion possibly needed after 1982; (d) to assist the railway in buying locomotive spare parts and railway equipment (mainly track maintenance equipment, turn- outs, bogies and machine tools and equipment for the railway workshops); and (e) to improve and expand training facilities and to provide technical assistance to reorganize the Training Department and improve training programs. Engineering Aspects 3.08 The final engineering of the new Douala station was carried out with Bank financing by consultants: (a) SOCOTEC-CECOBA (France-Cameroon) for the main civil works; (b) TRANSURB CONSULT (Belgium) for the signaling and public- address system; and (c) SCET International (France) for the road bridge. Cost estimates, implementation schedule and tender documents were included in the consultants' work, which was finished by March 1979.  - 22 - 3.09 The engineering studies for the railway workshop expansion are being carried out by consultants SOCOTEC-CECOBA on the basis of a master plan approved by the Bank after review by an experienced independent consultant hired by the Bank. Completion of these studies is expected by September 1979. 3.10 A preliminary design for the Yaounde locomotive running shed and rolling stock maintenance facilities was prepared by a consultant financed by Regifercam and reviewed by the Bank in May 1979. The proposed maintenance regime to be instituted in these new facilities complies with the Bank's recommendations. The final engineering will also be done by SOCOTEC-CECOBA. The engineering, including the preparation of the tender documents, is expected to be completed by December 1979. 3.11 The scope and design of the training component have been defined by consultants ORT (Switzerland) under Bank financing and supervision. Description The New Douala Marshalling Yard 3.12 The new Douala marshalling yard includes: (a) a marshalling yard with 2 sets of tracks for freight traffic and a rail bridge for access to the workshops and maintenance facilities; (b) a platform and surfaced areas for cargo-handling, including required service sidings; (c) a warehouse and its service tracks; (d) a wagon maintenance shed; (e) various service buildings and fixed installations; (f) internal service roads and parking areas; (g) a passenger station with tracks and platforms (excluding the passenger station building, its access and parking areas); (h) a set of tracks for servicing and parking passenger coaches; (i) a public road connection to the freight station and yard; and (j) a road bridge to replace the present level-crossing on the busy Douala-Yaounde road (an overhead crossing above 10 tracks of the new marshalling yard sidings).  - 23 - Regifercam agreed during negotiations to make arrangements by December 31, 1980, to build an adequate passenger station building and related facilities. Annex 1 describes the main features and merits of these new Douala traffic handling facilities. Map IBRD 14059 shows the location of the main railway facilities in the Douala area. Railway Equipment 3.13 The railway equipment to be included in the project comprises: (a) track maintenance equipment, mainly for renewal: 5 gang-cars with trailers, 2 inspection cars, 1 test rail car, and 1 small mechanical road-rail diesel shovel; (b) 50 turnouts, half for renewal and half for new service sidings, and about 75 turnouts necessary for the new Douala station and marshalling yard; (c) 50 bogies to replace those damaged in accidents; (d) a truck equipped with pump and hoses for the fire department; (e) machine tools, test, cleaning and lifting equipment for the workshop; and (f) locomotive spare parts. Douala Workshop Expansion 3.14 The workshop expansion comprises: (a) the civil works which include: (i) the expa sion of the diesel locomotive workshop (1,215 m ); (ii) the construction of a storage building for major locomotive spare parts and assemblies (bogie frames, wheels, traction2motors, diesel engines, main gene- rators) (1,250 m ); (iii) the construction of a cleaning plant for locomotive bogies and heavy spare parts; (iv) the construction of a workshop for maintenan e and repair of track maintenance machinery (810 m );  - 24 - (v) the construction of a platform for locomotive cleaning; (vi) the construction of an additional2storage building for spare parts and supplies (2,000 m ); (vii) the constructton of an office for the general railway stores (650 m )9 (viii) the construction of a new locomotive testing facility with sufficient capacity for the most powerful mainline locomotives (3600 HP); (ix) necessary drainage improvements and extension of the utility networks (compressed air, gas, water, elec- tricity); and (x) the extension of the service tracks. (b) the construction of a service station in the vicinity of the 3 new Douala marshalling yard, with refueling facilities (150 m storage tank). This workshop expansion is the first phase of the implementation of a master plan proposed by the railway and is deemed sufficient to meet traffic and maintenance requirements until at least 1982. Further workshop expansion will depend on the results of a feasibility study to be undertaken under the project. The general layout of the first phase of the workshop expansion is shown in Map IBRD 14060. Yaounde Locomotive Running Shed 3.15 A complete locomotive running shed will be constructed in two phases in Yaounde to perform the running maintenance of all the diesel locomotives operating on the Transcameroon railway, both mainline and shunting locomotives. The first phase has been included in the proposed project and is designed for the maintenance of 50 mainline locomotives, railcars and shunters. The present Yaounde service station, which is located in the Yaounde marshalling yard, will be re-arranged to accommodate these 50 units. Yaounde Rolling Stock Maintenance Facilities 3.16 A workshop will be constructed in Yaounde for routine checks and maintenance of freight cars and passenger coaches. This will enable the railway to postpone the construction of new freight car workshops until the studies financed under the project are completed (para. 3.17(e)). Operations and Management Assistance and Supervision of Works 3.17 The proposed project includes 306 man-months of consulting services and technical assistance for the improvement of railway operations and man- agement, and, additionally, feasibility and engineering studies for the  - 25 - construction of maintenance facilities provided for in the project, the preparation of possible further workshop expansion and the supervision of the works under the contracts. These components will comprise: (a) continuation of the actions undertaken under the Third Railway Project, to strengthen the office of the deputy general manager for studies, who is responsible for plan- ning and budgeting, technical, economic and financial studies, statistics and computerization; (b) setting up of Organization and Methods Units, one of which is to be attached to each of the main technical departments of the railway, namely Mechanical Engineering (M.T.), Oper- ations (DOT) and Permanent Way (V.B.T.); Regifercam agreed during negotiations to institute these units by December 31, 1979 on terms acceptable to the Bank and to provide Cameroonian counterparts of adequate number and qualifica- tions for the technical assistants provided for these units under the proposed project; (c) finalization of the railway's manpower plan (para 2.03) and implementation of improved personnel management tech- niques (para 2.07) will require, respectively, 9 and 15 additional man-months of technical assistance for which funds have been provided in the proposed project. Retro- active financing for these two components in the amount of up to US$200,000 was agreed upon during negotiations to prevent interruption of on-going works; (d) final engineering studies for the construction of the Yaounde locomotive running shed and rolling stock main- tenance facilities for which Regifercam requested retroactive financing in the amount of up to US$150,000, which is necessary to avoid delay in the preparation of this project element; (e) feasibility and engineering studies for the second phase of the workshop expansion; and (f) supervision of the works under contracts provided for in the project. Parts (a) and (b), to be carried out by consultants and technical assistants within three years, are aimed at improving management procedures and training of national counterparts. The technical assistants appointed to the Organiza- tion and Methods Units will be closely involved in day-to-day operations. Training 3.18 The training component comprises: furniture, equipment and material; the renovation of existing buildings and the addition of class- rooms and offices; and 194 man-months of technical assistance to strengthen  - 26 - the training department of the railway, to develop an improved training scheme based on manpower planning, to train supervisory training staff and instructors and to implement the recommendations of the training study performed by the consultants ORT. Refinancing of Loan S4-CM 3.19 US$2 million is provided in the proposed loan to refinance the non-repaid portion of the engineering loan of the Third Railway Project. C. Cost Estimates 3.20 The total cost of the proposed project, net of tax, is estimated at US$57.2 million equivalent, with foreign costs of about US$45.4 million (79%). Cameroonian legislation exempts construction works undertaken by Regifercam on the Transcameroon line from taxes and duties. A breakdown of project costs based on end-1978 prices is shown below. CFAF Million US$ Million Project Items Local Foreign Total Local Foreign Total 1. New Douala station (Bessengue) 970 2,824 3,794 4.4 12.8 17.2 (including signaling, tele- phone, water supply and electrical equipment) 2. Railway equipment 0 810 810 0 3J3 3.7 3. Workshop extension 241 1,172 1,413 1.1 5.3 6.4 (including machine tools) 4. Yaounde locomotive running shed 172 490 662 0.8 2.2 3.0 5. Yaounde rolling stock main- tenance facilities 49 196 245 0.2 0.9 1.1 6. Operations and management assis- tance, feasibility and engineering studies and works supervision 146 843 989 0.7 3.8 4.5 7. Training: Furniture, equipment & material 132 381 513 0.6 1.7 2.3 Building renovation/expansion 44 116 160 0.2 0.5 0.7 Technical assistance 86 305 391 o.4 1.4 1.8 Subtotal, training 262 802 1,064 1.2 3.6 4.8 Total base cost 1,840 7,137 8,977 8.4 32.3 40.7 Physical contingencies 229 838 1,067 1.0 3.8 4.8 Total with physical contingencies 2,069 7,975 10,044 9.4 36.1 45.5 Price contingencies 533 2,043 2,576 2.4 9.3 11.7 Total with all contingencies 2,602 10,018 12,620 11.8 45.4 57.2 8. Refinancing of Loan S4-CM -- 2.0 2.0 Grand total 11.8 47.4 59.2  - 27 - 3.21 Physical contingencies are estimated as follows: for the new Douala station, earthworks 15%, bridges 12%, and other works 10%; workshop expansion 15%; training equipment, material, furniture and buildings 10%; consulting services and technical assistance 15%; and engineering studies 10%. The estimates of price contingencies are assessed at 10% p.a. for equipment, civil works and services during the project implementation period. 3.22 The total cost per man-month of technical assistance and consulting services is estimated at US$9,970 excluding contingencies. This estimate is based on actual costs of contracts awarded under the Third Railway Project and includes all reimbursable expenses. Financing 3.23 The proposed project would be financed by an IDA credit of US$20 million and a Bank loan of US$27 million, including refinancing of the non- repaid portion of Loan S4-CM (US$2.0 million), the balance being provided by Regifercam (US$11.8 million equivalent in local costs and US$0.4 million equivalent in foreign costs for locomotive spare parts). Total retroactive financing of up to US$350,000 is proposed (para. 3.17 (c) and (d)). D. Project Execution, Procurement and Disbursement Execution 3.24 Regifercam is competent to carry out and supervise the project with the assistance of consulting engineers. The project is expected to start in October 1979 and be completed by the end of 1982. The purchase of equipment and civil works components are expected to be completed by the end of 1981. Provision of consulting services has been made in the proposed project to assist Regifercam in supervising the civil works contracts, including the manufacturing and installation of the electrical signaling system in the new Douala station and marshalling yard. Procurement (a) Civil Works 3.25 The civil works will be advertised internationally and the contracts will be awarded after international competitive bidding in accordance with Bank guidelines. An exception will be contracts for small buildings to be erected in the new Douala station area and at the training center, which will only be advertised locally. The total cost of these small buildings is estimated at US$1.7 million equivalent. (b) Equipment and Machine Tools 3.26 Railway equipment, other equipment and machine tools for the work- shops and the training center will be bought through international competitive bidding, except for the locomotive spare parts for which the critical items will be procured from the manufacturer of the existing locomotives or from  - 28 - the manufacturer of the original equipment. The cost with contingencies of the spare parts is about US$0.8 million equivalent of which the Bank would finance 50%. (c) Consulting Services and Technical Assistance 3.27 The ongoing contract for management assistance to the office of the Deputy General Manager for Studies (para 3.17(a)) will be extended under the proposed loan. This will cost a total of about US$0.9 million equivalent including contingencies. 3.28 Candidates for the staffing of the Organization and Methods Units will be selected by the borrower on terms and conditions acceptable to the Bank, in cooperation with the institution providing the existing technical assistance teams (OFERMAT, France). If suitable technical assistants cannot be found by this procedure, the borrower will seek candidates elsewhere with Bank assistance. In any event, the Bank will finance this component, closely scrutinize the experience and qualifications of the candidates and supervise the progress of their work. The estimated total cost of this component is US$4.2 million equivalent including contingencies. 3.29 Technical assistants for training, consultants for the execution of the feasibility and engineering studies for the second phase of the work- shop expansion, and consulting engineers to assist Regifercam in the supervi- sion of the works under contracts will be selected by the borrower on terms and conditions satisfactory to the Bank. Disbursements 3.30 Disbursements from the loan and credit accounts, which will be fully documented, will be made on the following basis: (a) 100% of the foreign cost or 85% of the local cost of imported material and equipment (mainly track material, machinery, spare parts for freight cars, and furniture, equipment and material for training); (b) 50% of the foreign cost of spare parts for locomotives; (c) Civil works, including signaling, telecommunication, water supply and electrical installations with the necessary equipment: 80% of the cost of contracts; and (d) Consulting services and technical assistants: 85% of total expenditures. 3.31 Disbursements for the Yaounde locomotive running shed and the rolling stock maintenance facilities will be conditional upon Regifercam furnishing the Bank with the design and engineering plans for these facilities and a proposal for a motive power and rolling stock maintenance policy which are satisfactory to the Bank.  - 29 - 3.32 The estimated schedule of disbursements for the credit and the loan is shown below: IBRD Fiscal Year and Quarter Ending Cumulative Disbursements 1980 (US$ million equivalent) September 30, 1979 2.7 December 31, 1979 7.0 March 31, 1980 11.3 June 30, 1980 14.2 1981 September 30, 1980 19.5 December 31, 1980 26.6 March 31, 1981 31.8 June 30, 1981 37.8 1982 September 30, 1981 42.5 December 31, 1981 44.6 March 31, 1982 46.1 June 30, 1982 46.6 1983 September 30, 1982 47.0 Note: Refinancing of Loan S4-CM is included in this disbursement schedule. 3.33 Any funds remaining in the credit and loan accounts upon completion of the project will be cancelled. IV. ECONOMIC EVALUATION A. General 4.01 The project has four separately identifiable elements: a marshalling yard at Douala; expansion of the locomotive workshop at Douala and construction of a running shed and rolling stock maintenance facilities at Yaounde; equip- ment, including that for track maintenance and replacement of wagon bogies; and technical assistance and studies. Of these, the marshalling yard, the work- shops, running shed and rolling stock maintenance facilities, and the equipment have separately identifiable benefit streams and are analysed accordingly below. Total project economic rates of return, including the sensitivity analysis,  - 30 - are assessed including the cost of technical assistance and studies attribut- able to the project. These project elements are expected to contribute to improvements in Regifercam's operational efficiency, but it is not possible to identify these benefits separately. B. Project Benefits Marshalling Yard 4.02 Marshalling facilities at Douala are operating close to capacity and indeed the incremental traffic between FY1979 and FY1980 is likely to place considerable strain on them. The capacity of the main yard (Douala station) cannot be expanded and it is subject to flooding during the frequent heavy rains. Its inadequacy has necessitated the use of other stations in the area for marshalling and the overall capacity limitations together with the problem of coordination of movements between the stations is a major contri- butory factor to the high average turnaround time of wagon (11 days). The major benefits from the marshalling yard will be a reduction in turnaround time of wagons and the associated improvement in utilization of both mainline and shunting locomotives. Wagon turnaround time should be reduced by about three days (over 25%) with a proportionate reduction in the need for wagon purchases and the avoidance of purchase of two mainline and two shunting locomotives. Annex 2, Tables 8 and 9 show the marked increase in concentra- tion of marshalling activity under the proposed project compared with that employing the existing, dispersed facilities. 4.03 The proposed facility will handle all traffic except Celluca-m paper, petroleum, alumina and the between one-third and one-half of all logs which will go directly to the port. The determinant of the demand on the facility is the number of wagons in the dominant flow, which is southbound. The total southbound movements through the facility will increase by about a quarter, from FY1979 to FY1983 after which there will be a decline as a result of road competition and then a recovery towards FY1989. Thus there will be a capacity deficit equivalent to about 17% of total southbound demand by FY1983 and 44% by FY1989 (Annex 2, Table 10). 4.04 In the absence of investment to relieve the marshalling bottleneck traffic will either be suppressed or diverted to road. The poor road condition and the fact that traffic suppression has already been experienced suggest that the former is a serious possibility. However, traffic could theoretically move between Douala and Yaounde by a circuitous route via Baffoussam and thus the second set of benefits from the project element is avoidance of the asso- ciated road transport costs. These transport costs are based upon diversion via Baffoussam or over the earth and gravel road between Edea and Yaounde (Douala to Edea is paved) until a new paved road is built between Douala and Yaounde. Assuming this road is completed in FY1983, road transport costs would fall significantly thereafter with a consequent decline in the benefits from avoidance of traffic diversion to road. 4.05 In assessing road transport costs, no account is taken of the investment cost of road paving in view of the probability that the main  - 31 - justification of road upgrading will be passenger and generated freight traffic rather than the fairly small number of truck movement required to transport traffic diverted from rail. 4.06 The economic rate of return on the marshalling yard facilities, based upon operational improvements and the avoidance of traffic diversion to road, is 20%. This is considered a minimum in view of the possibility that short-run traffic suppression would occur without the project. Locomotive Workshop Expansion and Yaounde Running Shed Construction 4.07 On the basis of the best traffic estimate freight traffic in the dominant (southbound) direction is expected to nearly double between FY1979 and FY1983 from 233 m/t-km to 447 m/t-km. To handle this traffic, Regifercam has ordered an additional 20 2000/2400 HP locomotives, due for delivery about FY1980 (Canadian financed). Taking into consideration retirement of older locomotives in the 500 HP range, withdrawal from service of the CC 2400 class locomotives, and purchase of an additional 10 BB 900 locomotives which are being delivered, the net additions to the fleet will be 13 between FY1979 and FY1981 excluding the standby locomotives which will not require servic- ing. Eight more locomotives will probably be required by about FY1986. Thus the demand upon running sheds and workshops can be expected to increase by about 50% between FY1978 and the late 1980's. These facilities are already operating close to capacity and without an additional running shed and an expansion of the workshops, delays in servicing would increase and locomotive availability could be expected to decline significantly. The running shed requirement is particularly acute -- new locomotives should not require workshop attention before they are two years old but running shed operations are needed almost immediately (after about 2000 km). 4.08 Consequently, without an expansion of workshop and running shed capacity, the forecast increase in the locomotive fleet would result in .decreased service time per locomotive and this in turn would reduce avail- ability. Annex 2, Table 11 shows the effect in detail. In summary, without the project availability would be reduced by about one-fifth by FY1982 and one-third by the late 1980's. 4.09 The primary effect would be to require locomotive purchases to overcome the resultant capacity shortages. These purchases are estimated as ten in FY1982 and a further thirteen spread over FYs1983-89. 4.10 However, without any addition to the workshop/running shed capacity, the new locomotives would be out of action again after about two years. Thus there would be a secondary effect equivalent to major overhaul of locomotives by the manufacturers every two years. Shipment to Europe or elsewhere, serv- icing, and return, would effectively immobilize these locomotives for about one year in three. This would necessitate purchase of an additional four locomotives and advancing of the purchase of other locomotives and entail the cost of transportation to/from the supplier (Annex 2, Table 12). 4.11 Avoidance of these primary and secondary effects constitutes the main quantifiable benefit from workshop and running shed investment. The  - 32 - benefits assessed on this basis are less than the economic costs of divert- ing the traffic hauled by these locomotives to road. The quantified benefit streams thus constitute the minimum resulting from the project element. Addi- tionally, there would be unquantified benefits in terms of more efficient servicing operations and improvement in Regifercam's ability to deal with emergency repairs. The economic rate of return on the workshop and running shed element is over 17%. Equipment 4.12 The project includes about CFAF 600 million of equipment, including inspection cars and wagon bogies. The main benefits are obtained from rehab- ilitation of wagons by replacement of bogies but the individual components are too small to justify separate analysis. The benefits are consequently grouped and yield an economic return of 15%. C. Total Project Costs and Benefits 4.13 Total project economic costs and benefits are detailed in Annex 2, Table 13 and summarized below. Total Costs (CFAF million) Rates of Return Project Element 1979/80 - 80/81 % Marshalling yard 4,625 20 Workshops/sheds 2,675 17 Equipment 625 15 Total Project /a 8,242 18 /a Including technical assistance costs attributable to the project. 4.14 The project yields a satisfactory rate of return of 18% including the costs of technical assistance which benefit the project. The major elements -- the marshalling yards and the locomotive workshop and running shed investments -- meet an urgent need which will become acute as equipment supplied by other aid agencies comes into service and traffic consequently inereases. The overall first year rate of return is 36%, indicating the project is overdue. D. Sensitivity Analysis 4.15 For the sensitivity analysis the following assumptions have been made: (a) investment costs will be 10% above project estimates, which is the maximum considered likely as detailed engineering information is already available regarding the major element, the marshalling yard; (b) traffic (other than aluminum/alumina and paper for which future transport require- ments are known with reasonable certainty) will grow at only half the forecast rate between FYs1979 and 1983; and (c) after FY1983 traffic will  - 33 - decline as a result of road competition. In addition to the effect of the same percentage decline as assumed under the best traffic estimate, a further factor has been applied to take into account the possibility that road trans- port costs will be lower, and thus the diversion co-efficient higher, than can be assessed on the basis of existing information. The feasibility study on the Douala-Yaounde road, now being prepared by consultants GAUFF (West Germany) and which should be completed in the fall of 1979, should give guidance on this point. 4.16 While the above sensitivity tests are rigorous, the uncertainties concerning the future of two of Regifercam's most important traffic items, timber and freight from Chad and CAE, make them appropriate. The sensitivity analysis rates of return are, with increased costs and decreased benefits, on the marshalling yard 10%, on the workshops 10% and on the equipment (unchanged) 15%. For the total project, with unchanged costs and decreased benefits the rate is 11%, with increased costs and unchanged benefits 16%, and with costs increased and benefits decreased 10%. These rates are con- sidered acceptable, particularly in view of the comparatively long gestation period for a project of the complexity of a marshalling yard, and the con- sequent need for adequate capacity to be built into the project to allow for the possibility of traffic growth exceeding sensitivity forecasts. V. FINANCIAL EVALUATION A. Past and Present Position 5.01 Regifercam's operating revenue increased 180% from FY1973 to FY1978 or 23% per year; 48% of this growth was generated by increased traffic volumes and changes in the traffic structure and the remaining 52% by tariff increases. Tariffs, on the average, increased by about 70% during this period. This, however, was only sufficient to offset inflation, with the effect that, in constant prices, the tariff level remained virtually unchanged. Since tariff increases in the six years preceding 1973 were insufficient to offset infla- tion, Regifercam's tariffs were in early 1978, in constant prices, about 25% below the 1967 level. Tariff increases in July 1978 reduced this gap to about 17%, but additional increases in excess of inflation are needed to improve the railway's cash generation. 5.02 Regifercam's working and operating expenses grew by about 200% and 190% respectively from FY1973 to FY1978, somewhat exceeding the growth of operating revenues and leading to a deterioration of the railway's working and operating ratios particularly during the first part of the review period, followed by a slight improvement. The principal causes for this mediocre performance were operational problems and insufficient cost control. Due inter alia to the technical assistance provided under the Third Railway Project, progress in these problem areas is being made, in particular in the important fields of locomotive maintenance and budgetary control.  - 34 - 5.03 Regifercam's income accounts and balance sheets are given in Annex 2, Tables 16 and 17 and summarized below: Fiscal Year ending June 30 1973 1975 1978 --------(in CFAF million)------ Income Accounts Operating revenue 3,567 5,339 10,046 Working expenses 2,818 4,718 8,433 Cash generated from operations 749 621 1,613 Depreciation 744 1,151 1,733 Net operating revenue (loss) 5 (530) (120) Interest charges 260 394 988 Government subsidies 224 1,182 1,553 Net surplus (loss) (47) 57 445 Working ratio 79% 88% 84% 1/ Operating ratio 100% 110% 101% Debt service 413 836 1,857 Debt service coverage 1.8x 0.7x 0.9x Balance Sheets Net fixed assets 20,327 37,198 43,101 Net current assets (223) 358 43 Long-term debt 7,050 13,999 19,147 Equity 13,120 23,623 24,019 Current ratio 0.9 1.2 1.0 Liquid ratio 0.4 0.6 0.4 Debt/Equity ratio 35/65 37/63 44/56 1/ Target under the Third Railway Project: 72%. 5.04 Tariff increases during the last two years have exceeded inflationary cost increases by about 14% and the Governuent accepts the general principle of annual railway tariff increases sufficient at least to offset inflation. Recent tariff increases have also been used to improve the rate structure and its relationship to operating costs. Further improvements may be needed, once Regifercam's costing system produces more detailed and reliable results (para. 2.09). Most tariffs appear to cover at least marginal costs, with the exception of freight tariffs on the western line and passenger tariffs. Losses on these latter services stem from inadequate rates and fares and operational problems such as inefficient passenger fare collection and poor train scheduling. Regifercam recently began to remedy the situation by closing stations on the western line and improving passenger fare collection. Additional measures will be needed to ensure that these services cover at least their long-term marginal costs, estimated at about 60% of total costs of these services. Regifercam agreed to implement by December 1980 necessary measures to achieve this figure and to submit to the Bank by June 1981 a  - 35 - report analyzing the avoidable costs of these services and recommending measures to cover them through operating revenues. The Government agreed to pay during an interim period not extending beyond December 1983 specific offsetting subsidies to the railway, should it object to measures proposed by the railway to achieve the above target. The Government will also submit to the Bank by June 1981 a study to determine the most economical, long-term distribution of traffic between rail and road in the area served by the Western line. 5.05 Depreciation is calculated at realistic rates. In FY1978 depre- ciation amounted to 3.3% of the book value of gross fixed assets in service. Assets are, however, valued at acquisition costs. At negotiations, the rail- way agreed to depreciate, on the basis of replacement cost, its motive power and rolling stock beginning immediately and its track material beginning in FY1982; both will be revalued thereafter every three years. 5.06 Regifercam's debt service quadrupled from 1973 to 1978, due to an increased investment volume and a hardening of borrowing terms, accompanied by only a small increase in cash generation from operations, necessitating borrowing on a larger scale. Regifercam's cash generation from operations actually stagnated until FY1976 and only then increased, due to substantial tariff increases, implemented under the auspices of the preceding Bank project. These tariff increases also prevented the debt service coverage ratio from dropping below a critical 0.9 in FY1978. 5.07 Throughout the review period, the railway's delicate financial position was alleviated through subsidies from the Government of Cameroon, amounting to CFAF 1.6 billion in FY1978, partly in the form of tax exemptions and partly as cash subsidies. In addition, the railway used bank overdrafts, amounting to CFAF 1.4 billion as of June 1978, mostly to cover financing gaps in its investment program. .5.08 The need for general operational subsidies and bank overdrafts can be eliminated only in the medium term through increased internal cash generation. In the immediate future, overdrafts must be refinanced through loans. One such loan of CFAF 750 million for six years has been obtained by Regifercam under Government auspices in May 1978 from the Office National de Commercialisation des Produits de Base (ONCPB), and higher amounts may be neeeded during the next 12 months. The railway reduced its overdrafts to less than CFAF 1 billion before negotiations. Regifercam agreed to limit overdrafts to CFAF 800 million after 1979, and to use these only in exceptional circum- stances and for short periods of time. 5.09 In spite of Regifercam's mediocre earning performance and rather heavy capital investment during the review period, the railway's debt to equity ratio increased only moderately from 35/65 to 44/56, because nearly 50% of Regifercam's investments were financed through grants which strengthened the railway's equity. Thus, the railway's indebtedness is presently at a reasonably low level and does not constrain its potential for future borrow- ing, assuming, however, that internal cash generation will increase sharply in the near term.  - 36 - B. Future Financial Position 5.10 The most important feature of Regifercam's future financial position is the need for a rapid and sustained increase of internal cash generation to alleviate the present liquidity shortage and to cope with a rapidly increasing debt service. Interest on and repayment of existing debt will increase from a total of CFAF 1.9 billion in FY1978 to CFAF 2.7 billion in FY1980. Additional borrowing, negotiated since July 1978 or required to refinance short-term debt and finance necessary capital investment, including the proposed project, will add another CFAF 0.9 billion to FY1980 debt service, bringing it to a total of CFAF 3.6 billion for that year, CFAF 5.4 billion in FY1983 and CFAF 6.5 billion in FY1985. The last two figures include CFAF 375 million to service an assumed medium-term loan of CFAF 1.5 billion to refinance existing and expected over- drafts and to finance necessary increases in working capital (cf. Annex 2, Tables 15 and 18). 5.11 There is little scope for reducing future debt service through a reduction of capital investment and borrowing, since most of the investment is needed to increase Regifercam's productivity and its capacity to cope with existing and expected traffic demand. Also, more concessional terms of financing can probably not be obtained by Regifercam since the largest single item--the realignment of the Douala-Edea section--will be financed as a grant by the Government, and most of the substantial investment in freight cars will be financed by a highly concessional credit from CIDA (Canada). Close attention to Regifercam's future capital investment and borrowing is, never- theless, needed. Regifercam agreed to: (a) seek, until completion of the project, the Bank's approval for any capital investment costing more than $2.5 million; and (b) seek the Bank's approval for any long-term borrowing exceeding a certain aggregate amount to be agreed upon from time to time. Appropriate ceilings have been established for the next three years. 5.12 There is scope during the next two years for increasing Regifercam's internal cash generation through tariff increases, since in the absence of an asphalt road, the railway presently enjoys a virtual monopoly on Transcameroon traffic (accounting for more than 90% of its revenue). Construction of an asphalt road between Douala and Yaounde, accounting for about one-third of the length of the Transcameroon line, is expected to be completed around 1983, at which time the railway will be exposed to serious competition for a substantial share of its freight traffic. Thus, tariff increases in excess of inflation should be concentrated in the next three years, followed by moderate increases thereafter. Suitable increases have been agreed for 1979, 1980 and 1981 which will raise tariffs in real terms to about 90% of the 1967 level. These increases, combined with forecast traffic growth, would increase cash generation from CFAF 1.6 billion in FY1978 to CFAF 3.8 billion in FY1980 and CFAF 6.6 billion in FY1981. At the same time, the debt service coverage ratio would improve from 0.9 in FY1978 to 1.4 in FY1981, and the working ratio from 84% to 66%.  - 37 - 5.13 After 1981, the railway will face two major constraints: growing road competition and difficulty in achieving rapid productivity gains once existing overstaffing is absorbed. To assist Regifercam in improving its productivity and coping with road competition, the proposed project includes a large training and technical assistance component, and incorporates an operational plan of action. To maintain Regifercam's tariffs at a competitive level, tariff increases after 1981 should not exceed inflation. An average annual reduction of railway tariffs in real terms of about 2% p.a. has been assumed, reducing Regifercam's freight rate level, expressed in 1978 prices, from CFAF 16.7/ton-km in FY1982 to CFAF 16.0 in FY1984. At this latter level, Regifercam would have a sufficient cost advantage over trucking costs on the Douala-Yaounde section, estimated on a comparable basis at CFAF 20/ton-km in 1978 prices, to permit it to compete effectively. No road construction is planned between Yaounde and Ngaoundere to replace existing earth roads. Thus, the railway would maintain its nearly monopolistic position for traffic originating and terminating beyond Yaounde, which accounts for an increasing share of Regifercam's volume. Rail tariffs could, therefore, be increased parallel with inflation after FY1984. Based, however, on Regifercam's then satisfactory financial situation, further annual decreases of 2% in real terms would be acceptable and have been assumed. 5.14 The forecast income accounts assume an inflation rate of 10% per annum and, based on past experience, reasonable gains in staff productivity. Full achievement of the goals of the railway's action plan would produce additional savings in operating costs. Beginning in FY1981, an extra increase in cash generation from passenger traffic by about CFAF 900 million p.a. has also been assumed, based either on rationalization of this traffic or on an offsetting Government subsidy (para. 5.04). Due to the lack of data, no corresponding estimate was made for freight traffic on the western line; the amounts involved are substantially smaller, probably between CFAF 100 and 150 million. 5.15 Assuming that the above tariff increases are implemented in a timely fashion and that the other assumptions materialize as expected, Regifercam's income accounts and balance sheets will develop as indicated in Tables 19 to 21 of Annex 2 and summarized below:  - 38 - Fiscal Year ending June 30 1980 1981 1983 1984 1986 ---(CFAF billion)------------- Income Accounts Operating revenue 14.9 19.7 29.5 30.1 36.3 Working expenses 11.1 13.1 18.2 19.9 24.7 Cash generated from operations 3.B 6.6 11.3 10.2 11.6 Depreciation /1 2.2 2.8 3.3 3.4 3.7 Net operating revenue 1.6 3.8 8.0 6.8 8.0 Interest charges 2.1 2.8 3.3 3.4 3.0 Net surplus (loss) (0.5) 1.0 4.6 3.4 5.0 Working ratio (%) 75 66 62 66 68 Operating ratio (%) 89 81 73 78 78 Debt service 3.6 4.8 5.4 6.2 6.0 Debt service coverage (times) 1.1 1.4 2.1 1.7 1.9 Balance Sheets Net fixed assets 70.1 82.2 90.3 92.1 91.4 Net current assets 2.4 3.9 4.8 5.6 8.9 Long-term debt 36.0 45.2 47.2 46.4 40.1 Equity 36.5 40.9 47.9 51.3 60.2 Liquid ratio 1.1 1.6 1.5 1.6 2.2 Debt/Equity ratio 50/50 52/48 50/50 47/53 40/60 /1 On unrevalued assets. 5.16 The above figures indicate achievement of a satisfactory financial performance in the fiscal years 1981 to 1983, as reflected in working ratios of 66% to 62% and an improved debt service coverage of up to 2.1. Under the impact of stronger road competition, Regifercam's financial situation is less good but still satisfactory beginning in FY1984: the working ratio increases to 70% and the debt service coverage drops to 1.7 and later recovers to 1.9. Regifercam agreed to take all measures necessary to ensure that its wirking ratio will not exceed 75% for FY1980, 72% for FY1981, 70% for FY1982 and subsequent years until completion of the planned Douala-Yaounde road, and 75% thereafter. These ratios take the results of the sensitivity analysis (para. 5.19) into consideration. 5.17 The debt service coverage does not drop below a satisfactory 1.7 after 1981 and the debt/equity ratio oscillates around an acceptable 50/50 until FY1983 and improves thereafter. The liquid position also improves to a satisfactory level. A forecast of sources and applications of funds is shown in Table 18 of Annex 2 and summarized below for the project period (FY1980 to FY1983):  - 39 - (CFAF billion) % Sources Cash generated from operations 30.4 43 Long-term borrowing 28.7 41 Grants 11.6 16 Total Funds Available 70.7 100 Applications Capital investment 48.9 69 Debt service 19.2 27 Increase of working capital 2.6 4 Total Funds Applied 70.7 100 5.18 During the project period, 59% of capital investment is expected to be financed through borrowing, 24% through grants and 17% through Regifercam's internal cash generation. Regifercam's contribution is relatively small, since most of the railway's substantial cash generation will be allocated to debt service and to increases in working capital. Regifercam's cash generation will however be sufficient to ensure that the railway can finance its contribution to the cost of the proposed project and to other capital investment. C. Sensitivity Analysis 5.19 The major risk that Regifercam faces in coming years is a shortfall in freight traffic below forecast levels. The economic sensitivity analysis assumes substantially smaller traffic increases, and the same assumptions have been made for this analysis. Lower traffic would be accompanied by reductions .in operating costs, which, however, would not suffice to offset the loss in revenue, resulting from reduced traffic growth and a 11% drop of freight traffic in FY1984. Additional tariff increases in real terms after FY1982 to maintain Regifercam's financial equilibrium without resorting to government subsidies may be difficult to implement in the face of heavy road competition. The scope for additional tariff increases would largely depend on actual trucking rates on a paved road between Douala and Yaounde. It is obviously difficult to give a reasonably accurate estimate of what these rates would be. 5.20 Assuming that tariff increases until FY1984 were limited to those in the main analysis, i.e. a reduction of railway tariffs in constant prices of about 2% per annum in FY1983 and FY1984, and assuming increases in parallel with inflation thereafter, the Government would have to subsidize the rail- way a total of about CFAF 5 billion during the first three years after com- pletion of the planned Douala-Yaounde road. The sensitivity analysis fore- casts (Annex 2, tables 22 to 25) show the need for a subsidy of about CFAF 2 billion in FY1984, decreasing to zero by FY1987. The resulting figures for Regifercam's future cash flow and some critical ratios are summarized below.  - 40 - Fiscal Year ending June 30 1981 1983 1984 1986 1987 -------- (CFAF billion)----- Sources of Funds Internal cash generation 5.9 7.9 6.1 8.0 9.6 Borrowing 11.2 5.9 4.0 2.0 2.0 Equity Investment 3.4 - - - - Subsidies - - 2.0 1.0 - Total Sources 20.5 13.8 12.1 11.0 11.6 Applications Capital Investment 14.8 7.9 5.3 3.0 3.0 Debt service 4.8 5.7 6.7 7.3 7.5 Increase in working capital 0.9 0.2 0.1 0.7 1.1 Total Applications 20.5 13.8 12.1 11.0 11.6 Working ratio (%) 68 67 74 72 71 Debt service coverage 1.2 1.4 0.9 1.1 1.3 Liquid ratio 1.6 1.4 1.4 1.6 1.7 Debt/Equity ratio 53/47 55/45 55/45 52/48 50/50 5.21 The working ratio increases after 1983 to 74% and improves there- after, and the debt service ratio drops with completion of the Douala-Yaounde road to 0.9 and improves subsequently to an acceptable 1.3 in PY1987. There is a risk that the Governmeat may have to subsidize the railway for several years after completion of the planned road. The Government agreed at nego- tiations to provide subsidies or such other financial support for Regifercam as may be appropriate to protect the railway's liquidity should the need arise. 5.22 A separate analysis was made in the context of the sensitivity analysis to establish whether the proposed project would under pessimistic assumptions contribute to the improvement of Regifercam's financial situation, and if so, to what extent (cf. Annex 3). FY1985 was selected for this anal- ysis, being fairly typical of the assumed conditions and not too distant in the future. Individual flows of cash in and out of the railway were cal- culated on the basis of the economic analysis, mainly through eliminating benefits which accrue to beneficiaries outside the railway and through in- flating the constant prices of the economic analysis. The results suggest that, after paying the full debt service on the proposed loan, the railway is CFAF 1.7 billion per year better off with the project than without it. If the project were not implemented, the Government would have to pay an additional annual subsidy of about $7.6 million. This figure would tend to increase in later years, but precise calculations distorted by time become less meaningful.  - 41 - VI. AGREEMENTS REACHED AND RECOMMENDATION 6.01 Agreement has been reached that: (a) the Government will: (i) carry out a study, to be reviewed by the Bank, to determine the best solution for improving the rail section between Edea and Maloume, and not undertake any capital investment on the railway's Edea-Maloume section unless its economic justification has been demonstrated (para 1.23); (ii) provide during an interim period until December 1983 for specific offsetting subsidies to Regifercam, should it object to measures proposed by the railway to reduce losses in freight traffic on the Western line and passenger traffic to 40% or less of the total cost of these services (para. 5.04); (iii) submit to the Bank by June 1981 a study determining the economically best long-term distribution of traffic between rail and road in the area served by Regifercam's Western line (para. 5.04); and (iv) provide subsidies or such other financial support for Regifercam as may be appropriate to protect the rail- way's liquidity should the need arise (para. 5.21). (b) Regifercam will: (i) submit to the Bank for review by June 30, 1980 a draft man- power plan, with the objectives of reducing overstaff- ing and ensuring a better matching of job requirements and staff qualifications; implementation of this plan will begin promptly after such review and will be com- pleted five years thereafter; in the meantime, increases of total staff number will be limited to imperative needs (para. 2.03); (ii) consult annually with the Bank on its technical assis- tance requirements and on measures necessary to meet them (para. 2.04);  - 42 - (iii) produce annually, beginning with FY1981, a comprehensive investment budget and a corresponding financing plan covering all railway-related investment irrespective of the source of financing; and submit, beginning FY1981, its draft budgets to the Bank for review at least 30 days before consideration by Regifercam's board, but in any event not later than one month before the beginning of the fiscal year covered by the budget. The same will apply, mutatis mutandis, to any amendments to the original investment budget proposed to be made during the year (para. 2.11); (iv) submit to the Bank not later than six months after the end of each fiscal year an audit report by auditors acceptable to the Bank (para. 2.13); (v) implement the plan of action incorporated in the Loan Agreement (para. 2.27); (vi) make arrangements by December 1980, for the construction of an adequate passenger station building and related facilities for the new Douala station (para. 3.12); (vii) institute, on terms acceptable to the Bank, by December 1979, Organization and Method Units in its three operating departments and provide Cameroonian counterparts of adequate number and qualification for the technical assistants provided for these units under the proposed project (para. 3.17 (b)); (viii) implement by December 1980 necessary measures to reduce losses in freight traffic on the Western line and in passenger traffic to 40% or less of total cost of these services, and submit to the Bank by June 1981 a report on the avoidable costs of these services and their re- covery from operating revenue (para. 5.04); (ix) depreciate, on the basis of replacement cost, its motive power and rolling stock beginning immediately and its track material beginning in FY1982; both will be revalued thereafter every three years (para. 5.05); (x) after 1979, limit bank overdrafts to CFAF 800 million and use them only in exceptional circumstances and for short periods (para. 5.08); (xi) seek, until completion of the project, the Bank's approval for any capital investment costing more than $2.5 million; and seek the Bank's approval for any long- term borrowing exceeding a certain aggregate amount to be agreed upon from time to time (para. 5.11); and  - 43 - (xiii) take necessary measures, including but not limited to agreed rate increases (para. 5.12), to achieve working ratios of not more than 75% for FY1980, 72% for FY1981, 70% for FY1982 and subsequent years until completion of the planned Douala-Yaounde road, and 75% thereafter (para. 5.16). 6.02 A condition for disbursement of funds for the Yaounde locomotive running shed and the rolling stock maintenance facilities will be that Regifercam furnish the Bank with the design and engineering plans for these facilites and a proposal for a motive power and rolling stock maintenance policy which are satisfactory to the Bank (para. 3.30). 6.03 Agreement having been reached on the items in para. 6.01, the proposed project is suitable for an IDA Credit of US$20 million on standard terms to the Government of Cameroon and a Bank loan of US$27 million (includ- ing refinancing of Loan S4-CM for US$2.0 million) to Regifercam with the Government of Cameroon as Guarantor for a period of 20 years, including a grace period of 5 years. Onlending of the Credit to Regifercam on the terms of the Bank loan would be a condition of effectiveness. May 1979  - 44 - ANNEX 1 Page 1 CAMEROON FOURTH RAILWAY PROJECT Description of the New Douala Station 1. Existing Facilities 1.1 The existing railway facilities in the Douala area include six stations: The Port station is open for freight traffic only and is con- nected to the Douala main station by a single track which is used as a service siding for marshalling operations in the latter station; The main Doula station is the main terminal for Douala for both passenger and freight traffic and has only five main tracks with a very short useful length (240 to 395 m); The New Bell station is located in the middle of the most densely populated area of Douala, handles almost exclusively passenger traffic and is the junction of the Douala-Yaounde line with the western line Douala-Nkongsamba; The Bassa station, on the Douala-Yaounde line, is devoted mainly to freight traffic, serves the industrial zone of northern Douala and a large log handling facility (about 10 hectares), and is expected to handle an increasingly large volume of freight traffic in the future; - The Bassa-Ateliers station is located near the New Bell station on the Western line; despite the limited capacity of its set of tracks, it handles a relatively large amount of traffic, both passengers and freight (the latter mostly petroleum products from private sidings and timber unloaded in a small log handling area) and gives access to the rail- way workshops at Bassa; and The Bonaberi station, located on the right bank of the Wouri River, on the Western line, serves a growing traffic to and from the industrial zone and the port of Bonaberi (cement, asphalt, fertilizer, logs and fruit for export). These stations are located on or connected to a closed loop about 10.5 km in length which enc