Peru - Railway Rehabilitation Project

RETURN TO REPOR DESK R E S T R I C T E D WI R e p o r t N o. TO-154b ONE A This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT ON THE PERUVIAN RAILWAY PROJECT (PERUVIAN CORPORATION) PERU March 19, 1958 D epa rtment of Technical Operations  CURRENCY Since January 23, 1958 the exchange rate has moved from 19 soles to 21 soles per dolla r. 1 U.S. $ = 21 soles 1 sol - 5 cents, approximately 1 million soles= U.S. $47,500 The fiscal year runs from July 1 to June 30. All tons are metric tons.  TABLE OF CONTENTS Page SU1MARY AND CONCLJSIONS iii I. INTRODUCTION II. HISTORY 2 III. CORPORATE STRUCTURE, OWNERSHIP A1ND JANAGEMENT CONdTROL 4 IV. PROPERTY, OPERATION AND ADMINISTRATION 7 V. FINANCIAL POSITION AND RECINT FINANCIAL RESULTS 9 VI. THE PROPOSED REHABILITATION PROGRAM 13 a. The Bas-ic Need for the Program 13 b. Description of Prcgram 13 Motive Power 13 il, Rolling Stock 14 iii. Wa-i-y and works 15 ivv Signalling, Telecommunications 15 v. Workshops and W.orkshop Equipment 15 ri,, Miscellanecus 16 viit, Contingencies and Engineering 16 cc Execution 16 d. Fu'uure Rlehabilitati,-n Needs 16 VII. TRAi7 IC ANALYSIS 18 a. Underlying Basis for Analysis 18 b. Principal Categories of Traffic 18 c. Traffic Development in the Past 18 d. Rate Structure 19 e. Road Transport Competition 19 f, Future Traffic Development Forecast 20 - Central Railway 2r - Southern Railway 21 g. Projected Gross Revenues 22 VIII, ECONOMIC JUSTIFICATION 23 IX. PROTECTIVE COVEALNTS, FINANCIAL PROJECTIONS AND THE FINANCING PLAN 24 The Need for Protective Covenants 24 Financial Projections 25 Interest and Debt Service Coverage 26 Financial Requirements and Proposed Financing Plan 27  - ii - TABLE OF CONTENTS MAP Table 1 - Central & Southern Railways - Cost Estimate Table 2 - Central Railway - Freight Traffic 1937/38-1956/57 Table 3 - Central Railway - Passenger Traffic 1938/39-1956/57 Table 4 - Southern Railway - Freight Traffic 1936/37-1956/57 Table 5 - Southern Railway - Passenger Traffic 1936/37-1956/57 Table 6 - Approximate Operating Cost for Standard trucks Table 7 - Central Railway - Freight Traffic by Nl'ajor Cate.-ories 195Z/53-1956/57 Table 8 - Southern Railwdy - Freight Traffic by Major Categories 1951/52-1956/57 Annex 1 - List of Directors Annex 2 - CGnsolidated Balance Sheets 1951-1957 Annex 3 - Consolidated Income Accounts 1951-1957 Annex 4 - Cash Flow Projections Anner 5 - Detailed Balance Sheet  - iii - SUMEARY AND CONCLUSIONS The Peruvian Corporation, which operates the Central Railway and the Southern Railway, submitted in December 1956 an extensive rehabilitation program, for which it sought Bank financing. After extensive discussions agreement was reached rn a scaled dowa program, the total cost of which is somewhat more than $20 million equivalent. The Iean under consideration would be for j15 million, or slightly less than 75% of the total cost. The first five chapters of this report analyze the history of the enterprise, its ownership, management, operations and finances. Chapter VI contains a discussion of the various elements of the proposed rehabilitation program. The traffic patterns and prospects of the railways are covered in Chapter VIT. Chapter VIII contains a brief analysis of the economic im- portance of the project to the Peruvian economy. Because of the poor financial record of the borrower it was con- sidered essential that certain protective provisions dealing with rates, depreciation policy and liquidity be incorporated in the proposed agreement. The need for and nature cf these provisions is discussed in Chapter IX. Their effect on the borrower's financial position and the consequent reduction of the Bank's risks is also included in this chapter. In view of the undertakings 1) by the Borrower with respect to policies to be followed in regard to management, and finances, and 2) by the Guarantor with respect to prompt and orderly rate adjustments, the project is suitable for a Bank loan of $15 million equivalent, with a term of 15 years (amortization to commence early in 1961). The borrower would be the Peruvian Corporation Ltd. The loan would be guaranteed by the Government of Peru.  PERU REPORT ON TIE PERUVIAN RAIL1WAY PROJECT (Peruvian Corporation) I. INTRODUCTION 1. This report is an appraisal of a three-year -/ (1957/1958 -1960/1961) rehabilitation and modernization program for the Central and Southern Railways of Peru. These railways are owned and operated by the Peruvian Corporation Ltd. (hereafter called the Peruvian Corporation) a limited liability company incorporated in England. The Peruvian Corporation is resident in Canada and is a wholly-owned subsidiary of Peruvian Transport Corporation Ltd. (hereafter called Peruvian Transport). 2. Early in 1956 the Peruvian Corporation engaged Messrs. Livesey & Henderson, consulting engineers, to undertake a survey of the Central and Southern Railways and to devise an adequate rehabilitatfon program for these Railways. The consultants submitted their preliminary report in December 1956, and a program estimated to cost about -24 million was presented for Bank financing. 3. Bank representatives visited Peru in March and April 1957 to review the traffic and operating prospects of the railways. Discussions with management representatives and their consultants were held in August and September to review: a) the scale and scope of the rehabilitation program, b) the projections of income and expense during and after the program period, and c) the snurces of finance for the program. In November, Bank representatives visited Peru for consultations with the Peruvian Government concerning a formula and procedures for: 1) rate adjustment to take account of changes in operating costs, and 2)consultations with officials of the borrower concerning the timing of equipment installations and revised traffic and earning projections in the light of changed conditions, par- ticularly for minerals traffic. 4. After extensive discussions, it was agreed that a three-year program involving a total expenditure of about $20 million equivalent could be undertaken, provided the Bank made a loan of $15 million equivalent, the Peruvian Corporation to supply the remainder,partly out of already existing cash balances and partly from anticipated cash generation during the program period. 5. The conclusions and recommendations contained in this report are based on the agreements reached with the Government with respect to rate adjust- ments and with the Company concerning financial policies. The timely execu- ticn of these agreements is indispensable to the success of the project. / 'While expenditures will be made in four fiscal years 1957/58 to 1960/61 inclusive, the spending period will embrace calendar years 1958 to 1960 inclusive with a small residual in the first half of calendar 1961.  - 2 - II. HISTORY 6. The Central and Southern Railways, the first sections of which were built in the 1870s, were originally owmed by the Peruvian Govern- ment which financed their construction by issues of government bonds to foreign investors. In 1878, not long after the initial sections of the Railway had been completed, Peru became engaged in a war with Chile which lasted until 1883, and resulted in the rich nitrate region of South Peru being ceded to Chile under the peace treaty. The revenues from nitrates which were part of the general security for the bonds floated for railway construction ceased to flow to the Peruvian Government and Peru became unable to meet the interest charges. 7. A settlement with foreign bondholders was arranged in 1889 re- leasing Peru from all further liabilities in exchange for the cession to the bondholders for a period of 66 years of the railws-rs, the tran P er to them of other assets and the payment cf an annuity. To implement this settlement, the Peruvian Corporation, an ?;nglish limit f liability company, was incorporated March 20, 1890 to hold these concessions. The bond- holders received shares in the Corporation in exchange for their holdings of Peruvian Government Bonds ,which were cancelled. 8. Several subsidiary companies (notably the Central Railway of Peru limited and the Southern Railway of Peru Limited) were set up by the Peruvian Corporat_on to operate the railways under the terms of the origi- nal concession upon a rental basis. The subsidiaries assumed liability for specified portions of the Coporation's debenture indebtedness incurred for extensions built after 1890. 9. The original railways concessions were to expire in 1956 but were modified by later contracts in 1907 and 1928. The 1907 contract extended the original concession to 1973 on modified terms. The 1928 contract gave the Peruvian Corporation perpetual ownership of the railways and stipu- lated (1) that taxes on the Corporation from 1937 to 1973 were to be limited to a tax of 8% on dividend distributions and (2) the price payable by the Government for the railways in the event of expropriation. 10. The construction of the extensions mentioned above was financed by the issuance by the Peruvian Corporation of