Argentina - Second Railway Project

Docunent of The World Bank FOR OFFICIAL USE ONLY Report No. 7855 PROJECT COMPLETION REPORT ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) JUNE 26, 1989 Infrastructure and Energy Operations Division Country Department IV Latin America and the Caribbean Regional Office This document bas a restricted distribution and may be used by recipients only in the performance of  CURPENCY EXCHANGE RATES 1 January 1970 lSley - 100$ mn ("moneda nacional" then prevailing) 14 March i979 (SAR) 400$ley US$1.00 (prevailing rate July 1977) 1 June 1983 10,000$ley l$a 14 June 1985 1,000$a - One Austral (A) - US$1.25 ABBREVIATIONS CPC Canadian Pacific Consultants FA Ferrocarriles Argentinos (Arge:itine Railways) OED Operations Evaluation Department PCR Project Completion Report SAR Staff Appraisal Report UNDP United Nations Development Program FISCAL YEAR January 1 to December 31  FOR OFFIAL USE OLY THE WORLD SANK Washington. D.C. 20433 U.S.A. Olfe atE ioDcsGeuwval Opwatuns EViiWtiiif June 26, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTs Project Completion Report on Argentina Second Railway Proiect (Loan 1677-AR) Attached, for inft'mation, is a copy of a report entitled 'Project Completion Report on Argentina - Second Railway Project (Loan 1677-AR)" prepared by the Latin America and the Caribbean Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restcted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discosed without World Bank authorztIn.  FOR OMCIAL USE ONLY ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT C0YPLETION REPORT Table of Contents Page No. PREFACE ........................................ i 3ASIC DATA SHEET .ii EVALUATION SUMMARY ..vi I. INTRODUCTION. 1 II. PROJECT PREPARATION, APPRAISAL AND NEGOTIATIONS. 2 III. PROJECT IMPLEMENTATION AND COSTS. 6 IV. TRAFFIC AND OPERATIONS .10 V. FINANCIAL PERFORMANCE .12 VI. INSTITUTIONAL PERFORMANCE AND DEVELOPMENT .18 VII. ECONOMIC EVALUATION .19 VIII. THE ROLE OF THE BANK .20 IX. CONCLUSIONS .21 TABLES 1. Estimated and Actual Schedule of Disbursements ............. 23 2. Estimated and Actual Completion Time for Project Items ..... 24 3. Comparison Between Appraisal Estimates and Actual Costs.... 25 4. Comparison of Actual Traffic with Appraisal Forecasts (Suimmary) ................................................ 26 5. Comparison of Actual Traffic with Appraisal Forecasts (Principal Products) ..................................... 27 6. Compliance with Action Plan Targets ........................ 28 7. Selected Operating Statistics .............................. 31 8. Income and Expense Statements (1979-1982) .................. 32 9. Operating Results by Railway Service ....................... 33 10. FA Balance Sheets (1979-1983) .............................. 34 11. FA Requirements and Sources of Funds (1980-1983) ........... 35 12. Basic Data for Economic Reevaluation; Track Renewal Projects ................................................. 36 13. Economic Reevaluation of Project Components .37 ANNEX Comments from Ferrocarriles Aigentinos .38 MAP IBRD 13699 (PCR) 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.  - i - ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for Argentina's Second Railway Project for which Loan 1677-AR in the amount of US$96.0 million was approved on March 26, 1979.. Upon cancellation of the undisbursed balance of US$29.65 million, the loan was fully disbursed on December 31, 1985. This PCR was prepared by the Infrastructure and Energy Operations Division, Country Department IV, of the Latin America and the Caribbean Regional Office and is based, inter alia, on the Staff Appraisal Report; the Loan and Project Agreements; supervision reports; correspondence between the Bank and the Borrower; and internal Baik memoranda. This PCR was read by the Operations Evaluation Department (OED). The draft PCR was sent to the Borrower for comments and they are attached to the Report (Annex).  - ii - ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT CMPLETION REPORT BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total project cost (USS million) 748.9 869.95 Overrun - 16% Loan amount (US$ million) 96.0 66.35 Disbursed 96.0 66.35 Cancelled - 29.65 Outstanding Date physical components completed 12182 12/84 Proportion completed by above date (X) La 100. Civil works (%) 78 Procurement of material (2) 87 Economic rate of return (ERR) (X) /b 22 18 Institutional performance /c Fair Poor Borrower's performance Id Fair Poor /a As a percentage of the amount originally envisaged at appraisal. lb Weighted average. /a Refers primarily to Ministry of Economy and Subsecretariat of Transport. /d Refers to Ferrocarriles Argentinos.  - {it - ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT COMPLETION REPORT BASIC DATA SHEET OTHER PROJECT DATA Original Actual or Item Plan Current Estimate First mention 6/76 Government application 1a 7/76 Negotiations 10/78 11/16-22/78 Board approval 11/78 03/26/79 Loan Agreement date 11/08/79 Effectiveness date 05/06/80 Closing date 06/30/83 6/30/85 Borrower Argentine Railways (FA) Guarantor The Republic of Argentina Executing agency Argentine Railways Fiscal year of borrower 01/01-12/31 /a There is no formal request on file. The Bank's identification mission of August 1976 was authorized in response to the request of Argentina's Minister of Economy on his visit to Bank headquarters in July 1976. CUMULATIVE DISBURSEMENTS FY80 FY81 FY82 FY83 FY84 FY85 FY86 Appraisal Estimate (US$million) 26.0 75.0 96.0 Actual (US$million) 21.8 46.6 52.1 57.2 66.4 Actual as % of Estimate 22.8 48.5 54.3 59.6 69.1  - iv - ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT COMPLETION REPORT MISSION DATA Sent No. of No. of Man- Date of Item by Month/year weeks persons weeks report Identification IBRD Aug 1976 1 3 3 08/20/76 Preparation /a IBRD Dec 1976 2 3 6 01/07/77 Preparation IBRD Mar 1977 1/2 1 1/2 04/01/77 Preparation IBRD May 1977 2 5 10 06/15/77 Project Brief #1 07/19/77 Preparation IBRD Aug 1977 2 3 6 09/06/77 Project Brief #2 09/12/77 Appraisal IBRD Jan-Feb 1978 4 5 20 02/27/78 Post Appraisal IBRD May 1978 2 3 6 05/30/78/c Financial Review IBRD Sep 1978 1/2 1 1/2 10/10/78 Pre-Board Review IBRD Feb 1979 2 2 4 03/14/79 Board 03/26/79 Total 16 56 Supervision IBRD May-Jun 1979 1 1 1 06/26/79 Supervision IBRD Aug 1979 1 day 1 08113/79 Loan Agreement 11108/79 Supervision IBRD Nov-Dec 1979 2 2 4 01/28/80 Supervision IBRD Feb 1980 1-1/2 2 3 03/12/80 Effectiveness 05/06/80 Studies Review IBRD Apr-May 1980 3 1 3 05/28/80 Supervision IBRD Jun 1980 1 3 3 07/18/80 Supervision IBRD Sep-Oct 1980 2 3 6 11121/80 Supervision IBRD Jan 1981 2 2 4 03/06/81 Supervision IBRD May-Jun 1981 2 3 6 07/01/81 Supervision IBRD Aug 1981 2 1 2 10/31/81 Supervision IBRD Nov 1981 2 2 4 12/09/81 Total C/F 19-1/2 36 La Included first discussion of UNDP participaticn for studies. /b Review of ITALCONSULT draft report in Rome. /a Issues Paper date.  Sent No. of No. of Man- Date of Item by Month/year weeks persons weeks report Supervision IBRD Feb 1982 1 1 1 03109/82 Supervision IBRD Jun 1982 1 3 3 07116182 Supervision IBRD Aug 1982 2 1 2 09/16/82 Supervision la IBRD Sep 1982 2 1 2 Supervision IBRD Doc 1982 2 5 10 02/07/83 Supervision IBRD Apr 1983 1-1/2 1 1-1/2 06/02/83 Supervision IBRD Jul 1983 2 3 6 08/29/83 Supervision IBRD Sep 1983 1-1/2 4 6 10125/83 Supervision IBRD Mar 1984 2 2 4 04/27/84 Supervision IBRD Jul 1984 2 4 8 08/17184 Supervision lb IBRD Mar 1985 3 3 9 04/11/85 Supervision lb IBRD Jul 1985 1 2 2 07/25/85 Subtotal 21 54-1/2 B3F 19-1/2 36 Total 40-1/2 90-1/2 /a Review of C.P.C. studies in Canada. lb Mission included PCR preparation in discussions with borrower. SrAFF s (Staff we*kals FY 4 71 Z z 77 Z2 le .1 32 af .4 .M Al - ZI I-a P,.upp.*iSal - - .1 48.9 58.1 - - - - - - - - - 102.1 Appraiewl - - - - 71.6 40.1 - - - - - - - - - 111.7 Negotintion - - - - - 20.1 - - - - - - - - - 20.1 Sup.rviioi - - - - - 4.4 24.6 32.7 20.4 17.0 12.1 19.7 9.9 8.2 5.4 154.4 Oth.r .1 - - - .S 2.1 - .2 .2 .6 .3 - - - - 4.1 TOTAL .1 .0 .1 48.9 125.2 66.7 24.5 32.9 20.6 17.6 12.4 19.7 9.9 8.2 5.4 392.3  - vi - ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT COMPLETION REPORT EVALUATION SUMMARY Oblectives The objective of the project -'as the strengthening of Argentine Railways (FA) as an institution by making it reasonably independent of Government financial support through the rationalization, redimensioning and rehabilitation of the railway system. This objective was to be met through the elimination of uneconomic lines, improvement of locomotive and rolling stock availability, selective rehabilitation of track, signalling and telecommunication works, provision of technical assistance, and related studies to facilitate export of agricultural products which form a substantial part of ,he railway's freight basiness (para 2.04). Implementation Experience In the momentum generated by the preparation (para 2.03) and implementation of the project, FA closed 10,405 kms of uneconomic lines, eliminated the losing suburban train services in cities other than Buenos Aires, reduced staff by over 50,000 (154,000 in 1976 to 99,900 iu 1986), strengthened and improved to some extent its maintenance practices, and carried out several of the important studies aimed at defining the future role of the railway. In particular, the Planning Study (para 3.0i) was responsible for the training of FA staff in project evaluation and in reviewing FA's investment needs. The studies for the Motive Power Rolling Stock, Signalling and Telecommunication System helped formulate the policy and essential investment needs in these areas (para 3.03). Also, one of the consequences of the enforcement of the principles of International Bidding utilized in Bank financed procurement was the introduction of the discipline of international prices in the local industry in Argentina (para 3.08). Implementation of the Bank project resulted in renegotiation of several contracts FA had entered into with suppliers of railway equipment, either because the prices were excessive or the quantities on order and the delivery schedules were inappropriate in the light of the requirements of the project. On the other hand, frequent changes in top management (five presidents between 1979 and 1985), uncertain political conditions (five changes of Government and the South Atlantic War) and Government indecisiveness in respect of important matters like marketing, tariff increases, uneconomic lines, etc. prevented the achievement of the traffic and operational targets agreed upon during appraisal, and led to a progressive deterioration in the financial condition of FA. The project wa8 partially completed in 1984 instead of 1982 (Table 2), and project  - vii - delays occurred due to the absence of a consistent managemint of FA, the lack of adequate local funds and inordinate delays in sanctions and budget approvals (para 3.06). Procurement action was excessively slow and time consuming, and required an inordinate amount of time to supervise on the part of the Bank missions (para 3.07i. Quite often, the Government's attitude was biased to support local industries in procurement matters (para 3.07), which complicated decisions even further. As the traffic targets foreseen at appraisal were not achieved (paras 4.01 to 4.03), most of the operating targets were not reached (Table 6), although the year 1983 saw the best staff productivity figures achieved by FA in several years (Table 7). Results Financial performance deteriorated substantially from an operating1 ratio of 216 in 1979 to 296 in 1983. In none of the project years reviewed did FA meet appraisal targets (para 5.01). The principal reasons for the failure to achieve the targets were: (a) freight traffic did not increase as forecast (para 4.01); and (b) tariffs in real terms decreased at an annual rate of 7% for freight and 12-15% for passenger as compared to a forecast ircrease in real terms of about 3-5% per annum during appraisal. Working expenses decreased, in real terms, at an annual rate of 12% per annum via a vis the appraisal forecast of an annual decrease of 4.3%, but this was not sufficient to offset the fa'lure to achieve the traffic forecast or the increase in tariffs (para 5.02). The reestimated economic rate of return upon completion of the project is 18% as compared to 22% estimated at appraisal (para 7.04 and Table 13). Sustainability The sustainability of the project's net benefits must be judged uncertain, given the many problems and uncertainties FA is facing. Findings The principal conclusion to be drawn from this project is that although the project under review had only a limited and partial success due to a combination of reasons, the problems of Argentine Railways are serious enough to claim the urgent attention of the Argentine Government and the Bank in a sustained effort designed to cut the losses of Argentine Railways, and to reorganize FA into a size and form better suited to the economic needs of the country. The two overarching issues are: FA's relationship with the Government and FA's internal management objectives. An essential element of any recovery program therefore is the establishment of a serious working relationship between FA and the Government in which financial and operational targets would be set by the Government for FA on the one hand, and on the other, the Government would support FA in its program of trimming its size, the reorganization of its management, increase of tariffs and the execution of the bare investment needs essential for the revitalization of PA (para 9.02).  ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT COMPLETION REPORT INTRODUCTION A. General 1.01 The transport sector plays a crucial role in the economic development of Argentina because of the important and complex function it has to fulfill, and also because of the sizable volume of the country's resources used for that purpose. Transport demand is influenced by the fact that in a large country like Argentina (2,767,000 sq km stretching about 3,700 km N-S and 1.600 km E-W), the bulk of the population (about 30 million people) is concentrated in a few large cities, with the rest dispeised in a number of small urban centers. About 70% of the country's population is located within a 600 km radius of Buenos Aires, the capital city of the country, and 852 of the GDP is generated within this radius. The combination of concentration and dispersion imply long-distance hauls, between supply and demand centers, of agricultural production, raw materials, and manufactured products. Furthermore, many exports and imports also require long transport to ports. As a result, the transport system is large, with long average hauling distances, low traffic volume on several links of the network, but big concentrations at major nodes such as Buenos Aires, and to a lesser extent, Rosario and Cordoba. In addition, the absence of natural deepwater harbors imposes further constraints on the system. 1.02 The bulk of the freight generated by the economy consists of agricultural products and other raw materials moving from the interior to the lower Parana River and the Atlantic coast around Buenos Aires, and of machinery and other production inputs, vehicles and manufactured consumer goods moving in the opposite direction. Metropolitan Buenos Aires is the focal point for transport in Argentina. In 1976, the year in which the idea of this project was first conceived, the Government estimated that rail transport held only 112 of the total ton-km with road transport (42!), water (35Z) and pipelines (12X) responsible for the balance. Despite this relatively minor position in the transport sector, railways have played an important role in Argentina's economic development since the first railways were built in the late 1800s. In 1946 the subsector was composed of some 12 private rail companies, 6 owned by the Government and 1 by the Province of Buenos Aires. In 1946 the Government purchased the 12 private lines, combined them with the other 7 and established the Government-owned entity, Ferrocarriles Argentinos (FA). The resulting 44,000 km network was organized into 6 systems, 4 broad gauge, 1 standard gauge and 1 narrow gauge, with the largest component being the broad gauge system. 1.03 Because of poor planning, inadequate management, lack of accountability, failure to recognize changing economic patterns and growth  -2- of competing traffic modes, the new entity soon experienced increasingly severe declines in traffic and financial position with attendant low productivity and poor service. 1.04 In 1970, the Government, recognizing these shortcomings, adopted a plan to redimension the railway and to concentrate on traffic which the railway could carry more economically than other modes. The Bank assisted in the financing of this plan with Loan 733-AR which became effective in July 1971. FA and the Government, however, failed to take constructive action in several of the critical areas; uneconomic line closures, workshop consolidation, reduction of staff, and general failure to increase operational efficiency. As a result, US$27.5 million of the US$84.0 million loan was cancelled in July 1974. 1.05 The situation continued to deteriorate through early 1976 despite the Government's recognition of the need for subst:-ntial and early corrective action. In mid-1976 the Minister of Economy, in the course of a visit to the Bank, requested Bank assistance in a new effort to redimension Ferrocarriles Argentinos. By this time important reductions had been made in the size of the railway by closing uneconomic lines, curtailment of intercity passenger services, and even substantial staff reductions, for the first time in the history of the Argentine Railways. In view of these encouraging signs on the part of the Government and FA, the Bank leaned touards supporting a new lending operation for the railway, at the same time recognizing that FA had started its improvement from a particularly bad position and that a great deal remained to be done. 1.06 This Project Completion Report is based on information obtained from files in the LAC Information Center, President's Report No. P-2489-AR, Staff Appraisal Report No. 2155b-AR, Staff Supervision Reports and Working Papers, and data sent by Argentine Railways together with a Final Report on the Completion of the Project. II. PROJECT PREPARATION, APPRAISAL AND NEGOTIATIONS 2.01 An Identification Mission visited Argentina in Auaxst 1976 in response to a request made to the Bank by the Minister of Economy for financial and technical support for the Government's plan to rationalize and modernize Ferrocarriles Argentinos (FA). Although the mission found that some of the conditions which were to lead to the cancellation of the First Railway Project (Loan 733-AR) still existed - frequent changes in top management, increase in staff numbers, and shortage of government supporting funds, there appeared to be sufficient favorable aspects to warrant Bank support for a new railway project within the framework of a set of Bank conditions to be agreed with FA. 2.02 Basic conditions for consideration of the dispatch of a further mission were: (a) reasonable progress in providing spare parts for locomotives; (b) reducing services on or closing uneconomic branch lines; and (c) elimination of several high cost/low occupancy interurban passenger trains. A Project Preparation Mission visited Argentina in December 1976 to assess the position, and found that favorable action was being taken on these items, and although other critical areas still required attention,  -3- the mission viewed favorably the prospects of Bank participation in the revitalization of the railway. The mission recommended that the Bank act as the executing agency for UNDP assistance in financing an outside team of experts to review FA's development plan, and, subject to the approval of this basic recommendation, proposed an action plan leading to appraisal in November 1977 and Board presentation in July 1978. Consultants were invited to submit pioposals to the Bank as Executing Agency, and after review by a a BanklFA team, an Italian consultant was selected to review FA's Development Plan and to make recommendations that would serve as the basis for FA's investment and action plan. Contract negotiations were concluded in May 1977 and the consultant began work on July 4, 1977. 2.03 Meanwhile, in May 1977 a further Bank preparation mission met with FA officials to review progress on critical program elements. These included the soare parts procurement program; rolling stock and motive power scrapping proposals; reduction of intercity passenger trains; uneconomic line studies; locomotives rehabilitation; staff reduction; and improvements in FA's financial position. Based on this review and related detailed discussions the first Project Brief was prepared on July 19, 1977. Given the poor performance under the first railway project, and the eagerness of the Argentina Government and FA for Bank financing of the Second Railway Project, a significant element of the mission's strategy was to get as much done (by way of staff reductions, line closures, etc.) as possible during appraisall and before Board approval of the loan. 2.04 The Project Brief proposed as the objective of the proposed project the strengthening of FA as an institution by making it reasonably independent of Government financial support through the rationalization, redimensioning and rehabilitation of the railway system. This objective was to be met through the elimination of uneconomic lines, improvement of locomotive and rolling stock availability, selective rehabilitation of track, signalling and telecommunication works, provision of technical assistance, and related studies to facilitate export of agricultural products which form a substantial part of the railway's freight business. A further Bank preparation mission visited Argentina in August 1977 primarily to review with the consultant and FA the progress being made on the review of FA's development plan. The mission found that the consultant team was making good progress in its work with the cooperation of FA. The mission also determined that some progress was being made on improving FA's overall status, but that differences of opinion continued to exist between FA and the Sub-Secretariat of Transport on the proper approach to dealing with some critical policy matters. 2.05 The Bank's comments on the consultant's draft report were forwarded in mid-October, and in late October 1977 Bank representatives met in Rome with the consultant and FA officials to review the report and the comments of the Bank and the Government. Based on the discussions and comments, the consultant prepared its final report which was submitted to the Bank on December 1977. Thereafter the Bank appraisal mission was 1/ As a matter of fact, with exceptional effort on behalf of the then Sub- Secretary for Transport, FA closed almost 9,000 km of uneconomic lines and reduced staff strength by almost 35,000 during the period of preparation of the project.  -4- scheduled for January/February 1978. The appraisal mission found that, although FA had made some progress in developing corrective measures in problem areas, several problems remained and this made it incumbent on the mission to recommend withholding of further appraisal processing pending corrective action by the Government on the investment plan for the railways, which provided inadequate funds for track rehabilitation and only a bare minimum of wagon replacement. A dominant cause of this situation was the Government's inefficient (and costly) procurement practices - in particular the "Compre Argentino" Law - and indiscriminate recourse to supplier's credits and bilateral credits as instruments of purchase, all of which led to the payment of higher than international prices for important items of railway equipment like rails, locomotives, wagons, etc. Another cause for the appraisal mission's concern was the Government's emphasis on and commitment to low priority investments for the railway. These concerns were passed formally to the Government with suggestions for remedial actJlo., which might lead to a more balanced development plan which the Bank could support. 2.06 As a result of the initial appraisal mission and the subsequent correspondence with Government, FA's program was revised and in May 1978 a second (or post) appraisal mission visited Argentina. Based on the revised investment plan for the years 1979-1983 this mission recommended a loan of US$85.0 million for a project comprising: (a) items of the Investment Plan on which execution would begin in 1980; (b) a Plan of Action with quantitative targets to improve the operations and finances of FA; and (c) a program of (i) technical assistance to FA for specific tasks within the Plan of Action; and (ii) feasibility studies for certain specific projects. 2.07 The Issues Paper of May 30, 1978, although giving general support to the proposed loan, noted the need for further modifications in some of the project items, and posed the following main issues: (a) renegotiation of existing contracts for equipment which were considered either excessively priced, poorly scheduled or for inappropriate quantities; (b) confirmation of the Government's commitment to the Investment Plan, and the proposed annual investment limit of about US$300 million in real terms, to ensure that shortfalls/over- investments would not occur in the maintenarnce and rehabilitation program; and (c) clarification of Government's policy for indexing railway tariffs. The paper recommended that all of the above be the subject of loan covenants. The Decision meeting on June 7, 1978, supported the recommendations of the Issues Paper. The Government was advised of the  -5- Bank's position by lettar of July 10, 1978, which indicated that loan negotiations would be subjact to f.he Goverrment providing information, satisfactory to the Bank, on thes. matters. 2.08 The Yellow Cover AppraisaL Report was circulated on July 28, 1978 recommending an increase in the proposei loan from US$85 million to US$96 million. Except for continued reservations by the Bank on the questions of the electrification of the Roca Railway, the Government's response to the issues raised earlier was considered satisfactory, and particularly the Argentine Government's response to the reduction of existing orders at excessive prices was very effective. The loan package was submitted to the Loan Committee on October 27, 1978. Loan negotiations took place in Washington frow November 16 to 22, 19,8. Several adjustments in the loan documents *,ere agreed and a side ietter confirming the Government's agreement to the Bank's positior. on tnie Roca railw4xy was approved. Another Bank mission visited Argentina in February 1979 to obtain clarification from the Government. The project was approved by the Board on March 26, 1979. The Loan Agreement was signed in November 8, 1979 because of the delay in the Government's formal agreement over the invesument plan and other conditions of the loan. 2.09 The final Project and List of Goods for Bank financing are detailed belows  -6- Local Foreign Total (a) Proiect (figures in USS millions) Way and works 252.41 95.09 347.50 Signal and telecom 16.63 15.61 32.24 Motive power and rolling stock 103.04 113.02 216.06 Consulting services 0.50 3.00 3.50 Total 372.58 226.72 599.30 Physical contingencies 13.61 9.41 23.02 Price contingencies 78.48 48.10 126.59 Grand Total 464.67 284.23 748.90 (b) List of Goods (figures in US$ millions) 1979 1980 1981 Total Rails 3.0 6.0 7.0 16.0 Wagon bodies - 10.0 10.0 20.0 Wagon bogies - 10.0 8.0 18.0 Track fittings - 8.5 7.5 16.0 Track contract 0.5 2.0 1.0 3.5 Track machinery 1.0 3.0 1.5 5.5 Technical assistance 1.5 1.5 - 3.0 Subtotal 6.0 41.0 35.0 82.0 Contingencies 1.0 7.0 6.0 14.0 Total 7.0 48.0 41.0 96.0 2.10 The loan became effective May 6, 1980, with a closing date of June 30, 1983, which was eventually extended to June 30, 1985. III. PROJECT IMPLEMENTATION AND COSTS 3.01 Implementation of the project had a slow start, and supervision missions in 1980 and 1981 noted that in addition to the delays in signing of the loan agreement and in the loan becoming effei. ve, proc4rement actions and disbursement from the loan were badly delayed. Up to the end of 1981, about 18 months after loan effectiveness, there had been no disbursements. By the end of FY82, US$21.8 million were disbursed and thereafter US$24.8 million in FY83, US$5.5 million in FY84, and US$5.1 million in FY85. At closure of the loan in June 1985, the Bank agreed to continue disbursements for those items alreudy contracted. Final disbursements were made in February 1986 and the remainder of the loan  -7- US$29.65 million was cancelled. A comparison of the actual disbursements with the disbursement schedule agreed at appraisal is given in Table 1. Although the rete of disbursements bears no comparison with the appraisal forecast, strangely enough it compares more favorably with *'-e standard profile for Argentina which suggests, in retrospect, that the project timing was rather over-optimistic, notwithstanding the various political and economic problems that arose during the period of implementation of the project. 3.02 The situation in regard to the completion of the various project items however is somewhat. more positive, and is detailed, item by item, in Table 2, which gives the actual completion dates as compared with the appraisal forecast dates. Although some of the project items were reduced in scope due to financial stringency, major items such as the procurement of locomotives and shunters were accomplished in full and within the stipulated time. The track renovation and improvements were completed to a considerable extent, although with delays. The rail accesses to the silos and the Mercado Central were completed in full. The wagon purchases and modifications to wagons were partially done because traffic did not increase as foreseen. Project completion date was extended up to December 31, 1984 and the percentage of completion of each task by the appraisal forecast date and up to this date is indicated in Table 2. 3.03 An important part of the project was the Technical Assistance and the Studies. Part of this work was to be done by FA and pertains to the development of the planning capability of FA and to a definition of the investment needs. The other part which was related to the task of defining the role of the railway was entrusted to the Government (Subsecretaria de Transporte) and included studies for a master plan for the suburban railway, review of the intercity passenger services and the uneconomic lines. Most of the studies to be carried out by FA were done. Canadian Pacific Consultants (CPC) won the contract for the Planning Study. The team sent out to Argentina trained FA staff in project evaluation, did a review, with FA staff, of many of the items on the investment program, and also prepared for reference of FA staff a manual for project evaluation and analysis of investments. The signal and telecommunications study was done by Italconsult, and the Motive Power and Rolling Stock study by SOFRERAIL. Reports of these studies were reviewed by Bank missions, and the final reports contained useful analyses of FA's needs and provided important guidelines for defining the future investments. However, they were inadequately utilized for future use dae to several changes in the management of FA, arising from frequent changes in the Government of Argentina. 3.04 The Manpower Study was to define the requirements of staff by department, and to review the training needs and salary structure of FA staff, and was, after a series of discussions with Bank missions, entrusted to FA instead of to outside consultants. This was agreed because of the sensitive nature of the work and the Government's concern regarding the explosive potential and the political overtones of the task of staff reduction. The Bank has not received any report from FA on the completion of this study. It is, however, known from the figures received from FA that at least in as much as staff reductions are concerned, the strength of the railway staff, after having been brought down from 156,000 in 1976 to  -8- 95,000 in 1981, gradually inched up to 107,800 in 1984, coming down to 99,000 in 1986. Currently FA has 95,000 employees which, although more than 391 lower than the figure in 1976, is still substantially higher than its real needs for a cost effective and efficient operation. 3.05 The performance in regard to the three studies2 to be conducted by the Government (Subsecretaria de Transporte) is rather a mixed bag. A limited study was done for suburban services, and the budget for the suburban services was separated, at least for some time, as agreed in one of the letters exchanged with the Government after the negotiations. No Master Plan for the suburban services ever emerged and much of the rationalization sought by the Bank never really materialized. The Intercity Services were studied partly and services curtailed substantially (para. 4.02). However, the study dealing with Unecononmic Lines was never done by the Subsecretaria de Transporte, in spite of repeated reminders by the Bank, and this was in fact one of the reasons for the cancellation of a part of the Loan in 1985. Although no reasons were given by the Government for this important act of omission, it is not difficult to imagine that the closure of uneconomic lines (beyond the 10,405 kms already closed) was a task that the Argentine Government did not relish, particularly in view of the unsettled political conditions during the project period. The task of redimensioning of the railway therefore remains substantially incomplete, although major reductions in staff and services were done, as detailed elsewhere in this report. Proiect Costs 3.06 Analysis of project costs for Argentina is a difficult task not only because of the high inflation rates, but also because the parity between the Dollar and the Peso is rather unevenly maintained, with marked fluctuations in certain years. As the original cost estimates at appraisal were prepared in mid 1977 US dollars, an attempt has been made to reduce all costs to constant 1977 US dollars so that the resultant figures would be comparable to the appraisal estimates, even though the work done in some of the project items was not the same as foreseen at appraisal (para. 3.02). A comparison between appraisal estimate and the actual costs is given in Table 3. Due to hyperinflation in Argentina during the project implementation period, and the consequent distortions introduced when converting Argentine Pesos/Australes into US dollars, the actual costs given in Table 3 can only be treated as indicative. However, an analysis of Tables 2 and 3 illustrates that the main features of the project implementation were as follows: (a) The project was partially completed in 1984, instead of 1982. The degree of completion of each item is indicated in Table 2. (b) Project delays occurred due to the absence of a consistent management on FA, the lack of adequate local funds, and inordinate delays in sanctions and budget approvals. 2/ Master Plan for Suburban Services; Intercity Passenger Services; and Uneconomic Lines.  (c) The cost of the project at US$869.95 was 16% higher that the appraisal estimate of US$748.90 million including contingencies. Cost overruns for the local expenditures was 16.9% and for foreign exchange 15.6%. td) A major cost overrun occurred in track works (w?ay and works) in which it reached 29%, comprising 33% increase in local costs and 18% in foreign costs. The main reason for the ccst increases was delays in execution of work.s caused by public expenditura .uts and delays in government clearances for the budget, and also some changes in the work content arising from these delays. (e) The signal and telecom works although relatively small in size had a cost over-run of 85%, 56% in local costs and 115% in foreign costs. This was caused by an amplification of the works over the extended period of the project. (f) The Motive Power and Rolling Stock package was executed at 85% of the original costs largely due to an advance in the deliveries of locomotives and reductions in wagon purchases. Procurement 3.07 Procurement action was very slow. Although the loan became effective in May 1980, and tenders were floated in the snme year, disbursements did not start till 1982. Initially, the pceparation of the tender documents in accordance with Bank Guidelines took some time, which is not unusual. However, the main delays occurred in tender evaluations which took anything between six months to a year. FA has stated in its Completion Report that one of the reasons for the delays were the "impugnaciones' or protests during tender evaluations. From the Bank's perspective, an undesirable feature of the tender evaluations was the propensity of FA to somehow reject the lowest offers from international bidders in favor of higher bids from the local industry. Quite often it appeared the Government in its preoccupation to protect the local industries, supported analyses that laboriously found reasons for rejection of the lowest bids from the international market. The tender documents, in accordance with standard Bank guidelines, allowed a preference of 15% for local bids, and no more. As a result, protracted corresponder.ce cesulted in connection with Bank's approval of the awards, and although the Bank's view generally prevailed, much time and effort was 1 3t in establishing the rights of the lowest evaluated bidders. 3.08 However, an important consequence of the enforcement of the principles of international bidding was the introduction of the discipline of international prices in the local industry in Argentina. When the Bank started appraising this project, F.A. was committed to long-tetm orders to the local industxy for rails, wagons, bogies and other railway equipment. These orders had been negotiated at inordinately high prices, sometimes as much as 100% over international prices. During appraisal, the Bank missions insisted that some of the ongoing contracts with the local  - 10 - industry covering items included in the project be renegotiated3 , either because the prices were considered excessive, or the quantities on order and the delivery schedules were inappropriate in the light of the requirements of the project. The results of these negotiations were very satisfactory, and the situation in regard to the long-term orders was substantially corrected. It was n3t, however, until the results of the international bids started coming in, that the discipline of international prices was introduced into the Argentine industry. As a matter of fact, during the later stages of the project, the local manufacturers of rails, freight cars, and other railway equipment started quoting prices consistent with international prices, and actualLy won some orders as the lowest bids. IV. TRAFFIC AND OPERATIONS 4.01 The project was based on forecasts of traffic, with substantial increases in freight traffic (see table below) which did not materialize. This was due to a combination of reasons arising mainly from the unsettled political conditions, reduced economic activity and the South Atlantic War which diverted the country's resources and transport capacity. The fact that FA was not properly managed during the period was also a major contributory factor. The forecasts of freight traffic increases had been based on gradually increasing exports of grains and steady increases in nongrain traffic such as minerals, limestone, sugar, wine, etc. Tables 4 and 5 show the traffic forecast and actually carried by FA in the years 1979 to 1986. The increases in grain traffic just did not come about and although sugar, limestone and petroleum traffic registered increases in line with appraisal forecasts, wine, minerals and fuel did not. As a result, FA's freight traffic having peaked to 22.5 million tons in 1983, steadily declined to 15 million tons by 1986. The ups and downs in FA's freight traffic over the period are summarized below. Tons (millions) Ton kms (billions) Forecast Actual Forecast Actual 1979 18.3 19.1 10.8 10.9 1980 19.9 16.3 11.8 9.5 1981 21.9 16.6 12.8 9.2 1982 23.9 19.1 13.9 11.5 1983 25.9 22.5 14.9 13.4 1984 - 19.5 - 11.2 1985 - 17.2 9.5 1986 - 15.0 8.7 3/ See para. 3.09 of SAR No. 2155b-AR.  - 11 - 4.02 As far as Intercity Passenger Traffic is concerned, the intention was to cause a progressive reduction in the services and then to maintain these services at the level aimed for 1980. In effect the reduction in intercity passenger services was greater than planned (which was fortuitous as the intercity services lose heavily) and even though there was some tecovery in the number of passengers carried, rising from a low of 7.7 million in 1982 to 12.8 million in 1986, intercity traffic has continued to be relatively low, perhaps signifying the need for at least some of these services to be taken over by intercity buses which are served by excellent roads. No. of Passengers (millions) Passenger kms (billions) Forecast Actual Forecast Actual 1979 14.7 10.7 4.3 4.0 1980 14.1 10.6 4.1 4.2 1981 14.9 8.2 4.4 3.4 1982 14.9 7.7 4.4 3.3 1983 14.9 9.6 4.4 4.0 1984 - 11.5 - 4,8 1985 11.8 4.9 1986 12.8 5.3 4.03 In regard to the suburban passenger services (in Buenos Aires), the position of the actual performance vis-a-vis the forecasts was as follows: No. of Passengers (millions) Passenger kms (billions) Forecast Actual Forecast Actual 1979 401 366 8.2 8.0 1980 404 383 8.3 8.5 1981 409 338 8.4 7.7 1982 413 295 8.5 6.8 1983 416 201 8.6 6.3 1984 - 279 - 5.7 1985 288 5.8 1986 345 7.1  - 12 - Here again the progressive increases in traffic forecast did not materialize due to the depressed economic and industrial activity, although an additional factor was the dislocation (particularly in the years 1982-85) arising from the electrification of the Roca Railway, which eased somewhat as the electrification progressed. FA has also reported a progressive increase in the amount of ticketless travelling in the Buenos Aires area which was attributed to the reductions of staff imposed in the earlier years of the project. However, the problem of ticketless travelling is linked also to the need for construction of security facilities in the rather large numbers of suburban stations, and the solution of this problem really lies in judicious investments in ticketing and control equipment, some civil works at stations, and of course, effective personnel. 4.04 Table 6 shows the degree of FA's compliance, year by year, with the various Action Plan targets agreed at sppraisal. Due to shortfall in traffic, most of the operating targets were not achieved, except the staff reductions (for some years) and the average loads of freight cars which exceeded the forecasts. Selected operating statistics of FA for the years 1979 to 1986 are given in Table 7. The operating statistics for the period reflect a peak in FA's activities in 1983 when it carried the maximum freight (22.5 million tons), the maximum gross ton-kms (13.4 billion) and had the best ratio of freight ton kms to track Ims (374). During this year the productivity of the staff was also relatively good reaching a high of 241,900 units of traffic per employee. As the table shows, clearly the momentum for closure of uneconomic lines generated during the preparation and early stages of implementation of the project was not maintained, and I after the closure of 10,405 km of lines, the Government (Subsecretaria de Transporte) did not, inspite of repeated urging by the Bank, carry out the studies included in Part C of the project (item 4) for the uneconomic lines (see also para. 3.05). The closure of 10,405 km of uneconomic llnes is, however, no mean achievement by any standards, although most of it was brought about, at least in part, by the pressure exerted by the Bank. 4.35 A significant contribution of the project was the elimination of suburban passenger services in cities other than Buenos Aires. Rosario, Santa Fe, Cordoba, and Tucuman each had its own suburban services which lost heavily, but nurtured ambitious plans for development. These services were progressively reduced and were eliminated in 1980. V. FINANCIAL PERFORMANCE Overall Financial Performance ofLFA 5.01 Table 8 shows FA's actual financial results compared with appraisal projections for the period 1979-82 and the actual results for the year 1983. Financial performance deteriorated substantially from an operating ratio of 216 in 1979 to 296 in 1983. In none of the project years reviewed did FA meet appraisal targets. Working and operating ratios are summarized below:  -13- Workinz Ratio Operating Ratio Year Appraisal Forecast Actual Appraisal Forecast Actual 1979 151 190 182 216 1980 141 208 170 271 1981 127 206 156 298 1982 121 208 149 392 1983 - 180 - 296 5.02 The principal reasons for the failure to achieve the targets set forth during appraisal were: (a) freight traffic did not increase as forecast (para. 4.01); and (b) tariffs in real terms decreased at an annual rate of 7Z for freight and 12-15% for passenger as compared to a forecast increase in real terms of about 3-52 per annum during appraisal. Working expenses decreased, in real terms, at an annual rate of 122 per annum vis a vis the appraisal forecast of an annual decrease of 4.3%, but this was not sufficient to offset the failure to achieve the traffic forecast or the increase in tariffs. 5.03 The appraisal report included a general review of the financial performance of FA, and the forecast was made on the financial information then available. An analysis of the operating results by railway service was forecast for 1980. A similar analysis was carried out with actual data for 1984. To provide a bettez understanding of FA's financial performance during the period under consideration, the results of the SAR forecast in 1980 and the actual values in 1984 are given below by service. More detailed information is provided in Table 9. Broad Gauge Standard Gauge Narrow Gauge 1980 1984 1980 1984 1980 1984 -------------- (% of revenues) --------- Lona Run Variable Costs Freight services 83 79 123 115 99 93 Suburban passenger services 88 219 102 159 166 261 Intercity passenger services 91 162 119 200 139 148 Parcel post, baggage, etc. 527 444 311 600 476 200 Total all services 92 122 125 147 119 114 Fixed costs 62 74 92 171 101 100 Total operating losses 54 97 117 218 119 114  - 14 - 5.04 The above figures show that on all gauges, long-run variable costs for freight services as a percentage of revenue, were lower in 1984 than forecast for 1980 in the Staff Appraisal Report. However, similar values for all services were higher than forecast for the broad and standard gauges (332 and 18Z, respectively) and slightly lower (4%) for the narrow gauge. Suburban and intercity passenger services have been the greatest financial burden of FA du' to the Government's reluctance to increase fares to a level to cover cost of services, mainly because of sociopolitical reasons. FA's Operating Revenues 5.05 Table 8 shows that appraisal projections indicated that FA's operating revenues would increase from US$411.1 million in 1979 to US$513.2 million in 1982. The same table indicates that actually, operating revenue in 1979 was US$277.1 million and in 1982 it decreased to US$161.7 million. The main reasons for failing to reach the revenue forecast were: (a) FA's traffic decreased somehow during the period, instead of increasing at the pace forecast during appraisal; and (b) FA failed to increase its tariffs in real terms at the anticipated rates as the Go:ernment did not honor its commitment to increase tariffs. The Government had agreed thiat it would not object to FA's changing freight tariffs (para. 5.13-viii), except in those cases where it felt that VA was exercising monopolistic pawer. In regard to passenger tariffs these were to remain subject to Government regulation. Appraisal estimates assumed that between 1979 and 1982, freight rates would increase in real terms at a rate of 3.62 per anuium, suburban passengers fares 5% and intercity passenger fares 3%. However, between 1979 and 1984, freight rates in fact decreased at a rate of 72 per annum, suburban passenger fares decreased 15.5% per annum and intercity passenger fares decreased 12.6% per annum. Fi's Operating Expenses 5.06 As shown in Table 8, the appraisal forecast indicated that working costs would remain constant between 1979 and 1982 at about US$622 million. Actual working costs decreased from US$526.5 million in 1979 to US$336.8 million in 1982, which represented 54% of the appraisal forecast. The main reason for the decrease in cost was the reduction, in real terms, in personnel costs, which dropped from US$418.9 million in 1979 to US$221.4 million in 1982. This was due to a reduction in personnel costs per employee of 432 (from US$4,047 to US$2,304) between 1979 and 1982, and a further reduction in the staff strength which was forecast to be 105,000 in 1982, at appraisal, and actually reached a value of 96,100. Consequently, the ratio of ealaries to working cost decreased from 79 in 1979 to 65 in 1982. 5.07 The fuel cost forecasts which represented about 8% of FA's working costs were based on engine-kilometers and reflected the rhasing out of steam traction. The forecast assumed that engine-kms would grow 8.82, from 72.0 million engine-kms in 1979 to 78.41 million engine-kms in 1982. Actually, there was a decrease of about 1% from 76.1 million engine-kms ia 1979 to 75.2 million engine-kms in 1982. Fuel costs forecast per million  - 15 - engir.e-kms uas estimated at US$0.69 in 1979 decreasing to US$0.62 in 1982. Actually fuel costs per million engine-kms were US$0.44 in 1979 and US$0.375 in 1982. 5.08 The appraisal forecast shows that FA's working cost would remain constant, in real terms, during the period 1979-82 whereas freight traffic ir. ton/km fo: that same period was forecast to increase by a yearly average of 8.7%. The basic assumption made during appraisal was that oecause of the 'mprovement in FA's operating perforaance, unit costs would be reduced by a yearly average of about 7.6%, which would appLoximately offset the extra cost due to the increas3e in trA-tffie. In fact, FA's working coets per traffic unit in 1982 were 35% lower than forecast, while operating costs were practically the same. In review, however, the appraisal forecast for working and operating costs proved to be fairly realistic. The main responsibility for the deterioration of FA's financial condition therefore rests fairly and squarely on lower revenues &risir.g from the non- achievement of the traffic forecasts, and the failure of FA and the Government to increase tariffs. 5.09 In accordance with Sention 5.06 of the Loan Agreement, FA revalued its main assets and rolling stock and motive power. Although the revaluation was not based on technical assessment, FA charged an adequate depreciation to its accounts. In 1982 depreciation charged in FA's accounts was over two times larger, in real terms, than in the appraisal forecast, which had a significant impL-t in the calculation of the operating ratio. Balance Sheet 5.10 Table 10 shows FA's balance sheets for the period 1979-83. The debt equitv ratio kept between 2/98 in 1980 (its lowest) and 8/92 (its worst) in 1981. Thaee ratios were better than the appraisal forecast due to the delay in the implementation of the project which resulted in lower than expected long-term loans during the period under consideration. Financial Plan for the Proiect and FA 5.11 Table 11 shows FA's actual capital requirements and sources of funds for the period 1980--83. It also provides a comparison between actual results and appraisal forecasts for the period 1980-82. The project was considerably delayed in its implementation due to paucity of Government funds and delays in Government sanctions. Therefore the project investment program and the original investment program cannot be readily compared due to a different timeframe in the implementation and also because passage of time altered the needs and priorities to some extent. Although Government contributions to the investment plan during the period 1980-82 were 23% lower than anticipated in the appraisal forecast, the overall Govetnment contribution was 2232 larger than anticipated, mainly because in this period, FA tariffs did not increase in real terms as forecast, and traffic failed to reach the estimated volumes. 5.12 The appraisal projected that Government contributions during the period 1980-82 would fully cover FA's deficit and debt repayments as well as about 32% of FA's investment requirements. The balance was to be  - 16 _ financed by loans/supplier credits which were to be obtained to cover about 341 of FA's investment plan, and by FA's own internally generated funds through depreciation and other charges to cover 341 of its investment requirements. Actual government contributions covered 89Z of FA's deficits, 100X of FA's debt repayments and only 1Z of FA's investment requirements. FA's internally generated funds were used to cover the balance of the deficits and 561 of FA's investment requirements; loans/supplier credits covered 431 of FA's investment requirements. In summary, actual Government contributions for the period 1980-82 amounted to US$3,741 million as compared to US$1,679 million envisaged in the appraisal forecast which were to cover 661 of FA's cash needs. Actual contributions covered 691 of FA's cash requirements. Financial Covenants 5.13 The loan included traditional financial covenants and targets for the period 1979-82, covering recordkeeping, annual audits, revaluation of fixed assets, tariffs, financial ratio targets, capital expenditure limitations and debt limitations. In retrospect, the financial covenants included in the Loan Agreement were very general and now appear to have been inadequately suited to the project as it actually evolved. It may have been better to have prepared some covenants focusing on specific financial aspects of the project, and not on the railways as a whole, such as specific operating indices and targets for the freight operation and for suburban and intercity passenger services, in order to monitor FA's actions and measure achievements more precisely. On the other hand it is doubtful if a different structuring of the targets would have helped very much given the lack of interest of the authorities in enforcing the Action Yrogram during the critical years of the project. A sumary of the bors jr's and guarantor's compliance with main financial covenants follows: (a) Loan Agreement (i) Record Keeping and Accounts (Section 5.01). FA has worked consistently to improve the quality and timeliness of its financial reporting and achieved reasonable results. (ii) Independent and Actual Audits (Section 5.02). FA's accounts are audited by independent Government auditors. During the appraisal of this project, it was agreed with PA that the auditor's reports would be furnished to the Bank as soon as available, but not later than four months after the end of each fiscal year. During the period 1979-84, the auditor's reports were consistently late. The report for the year 1983 was submitted to the Bank on June 2, 1986, about two years and two months after the due date. (iii) Payment of Amounts Owed by Guarantor and Other Public Corporations (Section 5.04). The Borrower took actions to collect all amounts owing it by the Guarantor, and other public corporations, and although it improved the period the amount owed were outstanding to about 75 days, it never reached the no more than two months agreed to in the Loan Agreement.  - 17 - (iv) 30 Day.i race Period for Settlement of Account (Section 5.05). The Borrower complied with this covenant and imposed a penalty for payment by users of its services for payments ln more than 30 days. (v) Revaluation of Fixed Assets (Section 5.06). The Borrower complied partially with this covenant. Beginning in 1979 it revalued its *aain assets and rolling stock and motive power annually. However, the revaluation is not based on technical assessment. Technical re, zluation of the fixed assets was begun in 1983 but at the closing of the Loan, it hat' not been completed. Nevertheless, depreciation charges ba!ed on the revalued assets are deemed reasonable. (vi) Recording of Valuea of Materials and Spare Parts (Section 5.07). The Borrower made substantial efforta to improve the recording of materials and spare parts values to comply with this covenant, but the efforts were not sufficient to totally comply with this cover?'nt. (vii) Debt Limitations (Section 5.09). The Borrower complied with the provisions of this covenant. (viii) Tariffs (Section 5.10). The Borrower took action necessary to comply with this covenant, but the Government restricted FA from making the necessary increases in freight and passenger tariffs. (b) Guarantee Agreement (i) Provision of Funds (Section 2.01). The Government partially complied with this covenant making available to the Borrower the funds necessary for the punctual payment of the principal of, and interest and other charges on, the loan. (ii) Provision of Funds for the Project (Section 2.02). The Government consistently fell short of its obligations to allocate funds for FA to carry out its investments plan which includes the Bank project. The shortage of funds was one of the principal reasons for the two-year delay in the execution of the Bank project and the execution of FA's total investment program. (iii) Tariff Increases (Section 4.03). The Government, for sociopolitical reasons, restricted FA from making the necessary increases in the tariffs. (iv) Discontinuation of Suburban Services (Section 4.04). The Guarantor complied with this covenant. Suburban service in the cities other than Buenos Aires were discontinued in 1979, one year ahead of schedule.  - 18 - (v) Specific Subsidies for Uneconomic Lines (Section 4.05). The Guarantor has complied with this covenant inasmuch as the losses incurred on FA (including uneconomic lines) were reimbursed to FA. (vi) Freedom to Adiust Freight Rates (Section 4.06). The Government has regulated the level of freight rates, thus not giving FA the freedom to modify its freight rates called for in this covenant. (vii) Accounts Payable to Borrower (Section 4.07). The Borrower was able to improve the collection of amounts owed it by the Government and other public corporations, but has not been able to reach the maximum of two months stipulated in this covenant. Therefore, the Guarantor is in partial compliance with this covenant. VI. INSTITUTIONAL PERFORMANCE AND DEVELOPMENT 6.01 In a large public sector enterprise like FA, institutional development covers broadly two areas; the first is the role of the Government in managing the enterprise, and the second, and perhaps more important, is the organization and management of the enterprise itself. The appraisal report reviewed in a general way both the role of the Government and the management of FA, keeping in view the objective of strengthening FA to improve its finLncial position and competitive advantage, and highlighted the following areas of actions (a) Government - Grant of autonomy to FA to increase its tariffs. - Redimensioning of FA by the clo- i of uneconomic lines and services. (b) Ferrocarriles Argentincs - Improvement of the organizational structure of FA. - Development of a Planning Office to analyze proposals for investments. - Reduction of staff strength. - Selective Program of Investments. 6.02 First, in regard to the tariff increases the Government neither gave FA the autonomy to increase its tariffs, nor indeed ever substantially acceded to FA's proposals for tariff increases. This was a major cause of the poor performance of FA (para. 5.02), and in a sense was a confirmation of the indication in the appraisal report that financial results were particularly sensitive to tariff increases. Second, the Government's role in the redimensioning of FA was initially quite aggressive; 10,405 km of  - 19 - lines were closed by 1981, intercity passenger services were reduced substantially, and suburban services in cities other than Buenos Aires were discontinued. However, the crucial studies in connection with further line closures were never done, and the momentum generated in the years 1979-81 just petered out in the following years of turmoil. 6.03 As far as FA is concerned, a certain strengthening of the "Organismo Central", the central office of FA, did take place in as much as this office controlled the investments and improved its control over operations of the different railways. However, much remains to be done in this area to coordinate train operations and to avoid duplication of services over the different railways which sometimes cover contiguous areas.4 The planning capability of FA was considerably strengthened through the technical assistance received from consultants (CPC, Canada) who not only anal,zed most of the proposed investments, but also trained FA staff to do the project analysis. The consultants also prepared a manual to be used as a guide in project evaluation. The Manpower Study, although not completely followed through, enabled FA to focus on the problem of the strength of its staff, on the training aspect of personnel management, and on the question of salaries, wages and incentives. VII. ECONOMIC REEVALUATION 7.01 The general and subproject specific methodologies followed for the economic reevaluation of the project are, basically, the same as the ones used at appraisal. For example, for the evaluation of individual subprojects, it was assumed as it was done before, that the without project case represented only the exclusion of the subproject in question, ar.d that the other subprojects were implemented according to the program. Also, the benefits taken into account for the reevaluation of each type of subprojects were essentially the same as the ones included in the SAR, namely: (a) savings in accident costs, savings in track maintenance costs and reductions in some train operating costs for the subprojects involving permanent way rehabilitation outside the suburban system; (b) reductions in maintenance and train operating costs, savings in accident costs, and provision of additional capacity for traffic that would otherwise travel by road, for the subprojects comprising pevmanent way rehabilitation within the Buenos Aires suburban system; (c) savings in railway vehicle operating costs for the subprojects to purchase new wagons and shunting locomotives to replace old equipment; (d) avoidance of higher transport cost by truck as compared with railways for subprojects creating more or new railway capacity. 7.02 Practically all items evaluated at appraisal were reevaluated, with the only exceptions of the access to silos (included in Loan 1521-AR).. The components not evaluated at appraisal were not reevaluated either; these items constitute about 20X of the total economic cost of the project. The economic costs included physical contingencies and excluded taxes. 4/ Eventually, it will be necessary to reduce the number of railways under the jurisdiction of FA from the present six to three, representing the three different gauges.  - 20 - 7.03 The present economic reevaluation follows as far as possible, the methodology and format of the appraisal report, within the limitations imposed by availability of data and information. The Bank Project in the Appraisal Report consisted of 24 subprojects of which 3 projects were for accesses to facilities; 15 projects for rehabilitation of permanent way; 3 projects for motive power and rolling stock; and 3 other small projects for light maintenance equipment and for enclosing subway stations and ticketing machines. Table 12 includes basic data for the economic reevaluation of the 15 projects for rehabilitation of permanent way. In particular, actual traffic data included in that table is consistent, within a reasonable degree of variation, with the values estimated at SAR. 7.04 The economic cost of most of the 24 components of the Bank project, as well as the respective internal rates of return (IRR) are shown in Table 13. The reevaluated IRRs are, in general, acceptable, with only 4 projects (representing about 20 of the total economic costs) with marginal IRRs of about 10%. Three of these projects were also marginal at the time of the SAR economic evaluation. In general, the reevaluated IRRs compare well, with a few exceptions, with the values estimated at SAR. The weighted average of the reevaluated IRRs is about 18%, an acceptable value, which is consistent with the comparable value estimated at SAR of 22%. VIII. THE ROLE OF THE BANK 8.01 This Project Completion Report is being written almost 10 years after appraisal of the project, and although this has meant that retrieval of project-related data was quite difficult because of the succession of changes in the government of Argentina and the management of FA (and to a lesser extent in the Bankl), this does endow the Bank and the Borrower with the advantage of considerable 'hindsight", particularly because of the preparation in recent years of a comprehensive study of the Transport Sector Public Enterprises of Argentina (currently being finalized by the Bank), which permitted a look at what happened in the project in the context of the economy of Argentina in general and the major transport sector enterprises in particular. 8.02 In the first place, as FA's Completion Report brings out, the Bank's contribution to FA's development was a positive one. The Bank mission's diagnosis of the railway situation was appropriate and the measures proposed not only necessary but also possible, given the indications received from the Argentine Government during appraisal and loan negotiations. However, in the light of information now available, it would seem that the time span for the execution of the project was over- optimistic (para. 3.01). The Bank's contribution to the supervision effort was certainly adequate, although an inordinately large proportion of this effort was spent on procurement (para. 3.07). The main cause of delays in project execution and noncompliance of some of the important parts of the Action Program was the failure of the Government and FA to follow through with the actions agreed upon during appraisal. This inaction is attributable to the frequent changes in Government and the inability of any of the several governments to settle down to anything like a sustained program of effective actions. Indeed, by the time the Alfonsin Government came to power, the project had already run through four years of its  - 21 - roller-coaster ride, with two extensions already exhausted, and the Bank was ready to define a final closure date to stitch up the project in whatever state it could be done. Further expenditure of resources in supervision appeared futile and therefore the project was closed on December 31, 1984 and disbursements continued till the equipment under contracts already signed were delivered. 8.03 Altbough clearly much remained to be don-;, the appraisal of the Second Railway Project and its implementation, however incomplete, brought home to the Argentine Government and the Railways what needs to be done in terms of establishing a working relationship between the Government and the management objectives of FA. This awareness gave rise to three major Government initiatives, which although disparate in nature, provide enough gaidance to indicate in what direction FA and the Government should Ro together. These three documents were: (a) the Government's Policy Paper of June 1987 on 'Politicas de Transporte para el Corto y Mediano Plazo"; (b) the 'Madanes Plan" for reorganizing FA which was developed by a commission reporting to the Directorate of Public Enterprises (DEP); and (c) a Plan of Reorganization developed within FA which has been called the "Salmeron Plan". These initiatives fall into an almost descending order of sagacity, with the Government Policy Paper saying all the right things, the "Salmeron Plan' voicing the rather blind survival instincts of FA with minimal changes in the organization, and the "Madanes Plan' straddling somewhere in between the two extremes. Whereas all the three plans have rather different traffic scenarios, there seems at least to be a certain amount of unanimity on the overall objective of operating FA as a business enterprise. The Transport Sector Public Enterprises Study steers through the murky waters of past failures and the abundance of future plans, and focuses on what needs to be done inter alia, to redimension, reorganize and revitalize the railway, possibly with Bank help and guidance. IX. CONCLUSIONS 9.01 It is abundantly clear from a review of the information and data furnished by FA as well as the supervision reports and the Bank files on the subject, that the principal cause of the delays and inadequlacies in compliance with the project and its program of action were institutional, and were aggravated by the political and economic problems which overtook the country during the most critical years of project implementation viz 1980-84. The management of FA, at its best not well-organized to tackle the difficult tasks of the project, was changed five times during the project period. On its part, the Bank endeavored to get the essential parts of the project implemented, but when serious delays in procurement tender evaluations and awards continued to take place and there did not appear to be any response to Bank pressure on the Government over taking action on tariff increases, line closures, etc., it was decided to close the project in December 1984. 9.02 The writing of a project completion report, however, enables events of the past to be reviewed with a certain detachment. In this case, the proposed course of action for disciplining and reorganizing FA somehow appears to emerge more and more clearly, as one reviews the accumulated experience of the second railways project, the several initiatives  - 22 - (par&. 8.03) for reorganizing the railways, and the Transport Sector Public Enterprises Report. The cumulative experience of the railways projects in the Bank indicates that the problems (and enormous deficits) of railways in the developing countries cannot just be washed away, and need to be addressed in a systematic and sustained manner over a number of years. It is also clear that in this task the Government has to play an important role, and a consensus has been emerging In recent years that a plausible approach is a carefully worked out contract plan between the Government and the railway, which would spell out the responsibilities of both parties. Some of the European and African railways were the first to try it, and a similar approach was adopted in Mexico on the Nacionales de Mexico, after the conclusion of four Bank-financed railway projects and the Fifth Railway Sector Project appraised in 1984. The problems of Argentine Railways are serious and deep-seated enough to claim urgent attention of the Governmcnt and the Bank. In the past, although the success of the railway projects was limited, the success of the Bank in developing an awareness of the sense of direction has been considerable and valuable, and deserves to be sustained till the problems of the railways are effectively resolved. Needless to say, an essential concomitant of this task, which may take several years, is political stability for which current prospects at any rate appear to be better than 10 years ago. 9.03 FA's data base-is strong and its costing system comprehensive and generally based on a logical approach. The Centro de Documentacion in Buenos Aires publishes voluminous statistics monthly, quarterly, and annually, and in addition, analytical tables entitled "Syntesis Estadistica de los Ferrocarrilles en Operaciones". Argentine Railways is therefore a paradise for analysts, and over the past years various consultant and Bank missions have produced numerous "well-documented' reports which have done not much more than rest on the shelves of the offices of FA and the Government. Wlhat is needed now is not additional research, but a pithy program of action that would commit both FA and the Government to cut the losses of the railways, and to reorganize them into a size and form better suited to the economic needs of the country. Some of the work done with railway projects in the Bank ir. recent years encourages the hope that such a task is possible.  - 23 - Table 1 ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AP) PROJECT COMPLETION REPORT Estimated and Actual Schedule of Disbursements IBRD Fiscal Year Appraisal Actual Total Actual as % of and Quarter Estimate Disbursement Appraisal_Estimate 1980 (........... US$ million . II Dec. 1979 7.0 III Mar. 1980 14.0 IV June 1980 26.0 1981 I Sep. 1980 40.0 II Dec. 1980 55.0 III Mar. 1981 65.0 IV June 1981 75.0 1982 I Sep. 1981 85.0 I Dec. 1981 96.0 III Mar. 1982 18.4 19.1 IV June 1982 21.8 22.8 1983 I Sep. 1982 30.3 31.6 II Dec. 1982 34.1 35.5 III Mar. 1983 40.3 42.0 IV June 1983 46.6 48.5 1984 I Sep. 1983 47.2 49.2 II Dec. 1983 47.9 49.9 III Mar. 1984 49.2 51.3 IV June 1984 52.1 54.3 1985 I Sep. 1984 53.3 55.5 II Dec. 1984 54.9 57.2 III Mar. 1985 56.4 58.7 IV June 1985 57.2 59.6 1986 I Sep. 1985 58.1 60.5 II Dec. 1985 64.3 67.0 III Mar. 1986 66.35 69.1 Cancelled (29.65) (30.9) Source: FA  ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT COMPLETION REPORT ESTIMATED AND ACTUAL COMPLETION TIME FOR PROJECT ITEMS Numbers or Kilometers Year of Completion Percentage of project item completed Original Completed Completed Original Actual by the by up to date up to original 12.31.84 origina!ly 12.31.84 date Project Item forseen Track renovation 1. Mainline 1697kms 598kms lO45kms 1983 1984 35.2 61.6 2. Suburban 376kms 57kms 312kms 1982 1984 15.1 83.0 Track improvement 1. Mainline 952kms 492kms 998kms 1933 1984 51.7 104.8 2. Suburban lOOkms - 80kms 1982 1984 - 80.0 Accesses to SILOS - - - 1980 1980 100.0 100.0 Access to Mercado Ctral. - - - 1982 1982 100.0 100.0 Access to Rosario port - - - 1980 - Mainline locomotives 64 81 81 1981 1981 100.0 100.0 Shunting locomotives 130 130 130 1983 1981 100.0 100.0 Wagon bodies 1532 287 1138 1982 1984/86 19.0 74.3 Modification of wagons 6088 2404 3263 1982 1984 39.5 53.6 Bogies for rehabilit- ation of wagons 4403 4180 4319 1982 1984 94.9 98.1 Bogies for new wagons 3064 2280 3064 1982 1983 74.4 100.0 Source: FA  ARGENTINA SECOND RAILWAY PROJECT (LOAN 1677-AR) PROJECT COMPLETION REPORT COMPARISON BETWEEN APPRAISAL ESTIMATES AND ACTUAL COSTS * (US$ Million) Estimated Costs 1/ Actual Costs Z/ Actual Costs as percentage of estimated costs 3/ Local Foreign Total Local Foreign Total Local Foreign Total 1. Way and Works 314.85 119.25 434.10 418.7 141.4 560.1 133 118 129 2. Signal and telecom 20.7 19.56 40.26 32.45 42.16 74.6 156 215 185 3. Motive Power & Rolling Stock 128.5 141.67 270.17 89.3 140.6 229.9 69 99.2 85 un 4. Consulting Services 0.62 3.75 4.37 0.91 4.44 5.35 146 118 122 5. Total 464.67 284.23 748.90 541.A5 328.60 869.95 116.9 115.6 116.0 * These figures are:notreadily comparable because the works actually carried out were not exactly as envisaged during appraisal, partly because of the longer time elapsed and partly due to reasons discussed in the report. 1/ Original estimates were in mid-1977 USDollars with physical and price contingencies added according to Bank Guidelines. It was assumed at appraisal that the peso exchange rate would change in order to maintain domestic and foreign prices in the same proportion. 2/ Due to the hyper-inflation in Argentina during the project implementation years and the consequent distortions introduced when converting Argentina pesos /Australes into ,US Dollars the actual costs given in this table should be treated as indicativeonly. 3/ These percentages are worked out after including appropriate share of contingencies in the estimated costs. Source: FA  ARGeg1A 9?4 RAITY PEJECr (IfN 1677-AR) PRRFECr OMPMOI(I REPRT U)ARISON OF CfIAL TRAFFIC Wrnll APPRUSAL FaESS (S1lRY) 1979 1980 1981 1982 1983 1984 1985 1986 Actual F'cast Actual F'cast Actual F'cast Actual F'cast Actual F'cast Actual F'cast Actual F'cast Actual F'cast 1. SLEJRBN PASSEN9S Passegers 366.,3% 401,000 383,050 404,010 337,760 409,000 294,555 413,000 200,942 416,000 279,138 - 288,128 - 345,875 - (txxmamds) Pass, kms 8,024 8,230 8,529 8,310 7,698 8,400 6,846 8,480 6,293 8,570 5,669 - 5,801 - 7,114 - (mlUlions) 2. EN113rIY PASSEN;1 Passergers 10,779 14,70U 10,617 14,100 8,173 14,900 7,724 14,900 9,606 14,900 11,522 - 11,877 - 12,877 - (thmmas) Pass, kis 4,005 4,340 4,177 4,130 3,560 4,360 3,301 4,360 4,093 4,360 4,801 - 4,943 - 5,345 - " (millions) 3. FREIQ!1 TRAFFIC Tors 19,128 18,338 16,273 19,953 16,664 21,951 19,09P 23,954 22,509 25,949 19,502 - 17,234 - 15,018 - (ts) Toa-rz 10,947 10,808 9,468 11,781 9,238 12,834 11,472 13,896 13,364 14,949 11,208 - 9,501 - 8,761 - (nullions) Source: FA  9C PAU1 1WIJI (UWN 1677-#F) no alwEN T