Sri Lanka - Transport sector memorandum

Report No. 8962CE Sri Lanka - - Transport Sector Memorandum June 28, 1991 Infrastructure Operations Division Country Department I Asia Regional Office FOR OFFICIAL USE ONLY Documern of the WM Bank 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 iisclosed without World Bank authorization.  CURRENCY AND EQUIVALENT UNITS (As of June 1991) Currency Unit = Sri Lanka Rupee (SL Rs) Rs 40.0 US$1.00 Rs 1,000 = US$25.00 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mil (mi) 1 hectare (ha) 2 2.48 acres (ac) 1 ton = 2,208 pounds 1 ton-km 0.62 ton-mile 1 passenger-km = 0.62 passenger-mile ACRONYMS ADB - Asian Development Bank CMC - Colombo Municipal Council CPC - Ceylon Petroleum Corporation CSC - Ceylon Shipping Corporation DPOT - Department of Private Omnibus Transport dwt - dead weight ton EDCF - Economic Development Cooperation Fund (Republic of Korea) ERC - Economic Restructuring Credit (2128-CE, May 1990) IMC-CPT - Inter-Ministerial Committee for Coordination and Planning of Transport kgs - kilograms JICA - Japan International Cooperation Administration MTH - Ministry of Transport and Highways OECF - Overseas Economic Cooperation Fund PC - Provincial Councils PIP - Public Investment Program RDA - Road Development Authority RTB - Regional Transport Boards SLCTB - Sri Lanka Central Transport Board SLPA - Sri Lanka Ports Authority SLR - Sri Lanka Railways TEU - Twenty-foot equivalent unit TSPC - Transport Studies and Planning Center TSPS - Transport Sector Planning Study (January 1988) VOC - vehicle operating costs FISCAL YEAR January 1 - December 31  FOR OMCIAL USE ONLY SRI LAM TRANSPORT S1CTOR MIWRAJNWI Table of Contents Page No. PR OB ................................................... ........ i EXECUTIVE SUMNKYY ......... .. ii 1. ROLE OF TRANSPORT IN THE SRI LANKAN ECONOMY . ..1 A. Country Background ......................................1 B. Transport and the Economy ....... C. Transport Modes ..................... ......... ... 3 - Modal Split .......3 - Road Transport .4...... ............... 4 - Railways. ..................... 9 - Colombo Urban Transport .......... 10 - Ports and Shipping . . ... ............ . 11 - Air Transport ... ......12 - Intermodal Linkages .1.......... . .. ............ 13 D. Transport Regulation in Sri Lanka ....... 14 E. Environmental Considerations............. 15 II. DEVELMRQENT STRATEGY BY MODE Issues and Recomiutded Strateies . .16 A. Highway Development .......... .. .. .17 B. Road Passenger Transport ......20 C. Railway Transport Development ..22 D. Urban Transport Development Strategies. 26 E. Ports and Shipping Development Strategies . . 28 F. Airport and Air Transport Development Strategy. 29 G. Intermodal Development Strategies . . 29 H. Benefits of Key Refomes. ............... .. ..... .31 III. RBVIEW OF THE TRANSPORT SECTOR PUBLIC INVESTMENT PROGRAM ...... 37 A. Overall Public Investment Program Allocations to Transport 37 B. Policy Statements in the Public Investment Programs ....... 37 General Observations .................................... 40 Modal Allocation ........................................ 41 C. Transport Investment Plan, 1990-94 ........................ 41 D. Approach to Developing a Core Investment Program .......... 47 E. Summary ...... ............................................. 50 This report is based on the findings of the transport sector mission whlich visited Sri Lanka in February and June 1990. Mission members included Mrs. Inai Bradfield (Sr. Economist, Task Manager, AS1IN) Messrs. Sigfus Sigfusson (Pr. Highway Engineer, ASTIN); Richard Scurfield (Sr. Urban Transport Specialist, INUTD); and Jan Johnson (Urban Transport Specialist, Consultant). The report has been revised based on discussions with Government officials during a mission in March 1991. This document has a restricted distribution and may be used by recipients only In the performance of their offlcial duties. Its contents may not otherwise be disclosed without World bank authorization.  Page No. nV. DONOR INIOLVMD6 IN TEU TIANSPORT SECTOR 0................... .S A. Past IDA/Bank Operations 50 B. Donor Involvement .52 C. Need for Donor Coordination .52 TEXT TABLES 1.1 Modal Split ............................................ 3 1.2 Inter-Zonal Freight Transport Demand by Comodity. 5 1.3 Summary Estimates of Revenue and Expenses from Private Buses 8 2.1 Estimated Annual Financial Benefits of Refoms .31 3.1 Allocations for Public Investment Programs - 1981-1994 .38 3.2 Public Expenditures in the Transport Sector .39 3.3 Public Investment Program .42 3.4 Road Development Authority - Proposed Five Year Expenditures 44 3.5 Recommended Sri Lanka Railway Investment Program .49 TABLES Table 1 Road Network by Province, Class, Jurisdiction and Surface Type, 198911990 ................................ 53 Table 2 Summary of Provisions/Expenditures on Roads ............. 54 Table 3 Vehicle Registrations by Class of Vehicle ............... 55 Table 4 Road Accidents Reported by Police Division .............. 56 Table 5 Private Bus Costs and Revenue Estimates ................. 57 Table 6 Costs of Road Transport ................................. 59 Table 7 Rail Traffic, 1975 - 1988 ............................... 60 Table 8 Costs of Rail Transport ................................ 61 Table 9 Revenue and Expenditure Account of Sri Lanka Railways ... 62 Table 10 Port and Airport Utilization (1988) ..................... 63 Table 11 Performance of Ceylon Shipping Corporation .............. 64 Table 12 Financial Performance of Air Lanka ...................... 65 Table 13 Comparative Land Transport Performance .................. 66 FIGURES Figure 1 Passenger Demand and Household Income .................. 67 Figure 2 Freight Demand and GDP .................................. 68 AMXES Annex 1 Summary of Recommended Actions .. 69 Annex 2 Basic Data on Road User Charges .. 77 Annex 3 Strategies to Increase Effectiveness of Road Maintenance ..90 Annex 4 Bus Costs and Tariffs ................................ 101 Annex 5 Quanitfiable Benefits of Reforms . ............. 105 Annex 6 Private Bus Fleet Estimates ................. 113 Annex 7 Major Donor Funding Activities in the Transport Sector .................. 119 REFE,RENCES ...................... 124 MAP IBRD No. 17938  SRI LAZIA TRANSPORT SECTOR MEMORANDUM Preface An Inter-Ministerial Committee for Coordination and Planning of Transport (IMC-CPT) was established in June 1984 with a view towards recommending organizational, administrative, fiscal and legal measures required for improvement of planning, implementing, monitoring and evaluating transport investment programs and operations. The IMC-CPT is supported by a transport Technical Secretariat, with the primary objective of providing transport data and technical analysis. The Technical Secretariat was intended to become the central analytical agency where plans and programs of the various transport modal agencies would be evaluated and brought together to form coherent national transport plans and programs for consideration by the decision-makers. It is now known as the Transport Studies and Planning Center (TSPC). The initial work undertaken by the IMC-CPT was preparation of a Transport Sector Planning Study (TSPS)--designed to be the first step in the establishment of a continuing transport planning system. (Funding was provided under the Second Roads Project, Loan 2517-CE, May 1985, with the assistance of local and expatriate consultants.) The TSPS was published in January 1988 using 1984-1986 data, and has become an important document for understanding of the transport sector. The study documented that the sector was not able to respond to increasing and diversified transport demand effectively and that service was provided at high cost to the economy. Vehicle and rail operating costs in real terms were rising faster than output and were higher than they should be because of the deteriorating road and rail infrastructure. Regulated fares and tariffs kept revenues below costs, and the Government subsidized inefficient public sector operations rather than make funds available for needed network maintenance. Expansion of bus service was also inhibited by the high cost of purchasing and financing buses and spare parts. This Transport Sector Memorandum analyzes institutional, operational, investment and policy issues by updating the data developed for the TSPS, and translates that analysis into a policy framework. The focus is on surface modes (road and rail), including urban transport problems; cursory treatment is given to the ports and air transport subsectors which have been functioning relatively well. Coastal shipping, which has only a minor role to play in the provision of transport services, is not addressed in this report. Coinciding with the preparation of this report, two IDA projects were being prepared, designed to rectify some of the weaknesses identified in the analysis of the transport sector. Both projects have now been approved, i.e., the Economic Restructuring Credit (2128-CE, May 1990); and the Third Roads Project (2183-CE, November 1990).  -ii- SRI LANMA TRANSPORT SECTOR KEKORANDUM Executive Summary Background 1. The transport sector plays an important part in the Sri Lankan economy, not only as a catalyst for production and efficiency in other sectors, but also as an employer of 1OZ of the six million work force and generator of 122 of the national income. In addition, it provides people with access to social services and employment opportunities. In spite of its importance to the economy, transport accounted for only 22 of Government expenditures prior to 1979--a low share by international standards. In recent years. however, there has been a shift of emphasis to rehabilitate deteriorating transport infrastructure and replace worn equipment with an increased share of the Public Investment Program. For example, the Public Investment Program allocation for transport increased to an average 62 in the 1981/85 perioJ, 92 for 1986/90, 182 for 1989-93, and 132 for 1990-94. 2. In its policy dialogue with the Government, IDA is emphasizing stabilization aimed at overcoming major obstacles to economic growth, including: (a) a large and inefficient public sector; (b) over-ambitious and unproductive public investments; (c) an overvalued Sri Lankan Rupee; and (d) heavy Government deficits which have been amplified by the campaign to quell civil conflicts. Ptogress is being made in these areas and, with the exception of the exchange rate, the transport dialogue mirrors the macroeconomic issues. The principal problems in the transport sector affecting the economy have been the high cost of public bus and rail transport stemming from poorly maintained road and rail infrastructure and inefficient public bus and rail operations. Paradoxically, the Government has not provided sufficient funds to bring transport networks to appropriate maintainable standards (which would help reduce operating costs), but has provided large subsidies to public transport enterprises which should normally recover their costs from operations. These distortions result from weak institutions, lack of a rational policy framework, poor investment planning and the burealtcratic nature of much of the decision making. 3. The Government is aware of these weaknesses and is taking steps to address them. In transport, it is attempting to rationalize investment and recurrent expenditures--with emphasis on eliminating unproductive projects and subsidies, while providing funds for priority activities such as road maintenance. It has adopted a policy of privatizing inefficient public agencies. Where privatization is not feasible, the Government intends to restructure agencies to operate along commercial lines. An important aspect of the Government's policy reformulation is progressive deregulation of selected prices and tariffs, gradually leaving them to market forces. These policies are supported by IDA in its transport strategy recommendations. 4. Kodal Split. Surface transport in Sri Lanka is dominated by highways that account for about 852 of passenger traffic (mostly by bus) and 802 of freight. The railway carries the balance. Both modes, however, are important  -iii- in different markets and are active in both urban and intercity transportation. Ports, shipping and air transport are also important, especially in promoting trade and tourism and as earners of foreign exchange. The Sri Lanka Ports Authority and Air Lanka provide examples of efficiently run public transport organizations in stark contrast to the rail and bus operations. A detailed discussion of major issues affecting each transport mode is contained in Chapter II of this report and strategies to resolve them are proposed. The strategies generally fall under five categories: (a) overall policy reform; (b) institutional reform; (c) improved management of operations and maintenance; (d) selection criteria to determine investment priorities within resource constraints; and (e) resource mobilization potential. 5. Highways. Sri Lanka has a network of some 10,400 km of national (paved) roads and 15,300 km of provincial and local roads. While the network covers the country adequately, it was built many years ago and is not designed to carry today's high level of traffic and heavy axle loads. Many roads and bridges are narrow and of inadequate structural strength. Poor maintenance has compounded ths problem. The main causes of poor maintenance are outdated practices, the absence of a pavement management system and of rigorous analysis to establish priorities. Road surfaces have deteriorated significantly in the past five years, which in turn have contributed to increasing vehicle operating costs. Revenues from road user charges appear to be adequate globally, but may require recalibration to discourage heavy axle loads. A road user charge study has commenced to determine the extent of distortions and the reforms needed to correct them (para 7.) Funding for highway maintenance, especially for routine maintenance, has not been at the levels necessary to ensure appropriate standards. 6. Responsibility for highway administration currently rests with the Ministry of Transport and Highways, however, ten reorganizations have taken place in the last twenty years.l/ In 1981, the Road Development Authority (RDA) was set up under the control of the then Ministry of Highways (MOH) to act primarily as its contractor; the Department of Highways (also under MOH) was retained with responsibilities for planning, investment programming and engineering designs. However, continued problems of retaining key staff, and the difficulties of operating within a highly structured bureaucracy led the Government to dissolve the Department of Highways in 1986, consolidating all its functions under RDA. Since this major change, the national roads have been under the RDA which had stabilized after some years of turbulence. However, RDA recently underwent another reorganization: responsibility for care and maintenance of about 15,300 km of roads and over 2,000 bridges was transferred to the Provincial Councils. At the same time, selected staff were transferred to the provinces to aid in maintaining the provincial roads. The role of the provinces has not yet been clearly defined within the Government's policy of decentralization. The frequent reorganizations and transfers of staff have been demoralizing and have impeded the efficient management of the road network. 7. Donors are helping to strengthen highway administration; for example, technical assistance for maintenance management financed by the Asian Vevelopment Bank; and a spare parts and equipment loan from Japan's Overseas Economic Cooperation Fund (OECF). IDA's Third Road Project (Credit 2183-CE, November 11 In 1989, the Ministry of Highways and the Ministry of Transport became the Ministry of Transport and Highways.  - iv- 1990) emphasizes road rehabilitation and institutional strengthening, and will assis1; the Government to: (a) strengthen the capacity of RDA and provincial offices to plan investments and maintenance through better data collection and analysis (e.g., traffic counts, road condition data, and vehicle operating costs): (b) reorganize the ways in which RDA employs consultants and contractors to provide greater transparency; (c) establish priorities among road sections in need of rehabilitation or upgrading using economic, financial, and technical considerations; (d) modernize maintenance operations to use more cost-effective means and materials; and (e) technical assistance for three studies including the one on road user charges which may result in the restructuring of road user charges to discourage use of two-axle trucks that are more damaging to the pavement. 8. Motorization in Sri Lanka is low by international standards. In 1988, there were about 226,000 motorcycles, close to 80,000 trucks, 37,000 buses and some 150,000 automobiles registered, of which half were owned by individuals and half by Government, its agencies, and private firms. At 8.8 cars per 1,000 people, the rate is low (although it compares to 2.3 in India). The accident rate is very high at about 33 per 10,000 vehicles (about 10 times higher than in industrialized countries). 9. Buses. About 80Z of motorized passenger trips in Sri Lanka are by bus but the level of service is inadequate. About half of bus service is provided by the publicly-owned and operated Sri Lanka Central Transport Board (SLCTB) and its nine Regional Transport Boards (RTB) and half by private operators. There are some 6,400 large buses in the public sector, and about 9,500 buses, mostly minibuses, in the private sector. There are also buses owned by Government agencies, public corporations, schools and tour operators amounting to about 20,000. (Buses have been the target of much terrorist bombing in the past few years.) Overall, the public bus boards are inefficient in terms of productivity per employee in comparison to those in India and other South Asian countries. Within Sri Lanka, privately-owned buses achieve higher availability (80% vs. 66%) and higher load factors (89? vs. 81X) than publicly-owned buses. Private sector buses are more efficiently managed, costs of operation per passenger-km for public buses in urban service being about 252 higher than for private buses. Public buses have required revenue support ranging from US$5 million to US$30 million in the past few years. 10. The Government is aware of the problems in bus transport and is working to resolve them. It has taken steps to privatize all bus service provided by SLCTB and the RTBs (hpeoplization'), following a set of principles supported by the Economic Restructuring Credit (Credit 2128-CE, May 1990), as follows: (a) SLCTB and RTBs will become new, private bus companies kept small to permit popular ownership; (b) a small agency should be created to oversee that bus service is satisfactory and safe (i.e., for training and testing of drivers, inspection of buses, and contracting for service on unprofitable routes); (c) management of bus stations and terminals should be transferred to local authorities; (d) workshops, driving schools, and other activities should be privatized; and (e) the transition to privatization should be made as smooth as possible by making a special effort to have direct communications with all parties involved and implementing an effective public relations campaign. In parallel, control of bus tariffs and regulations on importation of equipment and spare parts 's to be relaxed. To facilitate purchase of new buses and spare parts. the Government has offere4 financial incentives, such as exemption from import duties and tax holidays for a period of two years beginning in early 1990,  -1v- and a line of credit on favorable terms, supported by IDA's Fourth Small and Medium Scale Industries Project (Credit 2250-CE, May 1991.) 11. Road Frvi&ht. Road transport is dominant in Sri Lanka, hauling about 802 of all goods, with the trucking business largely in private hands. There is some evidence that truckers' associations act, to a limited degree, as cartels for the purpose of agreein& on somie tariffs, but by and large the industry is competitive. There is no apparent need for change in policies for this industry except for a possible restructuring of road user charges (para 5). 12. Railays. Sri Lanka Railways is a Government department under the Ministry of Transport and Highways. With some 20.000 employees, it has 1,450 km of track and over 1,000 steel bridges, mostly built 50 to 100 years age. The track ts broad gauge and single line, except for 102 km of double track in the Ce'lombo area. The fleet comprises about 200 diesel electric and diesel. hydraulic locomotives in service, 4,000 wagons, 1,300 coaches, and 46 power sets used exclusively for commuter traffic within the Greater Colombo area. The principal commodities hauled are building materials (including cement), petroleum products, fertilizer, limestone, rice, and flour. Since 1985, the volume of freight has stabilized at about 200 million ton-km, down from about 270 million ton-km in the late 1970s. Rail passenger traffic reached a peak of 4.1 billion passenger-km in 1979 but had steadily fallen to 1.9 billion passenger-km by 1988. The railway's deterioration is due to competition from road transport and consequent decreases in revenue, increasing costs, and disruption of service by civil disturbances. These factors resulted in increasing operating deficits, but Government subsidies have not kept pace with the escalating operating costs of the railways. Management has deferred track and building maintenance, and amassed an extensive fleet of out-of-service locomotives and rolling stock while awaiting imported spare parts. Despite the seriousness of the railway's problems, it could be restructured to serve an economic purpose in selected markets. With the 4ssistance of the OECF, amounting to US$80 million equivalent, the railway is remanufacturing ten diesel hydraulic locomotives on a trial basis, and undertaking related workshop improvements and track rehabilitation. 13. This report recommends the following: (a) more autonomy for the railway to insulate it from political intervention, and make it a more business- like organization (like, for example, the Sri Lanka Ports Authority); (b) adoption of a clear strategy with operating goals and policies for achieving them: (c) downsizing through closure of uneconomic lines, reductions in staff and strict cost control of operations; (d) an aggressive marketing approach, promoting services for which the railway has a comparative advantage (such as bulk and long-haul traffic), and those for which there are complementary relations with other modes or entities (commuter traffic in Colombo); (e) improvement in the level of service, prioritization of investment needs; and (f) introduction of economic fares and rates. 14. Urban Transport. The Greater Colombo area has four million inhabitants and is growing rapidly. The municipalities making up Greater Colombo and the Urban Development Authority do not always act in concert and are inadequately staffed to handle urban transport problems. Commuters from outside the city are served by both Duses and the railway, but neither offers adequate service or capacity. The number of automobiles and motorcycles is growing fast. Traffic congestion in Colom,o has become noticeable and by the year 2000, is likely to be a severe problem. In the Fort and Pettha sections of Colombo, congestion--which slows tra"tel speeds--is exacerbated by undisciplined driving  -vi- misuse of road space, poor traffic control and a few streets blocked as a result of civil disturbances. Traffic lanes are blocked by double-parked cars, curbside shops and pushcarts. Colombo has a high accident rate blamed on a combination of poor driving habits, pedestrians walking on the carriageway, and road conditions including poor shoulders, irregular pavement, lack of sidewalks, and the absence of median strips. Yet traffic police are neither adequately equipped with patrol cars nor trained to control traffic and enforce laws effectively. 15. Recommen0ations for urban transport include: (a) strengthening the Urban Development Authority, olombo Municipal Council and Transport Studies Planning Center for effective planning and policy analysis, and ultimately to develop a multimodal urban transportation plan coordinated with overall investment planning for Colombo; (b) improvement and coordination of bus and rail services for commuters as alternatives to private car travel; (c) establishing economic road user charges, including the possibility of charging fees for operating in congested areas and during peak hours; (d) application of traffic management measures, such as signalization, parking restrictions and meters, auto-free zones; (e) rehabilitation of streets and improved maintenatnce; and (f) enforcement of safety-related regulations and establishment of safety education programs. 16. Ports. The port of Colombo handles 902 of Sri Lanka's marine tonnage, 702 of which is container transshipment. There are dry-docks for ships up to 30,000 tons. Two lesser ports can take ocean-going ships, and other ports handle some coastal shipping and fishing vessels. The Sri Lanka Ports Authority manages and operates Colombo Port efficiently. Space for container storage is severely constrained within the port and facilities are needed for moving containers away from the port srea without adding to the already congested road traffic through unit train operations to Inland Container Depots. The feasibility of developing one of the minor ports at Galle for container handling is under investigation, with Japanese financing, but it is difficult to envisage an economic justification for this in the near term. During the 1980s, OECF financed the construction of the two container terminals and the third one (US$90 million) is under construction. 17. Shipping. The Government-owned Ceylon Shipping Corporation operates an assortment of ships which it owns or charters. Its revenues cover operating costs, but are not enough to service foreign debts incurred for the purchase of ships at an unfavorable time. Its problems are largely financial and particularly due to the purchase of unsuitable vessels which have been sold recently. Other possible remedial measures include curtailing services on routes where operating revenues cannot cover operating costs and restructuring of its bureaucratic decision making process to be more responsive to market demands. In January 1990, the shipping routes under the control of the Central Freight Bureau were deregulated except for the Colombo-Northern Europe routes. 18. Airports and Air Transport. Colombo's international airport and Air Lanka, the international airline, are modern, well-equipped, and well-managed. Besides international passenger traffic, they handle a variety of export goods. With a loan from OECF in 1986, funding was provided for an additional runway, a terminal building, and other improvements.  -vii- 19. Public Investment Program. As a development strategy the Government has adopted the concept of rolling five year investment programs. The ensuing Public Investment Programs (PIPs) therefore permit a redefinition of priorities annually. The allocation for transport peaked in the 1989-93 PIP at nearly 182, compared to 6? in the 1981-85 PIP, and a 1990-94 allocation of 13?. In real terms, however, the transport share in the 1990-94 PIP represented about a 73? increase over the 1981-85 program. As a percentage distribution in current prices, the share for highways has increased from almost 202 in 1981-85 to 512 in 1990-94. Railways increased from 31? to 37.5% over the same period, peaking at 42.52 in 1986-90. The shares in SLCTBlpublic bus, ports and shipping, and air transport all declined over this period. The major emphasis of the 1989-93 and 1990-94 PIPs is on the completion of ongoing projects and the maintenance and rehabilitation of existing assets. The bulk of expenditures for highways is for the rehabilitation and maintenance of the national and provincial road networks, and the repair of bridges. About 762 of the total railway investment is also for maintenance and rehabilitation, including track renewal, rehabilitation of 101 locomotives and workshop improvements. There is a proposal to modernize and expand Galle Port, but more analysis is needed before this investment should be undertaken. In the face of its budgetary stringency, the Government needs to prepare a core investment program that includes only those projects which can be expected to give high returns, coupled with a rationalization of its PIPs. for instance, current allocations for the railway subsector appear high in relation to its economic role, while the large increase for highways have not been matched by improvements in management and implementation capability. Specific capital investment proposals must, therefore, be subjected to detailed feasibility studies to determine its economic viability and priorities before investment decisions and implementation. 20. Donor Financing. Several donor agencies are supporting the sector. Commencing in 1979, the World Bank Group has supported four projects--three ro&d projects and one road passenger transport project--totalling US$133.0 million. The Asian Development Bank has been assisting RDA in the road subsector--lending a total of US$73.6 million to date for two road improvement projects. OECP has financed road maintenance (US$99.4 million), railway rehabilitation and maintenance (US$69.0 million), Colombo Port Development (US$199.8 million) and Co2ombo Airport development (US$73.6 million). The Overseas Development Administration (United Kingdom) has funded US$22.0 million for repair and rebuilding of two major trunk roads in Colombo. IDA, ADB, OECF, ODA, Canada and Germany are also participating in the financing of an Emergency Reconstruction and Rehabilitation Program which includes, inter alia, repair and rehabilitation of roads and railways, and also purchase of buses. Other donors in the transport sector include France, India, Republic of Korea and Romania. 21. IDA has taken the lead in arranging donor coordination. The resultant meetings have contributed to substantial success in reaching consensus on approaches and overall sector priorities.  SRI LANKA TRANSPORT SECTOR MEMORANDUM I. ROLE OF TRANSPORT IN THE SRI LANRAN ECONOMY A. Country Background 1.1 Sri Lanka is an island with an area of 66,000 km2 measuring about 400 km from north to south and 240 km from east to west. The country is generally flat in the coastal area and mountainous toward the center rising to peaks of 2,300-2,600 m. Rivers flow in a radial pattern from the mountains but have no navigational significance. Economic activity is influenced by the monsoon rains; the Southwest monsoon brings rain mainly from May through July and the Northeast monsoon during December and January. With an estimated per capita income of about US$410 (1990), total population is about 17 million (1990), which registered a moderate growth of 1.2Z per annum between 1980 and 1990. About half of the country's population lives within the south-west quadrant of the island, with densities of over 400 per km2. The size and topography of the country and the location of the population generate large and frequent short-distance movements of goods and passengers. B. Transport and the Econoy 1.2 Almost 302 of Sri Lanka's gross domestic product (GDP) is generated in the agricultural sector and close to 202 in the manufacturing sector. As a result, much of inland freight transport consists of agricultural commodities such as food grains (rice and wheat) and tree crops (tea, rubber, and coconut), as well as other bulk goods such as cement, building materials and oil products. Due to the import-export orientation of the Sri Lankan economy, and the concentration of most manufacturing industries in and around Colombo where the country's principal port is locsted, 502 of total freight is moved into and out of the Colombo area. Consequently, freight and passenger traffic in this urban area compete strongly with each other for the utilization of street space. 1.3 The importance of the transport sector in the Sri Lankan economy can be measured in part by its share of GDP (122 in 1989), the share of Government funds allocated to the sector in recent years, amounting to 142-18% of the total Public Investment Programs of 1988-1992 and 1989-1993, which have been increasing faster than GDP in the recent past. The close relationship between economic activity and transport can be seen by the upsurge in transport following the liberalization of the economy since 1977. Between 1981 and 1985, transport autput increased at an average annual rate of 7.72, compared to GDP growth of 5.5% or per capita of 4.32. The large increase in passenger-kms in that period coincided with the beginning of private bus operations as a result of import liberalization; bus passenger-km increased in parallel with the growth in household income (Figure 1). The increase in the number of licensed trucks was also pronounced between 1977 and 1985, at an average of 262 while GDP registered 62 annual growth (Figure 2). Interruptions in transport can also affect the economy negatively. A one month strike by public bus operators in June 1989 and the curtailment of service by private bus and railway operators brought the economy to a standstill. Many workers were unable to get to work, and lost production translated into lower growth during the subsequent few months. Sound transport policies and practices are a catalyst for growth for farmers, workers,  -2- and investors throughout the economy. Moreover, lower transport costs and be ter reliability of services can improve the competitiveness of the country's important export sectors. 1.4 With a rich natural resource base, a long tradition of relatively well-distributed incomes and extensive social services, as well as one of the best educated populations in the developing world, Sri Lanka has the potential for achieving excellent economic performance. However, since independence in 1948, it has been plagued by ethnic conflict as well as by inconsistent economic policies which have impeded its performance to the point where per capita GDP is only US$410, and its past social achievements are being eroded. The period of rapid expansion following the adoption of the economic liberalization program in 1977 was not sustained, and this program brought about structural imbalances. With the sharp increase in both investment and consumption spending, coupled with low national savings and a deterioration in the terms of trade, severe balance of payments and budgetary difficulties ensued. The main obstacles to sustained growth have been domination of the economy by a large and inefficient public sectorl/, ambitious and unproductive public expenditure programs2/, and the overvalued Sri Lankan Rupee (Rs). By 1989, escalating public expenditures associated with the civil conflict had raised the budget deficit to 12.52 of GDP. GDP itself grew only 2.32 in 1989. Inflation rose from 8? in 1987 to 12? in 1989, unemployment grew to 18?, the external deficit was over 1O0 of GDP, debt service was nearly 232 of goods and service exports, and foreign reserves were at their lowest level in over a decade.3/ 1.5 In response to this critical situation, the Government has undertaken to stabilize the economy and promote its growth by reducing and restructuring public expenditures, eliminating unproductive and low-return investment projects, reforming the civil service and public enterprises, increasing the role of the private sector, and restructuring or removing inefficient subsidies and transfers. In this context, the Government has adopted a time-bound action plan, including prioritizing investment projects with high economic returns, allocating sufficient funds for maintenance, decreasing the Public Investment Program from 16-172 of GDP in the early 19809 to 9-102 during the 1989-92 period, and reducing the fiscal deficit from 12.52 of GDP in 1989 to 10.42 of GDP in 1992. For the public bus operations, the Government is in the process of (a) deregulating private bus fares and privatizing their operations to enable private bus operators to achieve financial viability and to eliminate large Government subsidies; and (b) establishing a responsive regulatory and incentive framework to facilitate private sector development (para 2.21). 1.6 The macroeconomic policies and reforms outlined above open the door to further policy reforms in the transport sector. Budgetary (subsidy) support to Government operations in the transport sector has ranged from 2 to 3? of GDP, and the challenge now is to reduce such Government subsidies by: (a) increasing efficiency and productivity; (b) adopting appropriate policies (e.g., pricing and 1/ Which employs about 21? of the 6 million member labor force and spends about 33Z of GDP. 2/ Supported by foreign aid programs and heavy overseas commercial bank borrowing. 3/ Sri Lanka Country Strategy Paper (February 1990).  -3. regulation); (c) rationalization of instltutions (privatization or restructuring of public undertakings); and (d) prioritization of capital and recurrent expenditure. The disruption due to civil strife has been somewhat reduced giving the Government's stabilization and structural reform initiatives a chance to take effect. Thus, the need for fundamental changes in the transport sector occurs simultaneously with the political opportunity to effect such changes. C. Transport Modes 1.7 Catering to the needs of an export-import orient4d economy, Sri Lanka's transport system includes road and rail networks (built in the last 50 to 100 years) that penetrate almost every part of the island. There are also one main port and two minor ones, and seven airports, of which only one handles international traffic. Other modes of transport, such as domestic air and coastal shipping, are of minor importance. A short pipeline carries crude oil from Colombo Port to the refinery of Ceylon Petroleum Corporation in Colombo. Bus service is provided both by public and private concerns. Road freight is hauled by private operators; the railways are operated by a Government department. Modal Split 1.8 Intercity freight transport is currently handled by rail, truck and coastal shipping, and domestic passenger services are provided by rail, bus, and automobile. The relative modal shares are summarized in Table 1.1 below, while the trend by mode is shown in Figure 1. Table 1.1: MODAL SPLIT (In percent-1986) Bus System Small Large Rail Public Private Autos Trucks Trucks TOTAL Passenger Transport Shares Intercity Passengers 23 41 29 7 - - 100 Intercity Pass-km 10 44 38 8 - - 100 Commuter Passengers 10 39 43 8 - - 100 Commuter Pass-km 8 42 44 6 - - 100 Freight Transport Shares Intercity Freight 18 - - - 31 51 100 Intercity ton-km 23 - - - 28 49 100 Sources Table 13.  -4- 1.9 In 1986 intercity passengers made 702 of their trips by bus (public and private) and only 232 by rail, the proportions of passenger-km were 822 by bus and 102 by rail. This indicates that they tended to make longer trips by bus and shorter ones by rail. Commuters made 82X of trips and traveled 79Z of passenger-km by bus--not indicating a significant difference in trip length. Surprisingly small percentages (72 to 92) were accounted for by automobile trips. Road transport was also dominant for freight, hauling 822 of intercity tonnage and accounting for 772 of ton-km. The remaining freight is handled by rail. 1.10 Coastal shipping currently hauls some commodities previously transported by rail: cement and fertilizer f rtm Jaffna to Colombo, and flour from Trincomalee to Colombo. The amounts are too small to register in Table 1.1, and these flows may shift back to rail once island security is back to normal. 1.11 Future freight transport demand, derived from estimated growth rates between 1986 and 1996 in the ptoducing and consuming areas, is projected at annual growth rates ranging from 22 (pessimistic) to 82 (optimistic), with a base case of 4.72. Inter-zonal freight flows are expected to grow from about 10 million tons to 15 million tons under the base case, with a possible + 252 variation for the other scenarios (Table 1.2 below). Major increases were expected in non-traditional agricultural products, building materials, petroleum products, forest products, processed foods and industrial inputs. Traditional agricultural products (rice, rubber, etc.) and mining output are not expected to grow as fast. Passenger transport forecasts based on population distribution, income growth and passenger trips by origin and destination projected that total intercity passenger trips would grow from 121 million in 1986 to 272 million by 1996 under the base case scenario, and a low of 194 million or a high of 340 million under the pessimistic and optimistic scenarios. The annual rate of traffic growth over the 1986-1996 period is estimated in the range of 4-62 for passenger travel and about 42 for goods. Road Transport 1.12 Highway Network and Traffic. Sri Lanka's extensive and dense highway system evolved primarily to serve the inland plantations and convey their products to the ports. The network (Table 1) includes al,out 10,440 kilometers of national, 15,300 km of provincial, and over 52,000 km of local roads. All national roads are paved, as are about 712 of provincial roads and 13? of local roads, with about 28,000 km of paved roads. The total length has not increased over the last few years apart from the statistical addition of unclassified roads to the local roads category. With 65,525 km2 of land area, the network density is 1,200 km per 1,000 kWm or 4.6 km per 1,000 people, among the highest densities in Asia. The number of four-wheeled vehicles per kilometer of road, 3.4, is very low. 1.13 Some 902 of national roads had traffic of less than 4,000 vehicles per day (vpd) in 1987, while a similar proportion of provincial roads had less than 400 vpd. About 430 km of national roads in the vicinity of Colombo had traffic volumes over 4,000 vpd and about 60 km of these, mostly in and near Colombo, had volumes over 10,000 vpd. Traffic volumes on other roads were as low or lower than on provincial roads.  -5- Table 1.2: INTER-ZONAL MREIGHT TRANSPORT DEMAD BY COMMODITY (1986 and 1996) (1 000 Tons) 1986 1996 Base Optimistic Pessimistic Agricultural Products 382.5 703.4 1,200.4 578.0 Building Material 1,037.2 1,775.6 2,415.7 1,394.9 Cement 1,450.9 1,649.6 2,124.1 1,288.8 Coconut 648.8 957.8 1,161.6 646.8 Durable Consumer Goods 51.9 169.6 305.0 97.1 Fish 139.2 216.1 251.8 187.1 Flour 427.3 465.3 441.0 489.3 Food Products 74'1.4 1,126.5 1,166.4 962.9 Forestry Products 6i j.6 1,156.6 1,213.3 817.4 Fertilizer 729.4 1,160.5 1,368., 1,098.0 Industrial Products 599.4 1,185.8 1,723.5 806.2 Minerals 30.6 50.7 101.2 30.6 Non-durable Goods 261.5 541.9 737.1 400.8 Petroleum Products 1,153.3 2,090.9 2,746.9 1,644.3 Rice 1,048.8 1,163.4 1,191.2 967.9 Rubber 139.9 169.2 169.2 139.9 Tea 270.9 310.7 330.9 272.1 Total 9,788.5 14,893.6 18,648.0 11,822.1 Average annual growth 1986-1996 - 4.72 82 22 Sourcez TSPS, Vol. 1, 1988, Appendix A7.1. 1.14 Economic growth since 1977 has resulted in heavy traffic on some sections and in the use of vehicles with heavier chassis and axle loads than the pavements were designed to carry. At the same time, shortages of funds have prevented improvement of roads and bridges, and inefficient maintenance management and practices have led to inadequate drainage and pavement failure. The resulting high vehicle operating costs are up to 502 higher than under reasonable conditions of maintenance. The Government's stated policy is to give priority to maintaining and upgrading the existing road networks rather than new construction, but the authorities have been able to deal with only a fraction of the required work load to date. 1.15 Institutions. Responsibility for highway administration currently rests with the Ministry of Transport and Highways. However, ten reorganizations have taken place in the last twenty years. In 1981, the Road Development Authority (RDA) was established, and its functions expanded in 1986. As of January 1990, RDA's responsibilities were reduced to include only the national road network. All other public roads are under the jurisdiction of the Provincial Councils and municipal governments. Whereas RDA has a separate budget (Table 2), other roads must compete for funding with other provincial/local governments. Other donors are helping to strengthen highway administration. For  -6- example, RDA recently received technical assistance from the Asian Development Bank (ADB) to develop and Implement a computer-aided design and maintenance management system for pavements and bridges. Japan's Overseas Economic Cooperation Fund (OECP) is also funding a project to provide construction equipment, spare parts, and maintenance tools and equipment. Under an IDA- financed Third Roads Project 'Ci.edit 2183-CE, approved November 1990), additional technical assistance will be provided to train RDA staff in the areas of planning, design and contract management. 1.16 Domestic Road Contracting Industry. The local private contracting industry for roads has been improving steadily in recent years and many medium and small contractors can now comppete for road maintenanceirehabilitation works. RDA is supporting local contractors by leasing equipment to them. Nonetheless, not all of the companies have the required competence, capacity and financial resources to properly compete with foreign contractors who usually win the larger and more lucrative contracts. There is a need to improve the capability of the local contracting industry to strengthen the execution of road construction and maintenance works. A study to investigate current practices, analyze constraints the industry is facing and recommend an action plan will also be funded under IDA Credit 2183-CE. 1.17 Motor Vehicles and Motorization. The "registered" motor vehicle fleet has almost doubled from 1980 to 1988, representing a growth rate of 8.42 per year; data on the number of vehicles is unreliable because deregistration is incomplete. It is estimated that there were 492,400 motor vehicles registered in Sri Lanka in 1988 and about 462 (226,100) of these were motorcycles (Table 3). Commercial vehicles--buses and trucks--accounted for about 442 of four-wheel motor vehicles, with automobiles making up the remainder. The fastest growing categories have been motorcycles and privately owned buses, although all categories except public buses and tractor-trailers have increased substantially since the early 1980s. More recent data show that the number of publicly owned buses has declined from 7,500 in 1986 to about 6,400 in 1990 as they were not replaced at a sufficient rate to maintain the fleet. Out of the 6,400-bus fleet, only about 3,800 buses were operational in early 1990 because of damage done during the civil unrest and the lack of parts and tires necessary to keep the buses on the road. The remaining 20,000 buses are owned by Government agencies, public corporations and tour operators. 1.18 Although the vehicle population grew rapidly in the 1977-81 period immediately following import liberalization, motorization is still relatively low, especially in terms of automobiles (8.8 cars per 1,000 population). About one half of these automobiles are owned either by the Government (including state undertakings) or by private business enterprises. A rapid increase in vehicle ownership by individuals and private businesses can be expected in Sri Lanka if the civil situation returns to normal and incomes increase. Traffic congestion then will be an increasing problem, especially in Colombo and on national highways which have narrow carriageways. 1.19 Road Accident Rates. Road safety is an increasing problem in Sri Lanka in spite of a number of accident prevention programs. The numbers of accidents by geographical area (Police Division) from 1974 to 1988 are shown in Table 4. In 1988, there were again more than 33,000 accidents, with 1,365 fatalities (512 were pedestrians), and an accident rate of about 33 per 10,000  -7- vehiclesl about 10 times higher than in the industrialized countries.4/ The lack of driver discipline is clearly a major factor in the high accident rate. compounded by the mix of traffic and road users (motorized vehicles, pedestrians, animal and human-drawn carts, bicycles, three-wheelers, loose livestock); narrow and uneven road and street surfaces; poorly-maintained vehicles; and a lack of pedestrian facilities. Contributing to the lack of discipline are poor driver education, lack of strict licensing procedures, and a very low level of enforcement of even basic traffic regulations. The undisciplined use of the roads greatly reduces effective road capacity and contributes to unnecessarily high road transport costs. 1.20 Road User Charges. Road user charges include taxes, license and registration fees and duties. Total revenues from road user charges in 1988 were estimated to be Rs 4.2 billion, more than enough to cover the Rs 1.3 billion expenditures in road rehabilitation and maintenance in the same year or to cover the required, higher budget. As is typical in many economies, road user charges are used partly to fund sector expenditure and partly for general expenditures. A comprehensive study on road user charges is being undertaken to determine the appropriate structure and level of road user taxation that would minimize pavement damage, encourage proper axle configurations and reduce relative price distortions (para 2.16).S/ 1.21 Road Passenger Transport. For the majority of people in Sri Lanka, bus transport is the main form of motorized transport. It is estimated that presently over 801 of passenger travel is on buses. Until 1979, passenger transport was the monopoly of Sri Lanka Central Transport Board and nine Regional Transport Boards. Since 1979, however, private operations have been allowed to compete with public services. Private bus operations have grown rapidly, now representing about 601 of total buses, about 402 of total bus capacity, and approximately 501 of total passenger-km. As discussed in paras 2.19-'.21, the Government is in the process of privatizing all bus services. 1.22 The bus transport network within Sri Lanka is extensive, and most agglomerations from the smallest to the largest towns, including Greater Colombo, are served. Frequencies are generally tailored to demand, except during peak periods in the Colombo Metropolitan area, and range from very short headways for most urban and some inter-urban services, to two buses per day in the thinly populated areas. Private buses are concentrated in highly trafficked urban and intercity services and operated under the same range of fares as public buses until January 1990 when a fare increase was granted to private operators by the Government, the first since 1983. 1.23 However, the present bus transport service in Sri Lanka is inadequate to meet the travel needs of the public, as is clearly demonstrated by the high vehicle loads and long waiting lines observed in many parts of the country, particularly during commuting hours. This inadequacy results from a shortage of buses and unavailability of many of those in the fleet. Replacement of aging buses by both private and public operators has been seriously impeded by 4/ Japan has a rate of three per 10,000 vehicles. Sl Funding provided under IDA Credit 2183-CE, November 1990.  -8. Government controls on passenger fares combined with the high cost of financing new buses. This situation is expected to improve if the Government implements the planned bus fare deregulation. 1.24 Detailed estimates of revenue and expenses of private buses are given in Table 5 and summarized in Table 1.3 below. Table 1.3s SUMNARY ESTIMATES OF REVENUE AND EXPENSES FROM PRIVATE BUSES, JANUARY 1990 Large Bus Medium Bus Small Bus (In Rupees) Revenue 0.194 0.256 0.333 Costs 0.185 0.253 0.379 Profit 0.009 0.003 -0.047 These data must be qualified in two ways: (a) revenues based on seat-km are probably underestimates as recent higher load factors have not been included; and (b) interest is not included in costs. From the data, it appears that bus service is barely profitable. The 1990 fare increase of 242 is considerably lower than the increased operating costs ranging from Rs 0.19 to Rs 0.38 per seat-km which are 562 to 642 higher than those in 1986. 1.25 Road Freight Transport. The composition of the fleet (vans: two-axle traditional; multi-axle) is not known but it is estimated that less than 10? of the fleet is multi-axle. About two-thirds of the trucking fleet is privately owned, predominantly by small operators. The remainder is owned by Government agencies, public corporations and cooperatives. A shippers' choice survey conducted in 1986 indicated that importers/exporters, manufacturers, and traders found trucking services to be satisfactory in terms of reliability, even if their freight rates were generally considered to be high. The origin-destination survey conducted in the same year showed that about 202 of the total traffic on the main highway network was trucks, of which 902 were two-axle trucks; less than 5? were three-axle trucks or tractor trailers. Apart from annual vehicle inspections and gross vehicle weight limitations, road freight transport is unregulated with no officially set tariffs,6/ and entry to the industry is free. 1.26 The financial cost of freight transport per ton-km varies from Rs 1.37 to Rs 2.6 plus loading and unloading. These freight transport costs appear to be adequately covered by the average tariff level in January 1989, as shown in Table 6 (Rs 3.63 - Rs 3.98), and the tariffs have since been increased by 30t (in August 1989), apparently providing a comfortable margin to the truckers to cover overhead and profit. There are indications that some truckers' associations are able to negotiate tariffs somewhat higher than those charaed by non-members when carrying Government freight (e.g., tea estates). Nevertheless, truckers appear 6/ Although there is no formal regulation of tariffs, it is customary for truckers' associations to seek Government agreement on tariff increases.  -9- to be supplying the freight services that are needed gnd competing effectively with the railway. Railways 1.27 Sri Lanka Railways (SLR) is a Government department under the Ministry of Transport and Highways (MTH) and employs about 20,000 people. Most of the 1,450 km of track and over 1,000 steel bridges were built up to 100 years ago. The track is broad gauge with the exception of the 59 km on the Kelani Valley Line, which is narrow gauge. Most of it is single line, except for 102 km of double track in the Colombo area. It has about 200 71 diesel electric and diesel hydraulic locomotives in service, 4,000 wagons, 1,300 coaches, and 46 power sets used exclusively for commuter traffic within the Greater Colombo area. The principal commodities hauled are building materials (including cement), petroleum products, fertilizer, limestone, rice, and flour. 1.28 The railway system has deteriorated because of competition by road transport and consequent decrease in revenue, increased costs, and disruption of service by civil disturbances. These factors require increasing subsidies which have not kept up with costs. Management has therefore deferred track and building maintenance, and amassed an extensive fleet of out-of-service locomotives and rolling stock while awaiting imported spare parts. Consequent decreases in productivity for workshop staff and maintenance personnel have created a morale problem that has discouraged the more qualified and capable staff. 1.29 The civil unrest in the north and east of the island starting in 1983, resulted in suspension of the profitable long-distance operations to Jaffna, Kankesanthurai and Trincomalee until March 1990. Curtailment of these services and competition from buses and trucks has contributed to the reduction of total train kilometers to 70? of their 1980 level in 1988 (Table 7). Total ton-km averaged 268 million between 1975 and 1979, but declined by 19X in the 1980s to an average of 217 million, despite a brief rise in 1984 back to the 1970s level. Since 1985, the volume has been fairly steady at around 200 million ton-km, despite the loss of north-south, long-distance traffic. Rail passenger traffic reached a peak of 4.1 billion-passenger kilometers in 1979. Since then, it has steadily declined to 1.9 billion in 1988. 1.30 The SLR has experienced high unit operating costs stemming from up- country operations in hilly terrain, redundant staff, and an uneconomic mix of short-haul bulk cargo and local or mixed passenger trains requiring frequent stops. The estimated operating costs per train-km, converted to cost per ton-km and passenger-km, show that average unit costs have increased from 1985 to 1988 by 63Z, 202 of which was due to a drop in the train-km run by the SLR in 1988, 202 to increased interest charges, and most of the rest due to labor cost increases. This increase is above the inflation rate and represents an increase of 14X in real operating costs. 1.31 The increased costs have not been offset by increased revenues: on the contrary, fares are highly subsidized. For example, there are subsidies up to 90g for season ticket holders, civil servants and school children. To a lesser 7/ Of which about 110 are for mainline freight service, with the remainder providing intercity passenger and shunting services.  -10- extent, freight tariffs are also subsidized and averaged 782 of full costs or 6S5 of operating costs in 1988 (Table 8). In 1988 the SLR's operating losses amounted to Rs 1,500 million. About one-half of this deficit is accounted for by installment payments for assets procured abroad. The financial situation of SLR is becoming even more unhealthy with operating expenditures growing faster than revenue, as shown in Table 9. Although the Government continues to make budget appropriations for operating subsidies, the SLR remains a financial quagmire. Colombo Urban Transport 1.32 The Greater Colombo area comprises the municipality of Colombo and eight other contiguous municipalities. Greater Colombo corresponds roughly to the Western Province. There is little coordlnation between the communities and the Urban Development Authority, created to promote such coordination, has in practice carried little clout. 1.33 Greater Colombo has a population of over four million inhabitants, approximately 262 of total population and 602 of urban population. Between 1980 and 1985, population grew at about 82 per annum. Although data are lacking, there is little reason to believe that growth rates have declined in the past five years. Colombo is the primary industrial, commercial and transport link of the country, as well as its seat of Government; over 40? of the gross national product (GNP) results from activities in the region, and transportation is one of the key elements needed to make it more efficient. 1.34 Greater Colombo has a network of 2,453 km of paved roads and 2,586 km of unpaved roads, managed by Colombo Municipal Council and RDA (50 km of truck roads). Traffic volume of major roads has been growing at 4X per annum for the past several years, but is likely to result in major congestion in the absence of mitigating measures. The region is served by 2,800 public buses and about 6,400 private buses which provide service every six to ten minutes on major routes. The rail network service for Colombo includes four lines with a total of 164.4 km of track. Service to the 80 stations and other stopping places is reliable but less frequent and direct than buses. In addition to road and rail links, the St. Sebastian Canal and the Kelani River present opportunities for bypassing the congested roads leading to the port and central city, although the waterways are used much less than in the past. 1.35 The recent growth in motorization and railway services has not kept pace with rising urban travel demand. Public transport passenger trips comprise approximately 902 of all urban travel, and there exists a chronic shortage of bus and train services. The inadequacy of the present bus fleet and rail system is evidenced by severe overloading on most vehicles during peak travel periods throughout the region, and the worsening quality of public transport service offered in many travel corridors. Nearly all goods movement is serviced by vans, pick-ups and heavy trucks over a highly congested urban road network. Light hauls over shorter distances are still handled by slow-moving push-carts and other small vehicles, worsening already difficult traffic flow conditions. 1.36 Travel delays, increases in vehicle operating costs, a greater number of traffic accidents, and other factors have begun to pose a threat to the long- term health of Colombo's urban economy. According to the TSPS forecast, traffic growth in Colombo will lead to a significant increase in travel delay on six key urban travel corridors. Traffic volumes are expected to exceed the design  -11- capacit:' of these roads by 1996. The present average increase in vehicle operating costs p.a. due to congestion in the Galle Road corridor, for instance, is estimated at 5-102. This is forecast to accelerate to 35-SO by 1996, representing a major economic cost. To head off this traffic crisis, a comprehensive urban transport strategy and an investment program with appropriate funding are needed for the Greater Colombo area. Ports and Shippin 1.37 Ports. There are three ports for deep sea vessels. Colombo Port, the largest, is located on the southwest coast; Trincomalee, the second largest, is located on the northeast coast; and Gnlle is located about 120 kilometers south of Colombo. Until 1979, all the ports were under the Ministry of Trade and Shipping as a department and were operated through a tripartite administrative structure of agencies involving the Colombo Port Commission, the Port (Cargo) Corporation and the Port Tally and Protective Services Corporation, sharing among them the funding of port management, port planning, engineering and operations. Inevitably, there was duplication of work, lack of coordination, policy disagreements and long delays in day-to-day operations and project implementation. To integrate the port management, engineering, planning and operational functions, the ports were removed from control by a Government department, and the Sri Lanka Ports Authority (SLPA) was established in August 1979 as a statutory body to take over the functions previously performed by the three organizations. 1.38 Since the major restructuring, the SLPA has been able to streamline port operations, speed up development activity, put in place a planning mechanism and remit substantial income tax revenues to the Government. Colombo Port is the most active of Sri Lankan ports as shown in Table 10, and it has become a major transshipment point in South Asia. Container traffic through Colombo has increased from 7,500 twenty-foot equivalent unit (TEU) (the standard container unit length) in 1978, to 621,000 TEUs in 1988, of which about 70, were transshipments. More recently (1990), the share of transshipment is estimated to have increased to 772 of total TEUs handled by Colombo Port. Financial records indicate that Port Authority has earned after-tax surpluses of Rs 40 million in 1979, growing to Rs 313 million in 1988. The performance and growth of the port have been impressive, but since the utilization of the port depends largely on the transshipment traffic, it could be vulnerable to competing ports and other developments in the region. The possibility of such developments has to be carefully assessed in planning additions to the capacity of the port. The two container terminals at Colombo Port were financed by OECF; the third one is also being constructed with financing from OECF for about US$80 million. 1.39 Shipping. The Government-owned Ceylon Shipping Corporation (CSC) was established in 1971 by a Parliamentary Act to operate services for the transport of goods, mail and paseengers by sea and to carry on business as ship owners, charterers of ships, ship brokers, and shipping agents, as well as to undertake construction, maintenance and repair of ships. With an initial capital contribution of Rs 100 million by the Government, CSC has developed a number of subsidiary companies: Ceylon Shipping Lines (1002 owned), Ceylon Port Services (100?), Colombo Dockyards (75?), Amalgamated Lines (51?), and Lanka Tankers (50Z). Throughout the seventies, CSC provided conventional liner services on the South Asia-Europe, South Asia-Far East, Sri Lanka-Red Sea/Mediterranean and Sri Lanka-Arabian Gulf routes as well as tramp shipping services along the west coast of India.  -12- 1.40 The CSC operates eight container vessels, with a total capacity of 86,800 dwt. From time to time, the CSC also charters cellular container ships to serve the UK/Europe, the! Middle East and Hong Kong/Japan routes. In addition, it owns a 30,000 dwt tankcer which is used to import about a quarter of the country's crude oil requirements. 1.41 In 1986, the CS- carried out about 132 of total marine freight but increasingly, it has had to rely on budgetary support to service its debt payments. Table 11 shows CSC's financial and operational performance in 1986. The main causes of CSC's problems can be summarized ast (a) its overly optimistic expectations to capture a large share of the container traffic market at a time when the world economy was heading for a recession; (b) its decision to double its fleet capacity all at once rather than in stages; and (c) its purchase of small cellular ships, ran&ing from 175 TEUs to 537 TEUs, when other shipping lines were purchasing large container ships (1,500 TEUs - 2,000 TEUs) for long hauls to take advantage of economies of scale. (CSC's long-haul South AsialEurope container services were similarly showing excellent profits with chartered 1,074 TEU vessels.) The vessels purchased by CSC were suitable for feeder services, but they accounted for only one-third of the total CSC net freight earnings in the early eighties. Air Transport 1.42 Airports. The only significant airport operating at the present time is Colombo International, located in Katunayake, 32 km north of Colombo, and operated by the Airport and Aviation Services Company, Ltd., 9s an agency of the Government. Other airports at Jaffna, Trincomalee and Batticaloa formerly served scheduled domestic air routes, but these are no longer in operation (except for air taxis and general aviation). The former international airport at Ratmalana is now used for military and general aviation. The Colombo airport presently handles 2.5 m'llion passengers per year, and is expected to handle five million by the year 2000. Air freight volumes are currently about 30,000 tons/year and expected to increase to 70,000 tons/year by 2000. 1.43 The airport is well equipped to handle all types of aircraft. There are now two runways opened to traffic in 1989, two taxiways, (one with a high speed turnoff), an ample terminal apron, and modern radio navigational aids. More recently (1989-90), a new passenger terminal was completed, and a 42,000 ton capacity cargo building became operational, with a 5,000 m2 maintenance complex. 1.44 The airport is served by a spur access road from the Colombo-Negombo road. A rail spur from the Colombo-Puttalam line also serves the airport. It is located close to the heart of the Free Trade Zone, which contains a large concentration of industries producing garments and other light manufactured goods suitable for airfreighting. Although high airfreight tariffs cause nearly 90? of garment exports to be moved by ship in containers, those exported by air (mainly to the U.S. and Europe) make up 30? of outbound air cargo. 1.45 Nearly 15 tons of fruits and vegetables move daily as air cargo to the M4aldives, West Asia, and the Gulf region, and about 7.5 tons per day of crabs, lobsters, and live fish are flown to Japan, Germany, and the U.S. Other air exports include cut flowers, foliage plants, and betel leaves. 1.46 Air Lanka. Air Lanka was established in 1979 as a state-owned airline. Enthusiasm following liberalization in 1977, easy access to  -13- international capital markets, and the rapid growth in tourism, led the Government to support its creation in spite of the previous unsuccessful experience with Air Ceylon. Air Lanka began operations with one aircraft (B- 707); an early association with Singapore International Airlines provided key personnel and technical assistance in all aspects of the new company's operations. Air Lanka expanded rapidly in the early 1980s and built up a good reputation for in-flight service. 1.47 However, throughout most of the 1980s, Air Lanka suffered from a long period of losing performance. It had required about US$250 million from the Treasury to cover its losses in servicing its debts. The poor financial performance was the result of; (a) expanding rapidly without an equity base, with annual interest charges exceeding 20? of re;enues; (b) flying too many routes with low traffic volumes; and (c) purchasing a fleet of aircraft incompatible with the routes and the demand mix for passengers and cargo. The airline continued large losses and its constant need for budgetary support led the President to appoint a Committee of Inquiry which highlighted the airline's poor management practices and costly errors. 1.48 A major restructuring took place in 1988 under a new board of directors. A number of measures were undertaken: (a) high level management was strengthened; (b) two B-747s were sold to reduce excess capacity; (c) unprofitable routes were eliminated; and (d) operating costs were lowered through staff reduction, improved scheduling and aircraft utilization, and budgetary stringencies. By FY89, an operating profit of Rs 430 million was projected (Table 12). with a further increase in revenue for the first three quarters of FY90. With prospects of increased tourist traffic in the future, further improvement is expected. Intermodal Linkages 1.49 The TSPS analyzed in detail the intermodal aspects of the transport system from the viewpoint of the most economic allocations of traffic, transport capac ty, and capital investments among the various modes, with particular attention to road and rail transport comparisons. There are significant distortions in actual allocations resulting in unnecessarily high transportation costs, primarily attributable to: (a) costs of some modes which are excessive because of inefficient operation; and (b) tariffs which are not based on, or reasonably related to, the costs of providing services. These problems, both modal and intermodal, are in part attributable to the lack of vigor in applying a consistent transportation policy. In the development and implementation of such a policy, the Government requires considerable technical and analytical support through the IMC-CPT. Below are some observations on intermodal linkages. These are also discussed in Chapter II--Development Strategy by Model Issues and Recommended Strategies. 1.50 Intercity Passengers. Rail and road traasport compete for urban as well as intercity traffic. The estimated shares of each for passengers and freight in 1986 (shown in Table 13, and discussed in paras 1.8 and 1.9) seem to have changed by 1988. Available data indicate that the railway share estimated at 1.9 billion passenger-km, had further declined to 5.6? of total passenger transport, down significantly from 10-152 in the decade of 1975-86. Bus travel, estimated at 33 billion passenger-km in 1988, was about 12? greater than in 1984. If the security situation were normal, rail traffic would increase, but the overall balance of passenger traffic would be biased in favor of rail due to the  -14- very low subsdized fares. Although surveys show that users favor rail for comfort, the advantage of train service over bus service in terms of reliability and speed is less under present conditions than in the past. 1.51 Freight. The overall balance of freight between rail and road for medium to long distance (intercity) shipments appears to be more closely related to the economic costa of the services than is the case for the other rail services. If SLR concentrates its efforts on improving the services most appropriate for the railway, it is possible that this balance could be achieved with a rational cost-related tariff structure and commercialized railway operations. 1.52 Ports and Land Transport. Container transfer between the pert and land transport modes is biased in favor of road transport, leading to unnecessary traffic congestion. Road haulage of containers is cost-effective for many short hauls, but rail transport is better able to accommodate high density movements of containers and longer hauls. The present lack of an effective port-rail link in Colombo is a major factor contributing to this problem which reduces the transport sector performance. D. Transport Regulation in Sri Lanka 1.53 Legislation described below regulates the operations of motor vehicles, buses, railways, and shipping. In general, motor vehicles must be registered, and vehicles carrying passengers for hire must have permits to do so. Driving licenses are required, and there is provision for licensing driving instructors and schools. Third party insurance is required, and certain restrictions on the use of highways are spelled out. The Government is authorized to regulate the types and construction of vehicles permitted to operate on public roads, and the Commissioner of Motor Vehicles (Ministry of Transport and Highways), is authorized to inspect all motor vehicles and to establish other regulations. Limits are specified on gross vehicle weights (GVW) for certain types of vehicles--but not specifically on axle loads--and the limits are somewhat inconsistent. For instance, the maximum GVW for a standard two axle truck is 15,275 kgs which, in terms of axle loads, would indicate a rear axle of 10-11 tons and a front axle of some 4-5 tons. A single axle load of 10-11 tons would normally indicate a tandem axle of 16-18 tons. However, the maximum GVW for a semi-trailer with two tandem axles is only 30,500 kgs which would indicate a maximum load on each tandem axle of 13-14 tons, while at least 16 tons would be consistent with the 10 ton single axle. The semi-trailer would thus be underutilized by about 6-8 tons. The regulations therefore favor the use of two- axle trucks rather than the multi-axle truck that may be more economical and less damaging to the roads. This aspect of the regulations needs to be reviewed to provide a consistent approach to vehicle weights and axle loads and axle configurations. 1.54 In addition, there are laws regulating the operation of buses, either publicly or privately owned. The Sri Lanka Central Transport Board and its subsidiaries, the Regional Transport Boards, were established in 1959 (after nationalizing all privately owned buses) and were authorized to operate bus services as well as set fares subject to the approval of the Minister of Transport and Highways. Private bus services are also authorized, subject to permission by the Director of Private Omnibus Transportation (DPOT) to operate on designated routes at fares specified by the Minister. The Minister is also  -1S5 required to constitute District Private Omnibus Operators' Associations to which operators must belong and which have power to set and enforce schecl'd -es, ensure adequate service with comfort and safety of passengers, and to collec-. fiembership and user fees. While these associations, to which most private operators belong, may have a useful role, there is the danger that they could act as cartels and prevent competition from performing its role of economic pricing. 1.55 The Railways Ordinance No. 9 of 1902 is the only legislation governing operation of the railways. It gives the State Hinister of Transport (Ministry of Transport and Highways) authority to make rules, set fares and charges, and gives the General Manager the right to reduce rates, but not increase them. Otherw.se, it is concerned mainly with passenger behavior and ensuring that rights-of-way are not obstructed. It is generally not concerned with how the railway itself is operated. 1.56 There are laws that would permit very restrictive regulation of shipping by the Director of Merchant Shipping, Ministry of Trade and Shipping, but these have not been used. The Central Freight Bureau used to allocate cargo to shipping lines (favoring Ceylon Shipping Corporation) and controlled rates, but in January 1990, these functions were deregulated. Traders are now allowed to choose any shipping company to carry their cargo except for a limited number of routes, primarily to Northern Europe. Other laws established the Sri Lanka Ports Authority and the Ceylon Shipping Corporation as autonomous Government enterprises. S. Environmental Considerations 1.57 The National Environmental Act, as amended in 1988, requires all executing agencies, including those of transport to thoroughly assess environmental impacts of projects they execute. The Central Environmental Agency was established to oversee and monitor their compliance. To strengthen its oversight capability, a USAID-financed consultant has prepared a financial, training and technical assistance program which addresses a number of areas, including those related to transport. 1.58 Since most of transport works involve rehabilitation and maintenance of existing facilities which have served the same purpose for many decades, no adverse long-term impacts on the environment are expected. For instance, road and bridge works under the Third Roads Protct -equire no major earthworks or cut and fill work, realignments or changes in r.atral drainage, and therefore, there will be no adverse intrusion into the enviroswment. The need for resettlement sometimes arises if the road bed is widened as houses and other structures often encroach on right-of-ways. Similarly, the railway rehabilitation works involve reconstruction of existing workshops, replacement of sleepers and track renewal, and rehabilitation of old rolling stock. Traffic management measures in urban areas should result in greater comfort and reduced travel times. Some noise and dust created during implementation temporarily affect adjoining areas and there may be high levels of pollution from vehicle exhaust fumes. In the long run, rehabilitation works will be beneficial as they will reduce user discomfort, allow a smoother flow of traffic and improve drainage with a consequent lowering of current levels of traffic noise, dust and air pollution and a reduction in the present susceptibility to flooding of the roadside dwellers.  -16- 1.59 The Government should continue its policy of incorporating provisions in contract documents to safeguard the environment in respect of: (a) regrading and landscaping borrow areas, quarries and spoil tips; (b) storage areas, especially those for diesel fuel and bitumen; (c) sanitary arrangements in offices, yards and onsite; (d) avoiding pollution of water courses and groundwater; and (e) disposal of discarded materials in an environmentally acceptable manner. 1I. DEVELOPMENT STRATEGY BY MODE: Issues and Recozuwnded Strategies 2.1 In this Chapter, the major issues affecting each mode are presented, along with proposed strategies to resolve them. The strategies generally fall under five categories: (a) policy reform; (b) institutional reform; (c) improved operations and maintenance; (d) rational selection criteria to determine investment priorities within resource constraints; and (e) resource mobilization potential. The main emphasis is on institutional reforms needed to improve sector performance and achieve progressive reduction and rationalization of public expenditures. All strategy actions are summarized in Annex 1--a matrix which prioritizes activities over the coming years. Estimates of net benefits of many of the recommendations are summarized in Table 2.1 below (see para 2.57). 2.2 The performance of all transport modes has deteriorated since 1983 except the Sri Lanka Port Authority and Air Lanka after restructuring in 1988. To reverse this trend, a coherent transport strategy is needed to increase operational efficiency, overcome financial problems, and prioritize investment decisions to improve the sector's overall performance. While the challenges facing the sector are great, the success achieved by the reorganized Sri Lanka Port Authority and Air Lanka have demonstrated the effectiveness of major reforms carried out in the areas of management, operation, pricing and marketing. The lessons to be learned are cleart (a) privatization is appropriate for many transport modes, but when not practicable, efficiency in publicly-owned enterprises can be achieved with management structures patterned on private enterprise; and (b) political will and commitment are needed at the highest level. Dedicated and qualified people must be recruited who will provide leadership, carry out key reforms, establish incentives for good performance, and provide needed staff training, with the goal of improving economic efficiency. The potential also exists for other transport modes to undertake reforms to improve their efficiency. 2.3 Both users and operators make many thousands of decisions each day in the marketplace based on the cost and convenience of transport services, and the perceived profitability of operations and investments. In this environment, it is important for the Government to recognize its role and increase its effectiveness by providing and maintaining, (a) appropriate transportation infrastructure; (b) a competitive atmosphere where transport operators and users can make their own decisions within a policy framework and guidelines established and monitored by the Government; and (c) adequate and efficient transport services on a commercial basis except for the public service obligations to be clearly defined by the Government.  -17- A. Highway Developient Issues 2.4 In addition to the Government's sound objective of providing increased funds for roati maintenance and rehabilitation, the key question is how to accomplish such tasks at least possible cost. This requires overcoming major weaknesses in the subsector; a summary of those weaknesses are discussed below. 2.5 Institutional. With another highway administration reorganization currently underway--decentralization of responsibility for provincial roads, some 1,100 staff members (including 60 professionals) out of a total of 2,700 (320 professionals) are being transferred to the Provincial Councils (PCs) to handle the administration of Class C and D roads. Although well-intended, these frequent changes and reorganizations--without a clear policy framework, operational targets and strategies--have brought confusion, low staff morale and a loss of qualified staff to the private sector. 2.6 Outdated Maintenance Practices. RDA's routine and periodic maintenance operations involve sand seals, semi-grouted macadam and patching as tney rely heavily on the use of handbroken stone and naturally available materials such as sand. These maintenance and repair processes are inefficient, costly and are of poor durability. Consequently, road surfaces deteriorate rapidly with attendant high vehicle operating costs. The continued use of these maintenance practices on highly trafficked roads means that scarce funds are being wasted as they lead to short-lived improvements in the condition of the roads. 2.7 Lack of Rigorous Analysis to Determine Priorities. Although well intended and planned, RDA has not been systematically collecting the necessary information nor developing the required tools for planning and evaluating different investment options and determining priorities. Traffic counts, road condition surveys, axle-load surveys and cost-benefit analysis are undertaken only in connection with foreign assisted financing of particular road stretches. Domestically-financed road rehabilitation/improvement works amount to about half of the funds expended in the road sector, but receive only cursory evaluation. The absence of rigorous analysis to determine priority investments among locally financed projects results in suboptimal use of scarce funds. Thus far, only about 1,500 km of roads have been subjected to feasibility studies. This makes up only about 6? of the road network formerly under the RDA jurisdiction. On the vast majority of national and prcvincial (trunk) roads, little information is available on road surface roughness, strength, traffic and axle loadings. Without these fundamental data, it is difficult to estimate accurately the needs of the road network for periodic maintenance, rehabilitation, or upgrading, let alone prioritize them to fit the works within the limited budget. 2.8 Inadequate Funds for Road Maintenance. Due to the country's general resource constraints, the level of funding for roads has been inadequate to meet the backlog of maintenance and rehabilitation. Estimates of "ideal' requirements to bring the entire road network to fully maintainable stardard are as high as Rs 7 billion per year, compared to the estimated expenditures of Rs 1.0 billion in 1987 and Rs 1.3 billion in 1989 (Table 2). Clearly, rigorous prioritization is in order. Routine maintenance and pavement repair works have been especially neglected, while rehabilitation works have fared a little better due to the willingness of donors to finance such works. The accelerating rate of road  -18- deterioration has resulted in high vehicle operating costs which add substantial costs to the economy. Economic returns for periodic maintenance works on selected roads range upwards from 302, indicating that required maintenance has been long overdue.81 Delay in implementation of road maintenance means substantial economic benefits foregone for each year of postponement; therefore, increased budgets are needed urgently for maintenance and rehabilitation. A brief review of road user charges (Annex 2) seems to indicate that most vehicles are paying their share for using highways through high import duties on fuel. 2.9 Local Construction Industry. The road construction industry is heavily taxed and generally, credits to contractors must be covered by mortgages of real estate property. Having limited access to credit, private contractors are forced to hire the required equipment from the Government equipment pool on a daily or weekly basis. Other barriers to sound development of the construction industry includet (a) lack of managerial capabilities to organize and execute physical works; (b) inability to accurately estimate the cost of road works; and (c) little assurance for sustained road maintenance/rehabilitation works. 2.10 Vehicle Overloading. The problems of vehicle overloading do not appear to be as severe as in some other countries in the region according to the two-axle load surveys conducted by RDA in 1989 on limited stretches of major trunk roads. Although the surveys indicated that about 102 of 16-ton two-axle trucks (the vehicles causing most damage to pavement) were about 20? above legal limits, the percentage seems too low. These surveys are not comprehensive; axle load surveys planned as part of the study on road user charges may reveal a more widespread practice of overloading in view of the trucks frequently observed in the traffic stream with modified body structures and suspension systems designed to carry heavier loads. Load limits are not enforced and facilities for enforcement are not available in the country. Strategies 2.11 Several measures should be introduced immediately to increase the effectiveness of the highway subsector within the context of ongoing activities inc'luding donor-funded projects of IDA, ADB and OECF. 2.12 Strngthen Institutional Capability. RDA is taking steps to enhance Its policy analysis within which its corporate objectives are defined, operational targets set, and performance evaluation criteria spelled out to provide direction to the activities of the organization and accountability with regard to the performance of its staff. The establishment of an incentive scheme of rewarding good performance is part of this strategy. To achieve these objectives, the frequent reorganizations experienced in the past as well as staff transfers should be minimized (para 1.15). 2.13 Modernize Road Maintenance Operations. RDA's routine and periodic maintenance operations involving sand seals and semi-grouted macadam should be discontinued, especially on heavily travelled roads, to avoid wasting scarce funds, and be replaced by proper surface treatment, i.e., chip seals, slurry seals, double bituminous surface treatment, or the macadam method, together with metalling asphaltic concrete overlays of appropriate thickness. Initial costs may be higher than current practice, but over the long run, economic returns from 8I Based on the economic analysis for the Third Roads Project, Credit 2128-CE.  -19- this strategy will be substantial. It is common to see potholes appearing quickly in areas where insufficient bitumen is applied, and more effective surface treatments can be adopted. The most obvious is a proper surface dressing using stone chippings instead of sand. A double surface dressing is a particularly effective way of arresting surface disintegration and sealing the surface to prevent water from entering and weakening the pavement. This strategy should help to reduce the immense amount of pothole repair that RDA struggles to accomplish every year with the semi-grout method. 2.14 Strengthen Local Construction Industry. Because the bulk of the demand in the construction industry is created in the public sector by development projects, the Government can play a critical role in strengthening this industry. In order to enhance the competence of local contractors and to create a competitive environment, a study on the local contracting industry is planned under the Third Roads Project. The purpose of the study is to investigate current practices, identify constraints in detail and recommend measures and actions required to encourage wider involvement of local contractors in the execution of road maintenance/rehabilitation works. 2.15 Increase Pla=nn Caability and Optimize Available Resources. Adoption of a pavement management system as a planning tool is essential. Comprehensive data on road conditions, traffic, and pavement distress can provide the basis for evaluating different options for surface treatment to determine the most appropriate category of maintenance work. A conceptual framework expressed in a diagram in Annex 3 demonstrates various options for the surface treatment which would be appropriate for different levels of pavement stress, surface roughness and traffic volume. The surface treatment option selected can be adopted to different levels of funding; for example, in times of budget constraint, more of the least expensive treatments could be undertaken rather than the more expensive options available (betterment). These options could be further refined to determine alternatives within each treatment class to prevent as much deterioration as possible while keeping vehicle operating costs to a minimum level (for instance, undertake less costly patching works and surface treatments for periodic maintenance, instead of costly overlays). When funds become available, more substantive treatment could be accomplished. To determine different types of maintenance and road improvement required, a road network sstrix could be developed based on traffic and road condition data. Feasibility studies and economic analysis, currently done only for donor-financed projects with expatriate assistance, are also needed to prioritize locally-funded projects within budget constraints. To achieve this objective, the planning section in the Division of Engineering Services should be upgraded and given a higher status. 2.16 Ratioalize Regulations on Vehicle Loads. Medium payload (12.5 to 16 tons) and larger trucks (30.5 tons) may be causing more damage to roads than their overall contributions to taxes would cover, particularly the 16-ton two- axle truck. To determine the extent of distortions and the refoxrms needed to correct them, a study on road user charges has commenced, and is scheduled for completion in October 1991 (para 1.20) . If the study confirms, inter alia, that taxes paid by large trucks do not fully cover the cost of road damage that they cause, an appropriate tax structure would be recommended so that they would at least pay for the damage to the road network, and to discourage their import in favor of other vehicle types, which cause less damage due to their lower axle loads and proper axle configuration. Legislation on vehicle loads should define axle limits in addition to gross vehicle weight. The maximum laden weight of the  -20- vehicle must not be more than the sum of the maximum axle weights. Amendments to the Motor Vehicle Act may be necessary to control excessive loads. At the time of vehicle registration and issuance of certificate of road worthiness, the authorities could refuse to register or issue certificates for vehicles which have been modified to carry excessive loads. 2.17 Improve Contract Administration. To improve its contract administration, RDA should adopt a clear framework between itself as client, and its consultants and contractors. This would streamline and reduce the workload of contract administration. RDA's reluctance to clarify this situation was largely responsible for the inordinate delays and cost overruns experienced on the Second Roads Haintenance Project (Loan 2715-CE), and other donor-financed projects. Technical assistance included ander the Third Roads Project would assist RDA in improving contract administration. 2.18 Build Up Planning and Naintenance Capabillty at the Provincial Level. Road planning and maintenance responsibility of Class C and D and local roads now rest with the Provincial Councils and their respective local governments. Urban Local Authorities will continue to exercise responsibility for their roads under the Provincial Councils. Provincial Council staffing has been provided through the transfer of some 1.100 RDA staff (district engineer level and below), but expertise in the Provinces is weak, and therefore, technical assistance and training are needed to improve overall staff operational efficiency. The required technical assistance may be included in a future IDA project. B. Road Passenger Transport Issues 2.19 Public bus operations of the Sri Lanka Central Transport Board (SLCTB) were decentralized under an Act in 1979 to let each Regional Transport Board (RTB) compete with private operators who had just been allowed to enter the bus passenger transport market under attractive fiscal incentives.91 Since then, private buses have made significant inroads into the SLCTBIRTB passenger traffic market, as shown in Figure 1. The noticeable decline in SLCTB/RTB passenger service from 1981 was a clear signal that the private buses were rapidly expanding their services; they captured about half the market by the mid-1980s. Public buses suffered from service difficulties, political interference, frequent changes in management (almost every year), and poor financial performance. Annual revenue support ranging from US$5 million to US$30 million was needed for SLCTB/RTB to maintain 50Z of the market. Staff levels of SLCTB/RTB increased with each election, managers tended to be political appointees, fares were kept low, and foreign exchange needed to purchase spare parts and renew old buses was scarce. In the face of increasing operational losses, IDA and the Government discussed various proposals to improve management and operation of SLCTB/RTBs. Strategies 2.20 To overcome the problems, the Government resorted to drastic measures. Beginning in December 1990, the SLCTB and RTBs began privatizing through a 9/ The incentives were the reduction of import duty on private coaches from 25Z to 7.5Z c.i.f., and lump-sum depreciation.  -21- process of "peoplization,I a major transformation involving a comprehensive set of reforms. This process is scheduled for completion by December 1992. It is expected to improve operational efficiency, provide better service, increase cost recovery, and eliminate the drain on the Government budget. An analysis of bus tariffs and costs is given in Annex 4. Consequences of the Cabinet decision to restructure SLCTB/RTBs includet (a) retrenchment of about 20,000 surplus staff; (b) SLCTB's assets will be owned by a number of newly created companies, the shares of which will be divided between the workers--former SLCTB/RTB employees-- and a Trust; (c) fares will be deregulated; and (d) funds at reasonable lending terms will be made available for purchase of new buses. 2.21 The following seven principles for restructuring the public bus industry have been adopted for implementation:l0/ (a) the new companies are to be organized around single depots and be relatively small so that they are not difficult to manage and will be able to provide efficient services. It is expected that each new company will have less than 100 buses and cases will be reviewed where the companies would have more than 150; (b) the new units should be set up with as simple organization structures as possible; (c) the Trust Fund will not have managerial responsibilities but be an Asset Disposition Trust (or Asset Peoplization Trust). The Fund would have only one function: liquidate the assets that will not be transferred to the new companies. This Trust should thus be seen as a transitory body to be dissolved in a few years when all the loans are repaid and all remaining SLCTB assets are liquidated; (d) any technical assistance to be extended to the newly created companies should be extended from a unit within the Ministry of Transport and Highways; Ce) a new regulatory agency should be created to oversee the satisfactory and safe provision of bus services in Sri Lanka. The authority should have only limited powers, such as to control the number of buses operating in busy corridors and at busy bus stops in case serious traffic management problems arise. These powers should be used very sparingly and operators should presume they have the right to operate until informed otherwise by the authority. Where services must be operated which are socially desirable but which are expected to be unprofitable, procedures should be developed for the regulatory authority to award contracts by competitive tender. The current arrangements for concessionary fares should be discontinued, and be made for the current beneficiaries to be reimbursed directly. The new body should also monitor the safety of public bus services. It should be responsible for the design and implementation of improved vehicle testing, driver training and testing procedures. New legislation will be prepared as necessary; 10, Financed under ;he Economic Restructuring Credit, 2128-CE.  -22- (f) the assets to be transferred to the new companies will probably exclude surplus land and property and may exclude certain facilities, such as the specialized workshops, driving schools and city center bus terminals. The management of bus terminals or bus stations will be transferred to the local authorities. The ownership and operation of the specialist workshops and other self-contained operations, such as the driving schools, will be privatized. Opportunities should be pursued to maximize returns from the sale of assets such as land and scrap buses; and (g) every effort should be made to ensure that such a major exercise is accomplished as smoothly as possible. There are many parties who will be affected by the restiucturing, including the travelling public, management, the staff and their unions, and Government agencies such as the Department of Private Omnibus Transport. Each group will need to be fully informed of the program, and a major public relations campaign will be required if the confidence of all groups is to be maintained. C. Railway Transport Developuent Issues 2.22 The major issues in the railway subsector are as discussed below. 2.23 Organizatioasl Structure. As a Government department staffed by civil servants, the Sri Lanka Railways (SLR) is excessively bureaucratic, highly centralized and too cumbersome for effective decision making. Management cannot concentrate on managing the railway in a competitive, commercial way due to political interference, overstaffing, low tariffs, and an inability to discontinue services on uneconomic lines (where the alternative of bus transport exists). In addition, it is extremely difficult to obtain budgetary support for spare parts to repair immobilized locomotives. Loss of capable staff further complicates an already diffictult situation. 2.24 Lack of a Coherent Policy Framework. The railway does not have an appropriate policy framework to encourage efficiency and its operations are regarded as social services. At the same time, SLR is expected to operate as a comercial undertaking and recover its costs. These inconsistencies produce confusion and inhibit initiatives and innovation which are required to respond to market changes and competition from private bus and truck operators. 2.25 Financial Problems. The Government's tight control over railway pricing prevents SLR from increasing its fares to generate the revenues needed to cover its costs. Operating losses lead to reduced services and deferring maintenance of locomotives, wagons, track, signalization and other items. Essential scheduled maintenance and unscheduled repairs are sacrificed to first cover salaries and wages which alone amounted to 1382 of SLR's total revenue in 1989. Since financial targets are not set and fiscal discipline and accountability are lacking, there are no incentives to effect cost reduction measures and rationalize expenditures as long as the Government continues to subsidize SLR deficits, which in 1989 amounted to over Rs 800 million (US$20 million). A critical need is an accounting and management information system geared to assist in the management of finances and operations.  423- 2.26 OVerational Ineffic&pcZ. Unreliable and inefficient services are the combined effect of the current organizational structure, and ineffective management and information systems referred to above. Since operational performance targets are not set, and the manual information system is cumbersome and produces reports with delays of several months, timely evaluation of performance cannot be undertaken. At present, neither objective evaluation criteria nor procedures are in place with which to evaluate performance and take appropriate action. 2.27 Wasteful Use of Iovestment Funds. Investment decisions for various railway components are not carefully scrutinized to select least-cost options in economic and technical terms, aimed at serving the market for which SLR has a comparative advantage. The tendency is to make investment decisions based on credit availability and other non-economic and technical considerations rather than on suitability, minimum requirements for recurrent expenditures, and priority needs. 2.28 The problems of SLR are similar in many respects to those of railways in other countries, and arise largely from a tradition of Government regulation and control of what were originally monopolistic organizations. With growth in the population and expanded economy, transport demands have also increased. In a relatively competitive environment, privately operated trucks and buses are able to respond to market demands effectively to capture additional freight and passenger business, while the cumbersome, bureaucratic SLR management structure is unable to do likewise. Strategies 2.29 For a basic strategy to address SLR's problems, several options were considereds (a) close down the entire operation; (b) close down some parts of the operation; (c) put operations under a private management contract; (d) privatize some aspects of the operation (e.g., locomotive mair.tenance workshops); and (e) restructure SLR. Option (a) was ruled out as politically infeasible. Moreover, the TSPS indicates that there is an economic role for the railway to play (see paras 3.16-3.17 for the five alternatives evaluated.) Option (c) was judged undesirable under present conditions, because any management firm would have little chance of succeeding without fundamental changes in SLR's organizational structure and constraints. Options (b) and (d) were judged to have merit, but to be best included under option (e), restructuring of SLR, which is the recommendation most suitable and acceptable to the Government. There are significant risks in any scheme to restructure SLR; the task is enormous and implementation may be delayed or only partially undertaken because of institutional inertia, weakening political will and the difficulties of effecting fundamental changes in operating philosophy. Recommended reforms and their potential benefits can take effect only over a period of years. 2.30 Reorganization of SLR. Recognizing the impediments to change, the need is to transform SLR from a Government bureaucracy into a competitive business enterprise, insulated from political interference. A first step would  -24- include discussion among the Government and SLR to reach agreement on corporate objectives and a policy framework. Legal and administrative measures would have to be adopted to remove Government controls over pricing, service levels, staffing, and so on, and to establish the new corporation with its own board and management. A clear functional, organizational, and management structure would have to be established, as well as a business plan setting goals, strategy, and policies regarding operating, financial, marketing, and other activities. Management should be allowed to set tariffs, hire and fire staff and set their salaries, determine the priorities for maintenance operations, make its own procurement decisions, and all the other decisions required of a market-oriented business corporation. A good model to consider in designing the organization may well be the Sri Lanka Ports Authority, adapted, of course, to the particular characteristics of a railway. Under an IDA Project Preparation Facility (PPF No. P-471-CE)ll/, consultants are assisting the Government in preparing an implementation plan for SLR restructuring. 2.31 Improved Efficiency. One of the purposes of restructuring SLR is to improve its efficiency so that operational deficits and the need for Government subsidy can be eliminated. Measures include: (a) A phased retrenchment of redundant staff, estimated at 5,000 of a total 20,000 staff. This would be accomplished gradually with due regard for the social well-being of the staff. Phasing would include attrition, retirement incentive, retraining, and ultimately a negotiated separation package. One possibility is transferring excess security staffl21 to fill vacancies in the police departments of cities where they are assigned. (b) Curtail short-distance, intercity rail passenger service, shifting passengers (other than commuters) to buses for short trips except in congested urban areas; discontinue service on unprofitable lines, except in selected cases where the Government is willing to contract for a cost-covering public service subsidy; and operate longer passenger trains to Badulla, the north, and the northeast, and for express service between Colombo and Kandy to improve the throughput time for the trip. (c) Consolidate freight stations from 84 to about 40, rehabilitate the selected stations to handle freight efficiently, and contract for trucks to handle local delivery from stations. Similarly, consolidate passenger stations from 128 to about 80, equipped with automatic ticket vending machines, data processing terminals and efficient connecting bus and/or taxi service. (d) Establish a rolling stock maintenance program in conjunction with the rehabilitation of workshops to increase f1wet utilization. Ill/ PPF No. P-471-CE approved in February 1988; amended in June 1989 and April 1991. 12/ About 2,000.  -25- 2.32 Increased Reveue. Fares and tariffs should be set so that each railway service covers its economic costs. The tariff for a service should cover the long-run marginal costs (See Table 8).131 Large fare increases should be phased in over a three-to five-year period. Freight tariffs can be increased more quickly, especially if operational improvements are introduced at the same time. The freight tariff structure should be designed to secure those types of traffic where rail has a clear cost advantage over road (e.g., haulage of clinker from the port of Colombo to the factories at Palavi and Galle and limestone movement through unit train operations for the Cement Corporation). SLR should also promote multimodal contract haulage services (e.g., flour from Trincomalee to Colombo) by subcontracting road transport operators for pick-up at the origins and delivery at the destinations. Season ticket rates (90? of subsidy) should be increased faster than those for single trips; short-distance fares should probably be raised more than long-distance ones. Third-class intercity fares should be increased, initially by 25?, which would still leave them lower than bus fares, and the 502 discount on second-class intercity service should be discontinued. 2.33 Pricing and Subsidy Policy. Pricing below cost, a common practice for rail service in Sri Lanka, is particularly uneconomic where there is competition between rail and road transport. Although public bus fares are somewhat underpriced, average rail passenger fares are 70-91? below average total economic cost, drawing passengers away from buses in cases where the latter is economically superior. The same situation exists with regard to freight.14/ The distortions could be reduced by eithert (a) Eliminating rail subsidies. With this strategy, transport operators must be free to set fares and tariffs to cover costs; in this way, the most economical and efficient mode would get the traffic. There would be a strong incentive for railway management to control costs and operate with enough margin to be able to improve maintenance of locomotives, rolling stock, and track. Or (b) Targeting subsidies. If Government policy dictates subsidization of passenger fares, a way should be found to direct the subsidies to specific target groups (school children, elderly, and/or poor) or to specific geographical areas (e.g., isolated rural communities). In the former case, subsidies might be granted to users, giving them a choice of mode and operator or even the option of moving to a better location. As compared with subsidies to the transport operators, this approach would encourage the operators to focus attention on economic efficiency and would avoid giving the benefits of the subsidy to all users regardless of need. 13/ Long run marginal costs include variable train operating costs plus rolling stock depreciation, calculated at replacement costs. These amount to 77- 80? of the average long run economic costs shown in Table 8, which include the fixed costs of the railway operations (20-23X). 14/ Average freight tariffs were about 22Z of long rur marginal costs in 1989. Table 8 shows average rail tariffs and long run marginal costs for up country and low country.  -26- 2.34 Iproved Service. Service improvements, aggressively marketed, can expand the volume of the railway's business in operations where it has the potential to make profits. The profitable market opportunities must be distinguished from those where buses or trucks have a competitive advantage. Passenger, freight, and real estate business should have separate cost centers so that their costs can be closely monitored and opportunities recognized for increasing revenues and reducing costs in each category. By way of illustration, the following operations would seem to be worth marketing: (a) Long-distance intercity travel, with good feeder bus service vhere needed; special tourist express trains operating between Colombo and Kandy, Anuradhapura, and GallelMatara with a minimum of intermediate stops; commuter service in urban areas, where bus service is impeded by traffic congestion. The new power coaches, due to arrive in 1991, provide an opportunity to expand this market, introducing first class service with high reliability at premium fares. (b) Improved long-distance freight service. Since the railway's comparative advantage lies in intercity bulk freight transport, SLR should focus on ways to improve its services for the four main commodity groups (building materials and cement, fertilizer, limestone, rice and flour.) For some commodities, unit train service may be found particularly suitable; for others, conventional trains with fast turnaround times might be organized. Scheduled freight services (instead of waiting for full wagon loads before dispatching) may appeal to some customers. An important element of the strategy is to extend the recent (1990-91) SLR practices of contract pricing at tariffs equal to or greater than long-run marginal costs to about 70Z-802 of SLR freight traffic. Cc) Better maintenance procedures can improve service. A major reballasting program, implemented on a progressive and orderly basis, could eliminate temporary speed restrictions, allowing the railway to realize its potential advantage of higher speeds than road transport. Other service improvements include reducing waiting times for information or other customer services, and improving punctuality through coordinated train scheduling. 2.35 Rail Investment Strategy. SLR needs to prepare a development budget and prioritized investment program, formulated on strategies for the future role of the railway, a range of credible traffic forecasts, and evaluation of options, given resource constraints. Under PPF-471-CE, consultants are assisting SLR in these areas. Investments for the railway are discussed in Chapter III as part of the review of the transport sector Public Investment Program. D. Urban Transport Development Strategies Issues 2.36 The following issues apply primarily to Colombo, although there may be some aspects that should be considered to a lesser extent in other urban areas as wells  -27. (a) Organization. Responsibility for policy making, comprehensive planning, and management of urban transportation, including traffic management and public transportation, is divided and unclear, so that investments are piecemeal and management of different components is uncoordinated. (b) Access to the City for Commuters. Colombo's commuters are experiencing increasing difficulty in getting to work. This can only get worse as the city continues its growth unless measures are taken to facilitate their travel. Other urban areas may soon be subject to similar problem. (c) Traffic Congestion. Congestion not only affect commuters, but hampers delivery of goods and personal travel for non-work purposes. (d) Safety. The accident rate in Sri Lanka is alarmingly high. The majority of accidents occur in urban areas, especially In Colombo, and half the victims are pedestrians. There is no concerted plan to correct this situation. (e) Road Network and Pavement Conditions. There are bottlenecks in the road network of Colombo; some arteries and intersections need improvement. Maintenance of existing streets has been inadequate, leaving many of them in bad condition. Strategies 2.37 Urban transport problems must be addressed in the framework of a five to ten year plan. Some of the elements below can be accomplished rapidly, but others will require time. 2.38 Policy Planning Organizational Framework. Responsibility for policy making, comprehensive planning, and management of urban transportation, including traffic management and public transportation, is divided among the Urban Development Authority, Colombo Municipal Council and the Ministry of Transport and Highways. There is need for an agency with the capability to make technical studies of the effects of different proposed policies, and to help managers and policy-makers make rational decisions. Such an agency should be able to analyze the effects of pricing policies, traffic control measures, and public transport service, and to develop overall multimodal transportation plans. The strengthening of the Urban Development Authority, the Transport Studies Planning Center and the Colombo Municipal Council should be considered and the respective roles defined. The immediate objective should be to develop plans for regulation and control of traffic in Colombo, together with plans for improved commuter transportation. A further goal should be to develop a long-run investment program for improving the street network and public transport loading facilities. Both activities should be coordinated with investment planning for all sectors in Colombo. Preparation of a coordinated, multimodal investment program for urban transport is a major effort. Such a program should be prepared to serve as a catalyst for the strengthening of indigenous transport planning skills in Colombo and elsewhere in Sri Lanka. 2.39 Pricing Commuter Services. Rail passenger service and fares should be coordinated with those of bus service, especially in the approaches to and from the cities to facilitate travel by commuters. Commuter rail service should  -28- be emphasized in the urban areas as it can reduce road congestion. Fares for both services should be based on economic costs, with congestion costs included for buses. Both rail and bus service should be expanded, made more reliable, and should be promoted as alternatives to automobile travel downtown. 2.40 Traffic System Management (TSM) Measures. TSM measures, coordinated with other transport modes, should be designed to facilitate traffic flow and reduce congestion. They include traffic signals, turning lanes, fringe parking, parking restrictions and meters in the central business district, auto-free zones, reserved lanes for buses and other high-occupancy vehicles and pedestrian overpasses. One cumponent that could be considered is the charging of sF*ecial fees for operating autos in congested areas at critical times. This approach not only reduces congestion, but also generates revenue to help pay for costs of other aspects of the system. This scheme would require diligence to implement, but it has been successfully used in Singapore for some 15 years. 2.41 Road Network and Pavement Conditions. Rehabilitating roads and improving maintenance in the future will require allocating adequate funds for the purpose. It also should imply establishing responsibility for setting maintenance standards and schedules and for seeing that the work gets properly done. 2.42 Traffic Regulations and Safety Education Program. Enforcement of traffic regulations comes under the aegis of the Traffic Police, under the Ministry of the Interior. The Police would need additional staff and resources, such as patrol vehicles. to increase its ability to enforce traffic rules. The education of drivers and pedestrians (as well as some of the police) might appropriately be handled by the Colombo Municipal Council which is responsible for traffic management in the Colombo Municipality and by the regulatory agency to be established within the Ministry of Transport and Highways, with the responsibility of promoting safety regulations of all transport modes. E. Ports and Shipping Development Strategies Issues 2.43 Colombo. The management of the Port of Colombo has been excellent. The only issues concerning this Port have to do with the handling and storage of containers. The quantity of containers exceeds the storage capacity of the Port, and moving them by truck is adding to the congestion on the narrow roads in the vicinity of the Port and in the city. 2.44 Other Ports. The question of developing the Ports in Trincomalee and/or Galle to relieve some of the pressure on Colombo has been raised. Such proposals need to be carefully reviewed. Continued use of Kankesanthurai for coastal shipping of cement deserves attention. 2.45 Shipping. The Government-owned Ceylon Shipping Corporation has serious financial problems, evidently as a result of strategic errors in expansion of its fleet, compounded by the devaluation of the Sri Lankan Rupee. Possible solutions to these problems need study.  -29- strategies 2.46 Develog Rail Link for Containers. The feasibility of establishing train service to carry containers from the port should be explored (see para 2.55). 2.47 Develog Secondary Ports. If container transshipment traffic continues to grow at Colombo Port, it may make sense to develop Trincomalee and/or Gaile as a modern container port sometime in the future (10-20 years). However, before making a decision, the proposal to expand the Galle Port needs a careful analysis (Chapter III) and the storage area at Galle Port and its linkages to land transport need to be investigated. Consideration should be given to the question of whether it is prudent to Invest in expanding port facilities for such operations as transshipment which could easily shift to another country. 2.48 Shipping. Possible solutions to rectify the problems of the Ceylon Shipping Corporation include: (a) concentrating its operations on the South Asia/Europe Container Service and the Sri Lanka/Far East routes, with the objective of tapping an increasing share of cross trade cargo between ports in Japan and Singapore; (b) curtailing its services on the routes where operating revenues cannot cover operating costs; (c) disposing of additional smaller container vessels which are inappropriate in meeting the demand to realize some liquid cash and achieve economy by reducing staff; and (d) obtaining technical assistance from external sources to help in marketing container deployment and control and in the review of administrative systems and procedures to improve its overall efficiency through restructuring. F. Airport and Air Transport Development Strategy 2.49 There are no major issues relating to air transport as the Colombo (Katnayake) International Airport is modern and well-equipned. Also, there are no issues to be addressed regarding its facilities or oper'.cions. The same may be said of the international airline, Air La-*a. However, better methods of packaging fruits and vegetables where they are harvested is suggested to eliminate damage from excessive handling, which now affects 20 to 252 of the crop. There is a good export market for these products, shipped by air because of perishability. G. Intermodal DevelovmeEt Strategies Issues 2.50 Uneconomic Pricing of Services. The major distortions stemming from tariff structures that do not reflect the economics of the mode are: (a) over- reliance on rail transport for short-distance intercity travel and small consignments for which it has no comparative advantage; and (b) road transport carrying long-distance bulk traffic for which rail has potential advantages.15/ These distortions occur primarily due to pricing policies which are unrelated to the cost of providing particular services. 15/ Present rail traffic is limited by wagon shortages. A greater availability of wagons would allow SLR to obtain higher contract rates for long-dtstance bulk commodities which are still lower than truck rates.  -so- 2.51 Lack of Intermodal Coordination. The present syatem lacks coordination for passengers between bus and rail service and for freight between port and rail service. The complementarity of each mode is not exploited, and modal interfaces are not well-developed. Little cargo moves intermodally under one arrangement from origin to final destination. Consequently, transport costs are higher than necessary in two wayst (a) cargo and passengers are moved by uneconomic modes at higher costs to the economy under the distorted modal split; and (b) costs are higher because of additional handling and storage at each link in the chain of cargo flow and the need for additional middlemen and brokers to deal with paperwork and documentation. Strategies 2.52 Deregulation of Fares and Tariffs/Increased Competition Among Mcdes. To provide an economically efficient transport system free of price distortions, fares and tariffs should be deregulatedl6/ along with free market entry. This will ensure competition among transport operators which is the most effective means of reducing costs and enhancing services. 2.53 Multimodal Planning and Policy. To promote total transport system efficiency and coordination, multimodal planning capabilities need to be strengthened, and sector-wide policies on pricing, subsidies, cost recovery and modal competition should be clearly articulated, particularly with respect to rail transport. Such work cannot be effectively undertaken without the strong institutional framework and financial assistance. To this end, the TSPC must be expanded and put on a firm footing in order to have the ability to undertake multimodal planning and policy analysis and to guide the decision makers in the transport sector. Both the analytic capability and the database aspects must be built up to further define Government actions in the transport sector, and refine the strategies outlined in this report in collaboration with the modal agencies. 2.54 Coordination of Bus and Rail Services. The coordination of bus with rail services will lead to a better mix of services for the passengers and a lower cost to the economy. TSPC should identify possibilities of providing coordinated services, based on passenger msrket surveys, and disseminate such information. 2.55 Container Services and Port Decongestion. Congestion due to empty containers occupying space in the container terminals and container truck traffic on the limited street system can be partly solved with the completion of the new port access road. A possibility of unit train services to an inland container depot should be explored to reduce congestion at the port area and to realise potential economic benefits. 2.56 Link Bus and/or Rail Passenger Service to Airport. Air freight is handled by both highway and rail transport. Ground service for passengers should be studied to see whether there is a need for improving present arrangements by providing convenient service to Colombo and to tourist destinations either by rail cars or buses. 161 Except for targeted subsidies which should be made explicit and subject to periodic assessment.  -51- H. Benefits of Key Refoms 2.57 The transport development strategies proposed include key reforms in five major categories: policy, management, staffing, pricing and investment. These reforms should be considered as a package in the case of each transport mode as the objectives of the reforms are to encourage: (a) a situation vNI,re each transport mode and operation is as efficient as possible in terms of providing service with the least use of economic resources; (b) the most economic allocation of traffic to each mode and route; (c) the most economic level of capacity and investment in each mode and facility; and (d) investment and operational decisions that reflect the choices of the users of the services as far as possible. Quantification of benefits resulting from Institutional and policy refonms is problematic as many of their effects are not readily amenable to measurement. However, Table 2.1 below provides an attempt to quantify potential benefits of the proposed key reformss the paragraphs following Table 2.1 discusses how the benefits were quantified in those cases where a reasonable approach to measurement was available. Table 2.1: ESTIMATED ANUSAL FIHANCIAL BBUEFITS OF REFORMS (In current 1990 prices) Estimated Annual Benefits Total ----Rs Million---- gi8hnay8 To Users To Agencies (a) Improved maintenance techniques + 2,100 a/) Cb) Increased maintenance and rehab. + 2,820 bl} - 1,000 cl *c) Improved management + 200 d/ (d) Benefits of using trucks with proper axle configuration + 400 Road Passenger Transport (a) Reduced operating costs from peoplizationlprivatization + 300 Cb) Reduced costs from staff reduction + 600 (c) Rationalization of bus size + 60 Railway Transport (a) Improved marketing + 40 (b) Staff reduction _ + 120 et TOTAL: + 4,980 + 360 +5,340 o/ Estimated benefit In 10th year of program. j/ Assumlng an incremental expenditure of Rs 6 billion during the 1959-1983 planning period and a benefit/cost ratio of close to 4:1, the present value of the benefits resulting from redued vehicle opersting costs over 20 years would be Re 20 billion. The verageo annual boneflto to givo a present value of Re 20 billion (at 109) is