Colombia - National Railroads Rehabilitation Project

RETURN TO RESTRICTED REPORTS DESK Report No. TO-351b WITHIN ONE WEEK This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE COLOMBIAN NATIONAL RAILROADS REHABILITATION PROJECT June 3, 1963 Department of Technical Operations  CURRENCY EQUIVALENTS 1 Colombian Peso = US $0. 11 1 US Dollar = Col. Ps. 9  APPRAISAL OF THE COLOMBIAN NATIONIAL RAILROADS REHABILITATION PROJECT TABLE OF CONTENTS Page No. SUMMARY i I. INTRODUCTION 1 II. BACKGROUND 1 III. THE COLOMBIAN NATIONAL RAILROADS 4 A. Management and Organization 4 B. Labor Force and Wages 5 C. Properties 5 D. Operations 8 E. Traffic 8 F. Tariff Structure and Rate Levels 9 G. Road Competition 11 H. Inland Waterway Competition 12 I. Finances and Earnings 13 1V. REHABILITATION PROGRAM OF COLOMBIA'S RAILROADS 16 A. The Program 16 B. The Project 17 C. Financing of the Project 18 D. Procurement 18 E. Consultants 18 V. TRAFFIC FORECAST 19 VI. FUTURE FINAICES AND EARNINGS 19 VII. ECONOMIC JUSTIFICATION 23 V'III. CONCLUSIONS AND RECOM4ENDATIONS 27 mables: 1. Breakdowm of 1961 Revenue freight traffic by Commodities 2. Annual Revenue Freight and Passenger Traffic 1950-62 3. Summary Balance Sheets 1957-1962 4. Summary Income Accounts 1957-1962 5. Program for Railroad Investments 1963-1972 6. Forecast of Rail Freight Traffic 1963-1971 7. Forecast of Earnings 1963-1968 8. Statement of Estimated Cash-Flow 1963-1968 9. Pro-fonra Balance Sheets 1963-1968 iLPS  THE COL0OIWIAN NATIONiaL RAILROADS SUIyflIARY i. The Colombian National Railroads (CNR) have asked the Bank to assist themii in financing the first two years of their rehabilitation program by providing the foreign exchange component amounting to US$30 million equivalent. ii. This report covers an appraisal of the CNIR and of a ten-year investment program for the CNiR established with the assistance of a general Transport Survey Group and a team of railroad experts. The Transport Survey was concerned with all modes of transport in Colombia, and was under- taken on the initiative of the Bank. The investment program is divided in two five-year periods, the second part of which is tentative. The first part, to be carried out in 1963-67 is estimated to cost Ps.665 million (USP74T million equivalent) of which Ps. 915 million (US.57 million ) is in foreign exchange and Ps. 151 million in local currency including corntin- gencies for the first two years 1963-64. The project would be this five- year program, and the proposed Bank loan of $30 million would help to fi- nance execution of the first two years, 1963-64. iii. The Bank has rmade three previous loans to the Railroads totaling US';'6.3 million equivalent for construction of the Atlantic Railroad, which has been in operation since August 1961, for rehabilitation of the Dmndacion- Santa Marta line and for motive power and rolling stock for the Atlantic Railroad. The rehabilitation of the Santa Iliarta line is still underway. The proposed new loan would be devoted entirely to rehabilitate the other lines and operating facilities of the National Railroads and to increase their carrying capacity. iv. As a condition of the Bank's first loan in 1952, the National Railroads were establislhed as an autonomous entity whLch was to be finan- cially viable. There have been improvements in the operations of the unified railroads, but management throu'Thout the years has not always been satisfactory. The financial position has been and continues to be weak, as evidenced by the operating deficits year after year. Government has pro- vided the funds for capital investment except for the Bank's loans to the Railroads, and in respect of these the Government has met the debt service. v. The project is soundly conceived. It would provide for the rehabilitation of the track, for cornplete dieselization of the system and for the acquisition of rolling stock and other equipment, and would in- crease the Railroads' carrying capacity. Consulting services would be obtained during the execution of the project to advise on the maintenance of locomotives and rolling stock and on containerization. vi. Traffic forecasts prepared by the Transport Survey Group and the Railroads indicate the doubling of freight traffic in the next ten years, clearly establishing the need to increase the Railroads' carrying capacity.  - ii - The Bank accepts these forecasts. The completion of the Atlantic Railroad which brought about the integration of the railroad system created new possibilities for a rehabilitated railroad to neet the transportation needs of a groTing Colombian economy. vii. A recent increase of rates and fares in connection with price in- creases resulting from the devaluation of the Colombian Peso has improved the Railroadst financial prospects so that the forecasts based on the traffic projections indicate that by 1964 there would be a net operating revenue (after depreciation) and by 1967 a net income. viii. On the basis of the financial forecasts, the projected increase in revenue resulting from traffic growth, and the savings in working costs resulting from dieselization and the rehabilitated facilities, would, at the rate of 1968 earnings, give a lO, return on all capital investment during the five years 1963-67, assuming an economic life of 25 years. ix. The Bank has assisted the Railroads in the execution of its con- struction progirans and in the improvement of its operations, and has also endeavored to have policies corrected. Despite the improvements that have been made, the present financial position is weak and future viability there- fore depends on continuing improvement in management and operations, supported. by a sound rate policy. During loan negotiations agreements have been reachec; a) To strengthen management by the formation of an Executive Committee and creation of the position of Deputy General Manager; b) To train abroad selected senior staff; c) To give the Railroads' Board authority to set rates and fares; d) That the Railroads, with Government support, will pursue policies to make the Railroads' operations profitable by 1967; e) That the Government would provide the funds needed to complete the project. x. The expected traffic growth and the agreements reached with the Railroads and Government, particularly the authority to be given to the Board to set rates and fares, will establish a sound footing for the Railroads to attain profitability. The project is suitable for a Bank loan of US$30 million equivalent to the Colombian National Railroads, for a term of 20 years including about three years of grace.  I. INTRODUCTION 1. The Colombian National Railroads have asked the Bank to assist them in financing the first two years of the Railroadst rehabilitation program by providing the foreign exchange component amounting to about US$30 million equivalent for the acquisition of diesel locomotives, rolling stock, rails, steel for bridges, and workshop, and other equipment needed to start the re- habilitation and dieselization program of their existing railway properties and to meet the increasing demand for carrying capacity. 2. This report is based on appraisals of the Colombian National Rail- roads (CNR) by Bank missions which visited Colombia in June/July 1961 and in July 1962, and on the report of a Transport Survey Group and a team of rail road consultants which, in 1961, assessed amounts and priorities of the country's transport investment needs. II. BACKGROUND 3. The Bank has made three loans for the Railroads, all for the con- struction and equipment of the new Atlantic railroad. The first of these (68-co), made to the Government in August 1952, provided US$25 million equivalent for the foreign exchange cost of the construction of the Puerto Salgar/Gamarra section (see map), then called the Magdalena Valley Railroad, and of the rehabilitation of the Bogota workshops. Concurrently with the works mentioned above, the Borrower undertook: (i) to establish an autonomous body (the Colombian National Railroads) to operate the railroad network owned by the Borrower; (ii) to reorganize the administrative, operational and financial systems of the railroads; (iii) to rehabilitate the existing railroad track and other properties; and (iv) to acquire such supplementary rolling stock and other equipment as might be needed. 4. In June 1955, a second loan (119-CO) of US$15.9 million equivalent was made to the Colombian National Railroads to finance the foreign exchange cost of the construction of an extension of the Magdalena Valley Railroad from Gamarra north to Fundacion, the rehabilitation of the existing Fundacion- Santa Marta line, the Procurement of locomotives and rolling stock needed for the operation of this extension and some other equipment. The Government undertook to expand port facilities at Santa Marta and to construct a 60-km paved highway from Cienaga to Barranquilla. The entire line from Puerto Salgar to Santa I4arta is called the Atlantic Railroad. 5. The closing dates of both loans have been extended several times; considerable errors made in estimating the quantities of earth movement, inadequate organization of the work and financial difficulties of the con- tractors extended the duration of construction work by several years and greatly increased the real cost of the Atlantic Railroad. At the beginning of August 1961, the line was opened to traffic although most of the top lift ballast remains to be placed and some other work has still to be done. Rehabilitation of the Santa Marta-Fundacion line has been started only at the beginning of 1962 because all local funds up to that time were used to com- plete construction of the Atlantic Railroad.  - 2 - 6. In September 1960, a third loan (267-c0) of US$5.4 million equivalent was made to the Colombian National Railroads to finance the foreign currency requirements of a program consisting of the acqiisition of locomotives, rolling stock and shop equipment immediately required for operating the Atlantic Railroad. 7. At the time of this last loan the accounting consultants, employed by the Railroads at the instigation of the Bank, had not completed their analysis and it was not possible to appraise fully the operational efficiency or the financial status of the Railroads. The Railroads were still operating at a loss but there seemed to be a trend towards improvement rather than deterioration. In a side letter to the Loan Agreement the Railroads expressed tVe intention of reviewing rates with the objective of ensuring the Railroads a sound financial position as quickly as practicable. With these assurances and the imminent commissioning of the new Atlantic railroad there seemed good prospect that the Railroads would soon be viable. 8. In the event, cost increases have occurred due to inflation which have not been fully offset by rate increases and in the last two years the Railroadst financial position, far from improving, has deteriorated still further. 9. Summarizing, the positive results of the Bank's ten-year relationshi, with the Colombian Railroads have been i) establishment of a centralized and unified railroad system, ii) construction of the Atlantic Railroad and iii) managerial and administrative improvements. The major objectives which have not yet been achieved are i) rehabilitation of the existing facilities, which has been delayed because of lack of funds, due in part to the substan- tial increase in the construction cost of the Atlantic Railroad and ii) securance of a sound financial position for the CNR. The Bank has played an active part in the progress that has been made, insisting, among other things, on funds being made available by the Government to expedite construc- tion of the Atlantic Railroad (the funds in the Bank loans were re-allocated to serve the same end) and on strengthening the construction management, on improving the CNRts management as a whole, and on improving and modernizing the accounting and statistical systems. The Bank has pursued with the Rail- roads, and when necessary with the Government, the need for planned rehabilita- tion of the existing facilities and for sound financial policies and increased rates. The Bank initlated, and partly financed, the Transport Survey Missior of 1961. 10. This extensive transport survey, covering all modes of transportatior. in Coloribia was carried out by a team of consultants hired by the Colombian Government. The principal objectives were to determine the first priorities of transport investments and to recommend goals and rational policies for future Government tranisportation decisions. At the same time, a four-man team of railroad consultants was hired by the Colombian Natlional Railroads  - 3 - at the suggestion of the Bank, to adcvise on the practicnl application of the measures recommended to resolve the maintenance, statistical and account- ing problems. Other consultants continue to advise on completion of the Atlantic Railroad construction and rehabilitation of the Santa Marta- Fundacion line. 11. The Transport Survey Group's recommendations include an investment program for the Railroads, discussed later in this report, of which the major part is essential to keep them in operation and to prevent rapid deterioration of their facilities and decline in their carrying capacity. The balance of the investment program is for a net increase of motive power and rolling stock to handle the traffic increase as forecast in the Group's report. 12. The Groupts report in the field of Railroads also included recom- mendations concerning: (i) strengthening the Railroad's management and vesting authority for rate making in the Board; (ii) training of personnel; (iii) a feasibility study of a railroad extension to Barranquilla and Cartagena; (iv) re-establishment of a rail connection between Pereira and Manizales; (v) abandonment of the Manizales-Mariquita cableway; and (vi) various methods to increase operating efficiency on the Railroads.  - 4 - III. THlE COLOMBIAN NATTONAL RAILROADS A. Management and Organization 13. The CNR is an autonomous entity established December 1, 1954, as a condition of the first Bank loan, with a charter that was accented by the Bank. Its capital stock is owned entirely by the Government. It is headed by a five-member Board of Directors with the Mlinister of Public Wiorks, ex officio, as Chairman. The other members are appointed by the President of Colombia from lists submitted by private interests renresenting trade, in- dustry, banking, and agriculture. The Board appoints the General Manager and it has control of the Railway's operating and financial policies except for tariff changes which are subject to the approval of the Superintendency of Economic Regulations. 14. The arrangement whereby the Minister of Public WJorks is ex officio Chairman of the Board has not been conducive to efficiency because of frequent changes of Chairman, arising from the political nature of his appointment as Minister, and his infrequent attendance at meetings. An Executive Com- mittee is being established, consisting of one Board Member and the General Manager, to decide on all non-policy matters wihich otherwise would need Board decision, and this shouild adequately accelerate managerial action. To further assist the General Mianager in the execution of his function, a Deputy General Manager will shortly be appointed. 15. In general, the quality of executive officers is not high, mainly because there is a lack of experienced railroad men. There are, however, some notable exceptions on the General lIanager's and the divisional staffs who have helped to introduce sound onerational, statistical and accounting principles. 11ith good leadership it should be possible to improve further the quality of CNR's management in the future, and recent salary increases should help the CNR to retain their good men and to attract others. The Railroads will improve training of supervisors and also take steps to strengthen the Traffic Department. The assistance of consultants will be secured for some parts of the rehabilitation program, as is mentioned later. 16. For operational purposes the CNR is divided into five regional div- isions: Central, Pacific, Nlagdalena, Santander and Antioquia, the last mentioned having been created when the Antioquia Railroad was purchased from the Department of Antioquia on December 8, 1962 (see Map). 17. As a result of a Board Resolution (No. 3), local boards have been established for the Pacific, Magdalena and Santander Divisions in response to strong regional demands, particularly in the Pacific Division. These boards consist of five members appointed by the CNR Board, four members each representing an economic interest group chosen from lists draw^n up by the local business groups, and a fifth member selected freely by the CNJR Board, Resolution No. 3 Vas passed in October 1961.  - 5- 18. According to this Resolution the local boards are entrusted with managerial powers concerning, inter alia, provision of adequate railroad service, budgetary matters, engaging personnel, and awarding contracts. They appoint the Divisional Manager from a list of thlree drawn up by the Board of the ObR. 19. If the local boards were to exercise these powers there would be a decentralization of management which would impair efficiency and destroy integration of the railroads. In fact, the only board that is operating is on the Pacific Division and it exercises advisory functions only; in so doing it has been helpful to the General Manager. 20. The Bank has been informed by its Colombian Counsel that under the Railroads' Charter Resolution No. 3 is not legal, but any action on this matter to remove the local boards, or to formally make them advisory, would meet with resistance, particularly in the politically strong Pacific Division area. B. Labor Force and Wages 21. The average labor force in December 1962 (including the Antioquia Railroad) was about 15,400; it is unionized and arrangements exist for the settlement of workers' claims and disputes. In general, relations between management and labor are satisfactory. The workload in traffic units per employee is low in comparison with European standards partly because the very difficult terrain necessitates the restriction of train loads, and the bad condition of track and train equipment requires the employment of large maintenance forces. 22. Wages were raised from July 1, 1960, which caused an increase of al,out one-third in payroll cost, and in April 1962 another wage increase, of about 29%, was granted retroactive to January 16, 1962, which brought the total amount of the payroll to about Ps. 109 million in 1962. At this level the payroll is almost 70% of total working costs which is out of proportion with other expenses. However, the railroads' management considers that the increased wages are necessary to be competitive with wages in private in- dustry, and will enable them to retain labor which has heretofore been lured away by the better-paying private enterprises. 23. In February 1963 a further uage increase of 28p was granted retro- active to January 1 of that year, as a result of the cost increases which followed the devaluation of the peso. Tile average price of materials, etc., increased also by 28% so that the ratio of payroll cost/working costs would remain 70%. Wages are now twice as high as in June 1960. Wage negotiations with the Union are currently in session and there may be a further wage increase of about 10% from mid-1963. The January 1963 wage increase of 28% resulted from legislation passed by Congress. C. Properties 24. As described in more detail below, the Railroads' properties, as in the case of rnany of the developing countries, show the result of years of neglect and therefore the physical condition is generally bad.  - 6 - 25. There are five regional divisions, as listed below: Route Length km 1. Central Division, includes the Puerto Salgar-Puerto Berrio part of the Atlantic Railroad, head- quarters Bogota ...... 1,365 2. Pacific Division, headquarters Cali ...... 926 3. Santander Division, includes the Puerto Berrio-Gamarra part of the Atlantic Railroad, headquarters Bucaramanga ...... 392 4. Mag-dalena Division, includes the Gamarra-Fundacion part of the new Atlantic Railroad, headquarters Santa Marta ...... 403 5. Antioquia Division, headquarters Medellin ...... 339 Total 3,425 26. For operational purposes, the Atlantic Railroad has been made part of three separate divisions, as indicated above, since August, 1961. The Cundinamarca line, between Bogota and Puerto Salgar, formerly owned by the Department of Cundinamarca, has been incorporated in the Central Division since January 1, 1962. The Antioquia Railroad has been integrated with the CNR from December 8, 1962. The Nlarino Division, a short line terminating at Tumaco in the southwestern-most department of Colombia was discontinued in 1962 because it was a permanently losing operation; the Railway line was replaced by a highway. 27. The CNR is uniformly 3-feet gauge. The Atlantic Railroad (672 km) has 75-pound rail. The greater part of the old system has rail of less than 60-pounds, and about 90% of the whole is over 30 years old. By and large the condition of rail, ties and ballast, althougl slightly improved during the last three years, is below acceptable standards. There are a large number of bad ties because until recently untreated timber had been used, which had a very short service life, in some instances of only two years. Furthermore the unstable soil structure in various parts of the country causes frequent slides and poses a continuous threat to railroad embankments. An indication of most unsatisfactory conditions is the alarming number - 667 - of train derailments in 1960. A major improverment of the track is an objective of the CNR's rehabilitation program. They have established a Department in Bogota to execute the rail renewal program.  - 7 - 28. Irn May 1959 the Miunicipality of Pereira informed the Railroads that unless they removed the railroad track between Pereira Station in the city's center and the northern city boundary, the Municipality wiould do so. The Municipality insisted on removal because of the inconvenience of several level crossings. The Railroads complied and thereby broke the through rail connection to Manizales which is about 70 km away. To move freight to and from Manizales the railroads have contracted trucking service between these two cities at a cost of about Ps. 26 per ton but are obliged by Government order to charge rail freight rates which vary from ?s. 5 to Ps. 15 per ton according to the commodity; the Railroads now lose more than Ps. 0.5 million per annum on this trucking service. 29. The Transport Survey Group recormended re-establishment of a rail line between the two cities taking into account the present cost of moving the freight, and the need of service to Manizales, a growing city of over 200,000. The investment program includes Ps. 7.0 million, the Railroads' estimate for constructing a connecting line to Manizales bypassing Pereira. 30. There is strong feeling in some municipalities in Colombia to have the Railroad realigned away from city centers. This may be desirable in some cases but the cost should not be borne by the Railroads alone. The Government has agreed to make arrangements for an equitable cost sharing between the Municipality, the Government and the Railroads where such cases of realignment would arise. 31. Operation of the cableway between Manizales and Mariquita, which carries freight only, has resulted in annual net operating losses before depreciation for several years of about Ps. 0.7 million, more than four times its gross annual revenues. The cableway is obsolete and the Group recommends its abandonment with which the Railroads and the Bank are in agreement. Negotiations are underway between the CNR and the Manizales Municipality concerning re-establishment of a rail-link circumventing Pereira on con- dition that the Municipality agrees to the closing of the cablewiay to Mariquita. The Government has agreed that the cableway is obsolete and has expressed its intention to find a reasonable solution to this problem. 32. Of the many bridges with an aggregate length of more than six kilometers, excluding the new Atlantic Railroad, some 110 need strengthening or replacement of spans to permit operation of multiple unit diesel locomotives; many bridges show lack of maintenance and damage from corrosion. 33. Motive power consists of 278 steam and 51 diesel locomotives, and there are 59 diesel railcars. More than 60,jo of the steam units are over 30 years old, they are generally in bad repair, and are scheduled for scrapping. At the present time three diesel locomotives are out of service; during the first nine months of 1962 an average of only 38 (75cib of the total diesel fleet) were available for operation. About half the diesel railcars are less than two years old but some of these need repair of diesel engines, and most of the older railcars are in bad condition or out of service. The poor service record of the diesels has been mainly due to lack of spare parts. Comiiponents and spare parts have now been ordered and are being delivered, the funds therefor coming from residual amounts of earlier loans which the Bank agreed to re- &1locate for the purpose.  - 8 - 34. Freight cars number 5,294 of which more than 40% are overage (more than 35 years old); the total number of passenger cars is 633 of which more than half are overage. Rehabilitation of passenger cars is under way; the foreign currency needed is included in Bank Loan 267-CO. 35. There are seven main workshops. There is no shop for heavy diesel repairs. The best shops are at Medellin and Cali but the layout is inadequate and they lack equipment for diesel repairs. The other shops, at Bogota (the plan to rehabilitate and convert this shop for diesel maintenance was dis- carded because of its site in the center of the city, the ability to maintain diesels at Flandes, near Girardot, at that time, and the urgent need of additional funds for construction of the Atlantic Railroad), Bucaramanga, Facatativa and Santa Marta are very old and totally inadequate in layout and equipment for present and future needs. 36. The CINR have only limited experience in setting up diesel maintenance workshops and they have not yet worked out an adequate program of preventive maintenance for diesel equipment and rolling stock. A qualified consultant will be engaged by the Railroads to assist them in the establishment of modern workshops and of programs for sound preventive maintenance. 37. Office and station buildings are in reasonably good repair. In addition to the normal right-of-way and real estate for utility buildings, CNR owns sizeable pieces of land in urban areas of Bogota and Cali which they are zoning and selling. D. Operations 38. On the whole, operating efficiency is reasonably satisfactory taking into account existing conditions such as shortage of operating equipment and bad track. Lack of line capacity of the section Facatativa-Puerto Salgar restricts traffic now that freight from the Atlantic Railroad is added to the former traffic. According to the Consultants one bridge on this line section will have to be strengthened to allow double heading of trains; in addition various passing tracks must be lengthened to accommodate longer trains to in- crease line capacity. The car control system is well developed and is being adequately applied. 39. The Transport Survey Group has recommended that a detailed study be made of using cargo containers for suitable freight on the CNR. Containeriza- tion would reduce handling, packaging, breakage and pilferage and would speed up shiprents. The Railroads will engage a consultant to study this matter and to make recommendations on the scope of possible application. E. Traffic ILO. Prior to 1959 there was no rail connection between the various Rail- road divisions. In January 1959 the commencement of operations on the Puerto Salgar-Puerto Berrio section of the Atlantic Railroad established a connection betwveen the Central and Pacific Divisions via the Antioquia Railroad (which has since been incorporated in the CNR system). In August 1961, the opening to traffic of the entire Atlantic Railroad connected the Santander and Magdalena Divisions with the rest of the system.  -9- 41. The Central Division, the largest one, serves the capital city of Bogota, the surrounding area on the central plateau and the upper valley of the Magdalena river. Freight traffic in this Division has grown rapidly. About 45% of it is manufactured goods and one-third. minerals. The Paz del Rio steel mill in Belencito and the river ports on the Magdalena river generate, next to Bogota, most of the traffic. CNR also operate, on a con- tract basis, a trucking service across the mountain range from the Central to the Pacific Division between Ibague and Armenia. The Cundinamarca line connecting Bogota with the Atlantic Railroad generates very little traffic of its own. Until the Atlantic Railroad was opened the Santander Division served the traffic between the Magdalena river and Bucaramanga and the Magdalena Division banana traffic to the port of Santa Marta. 42. Manufactures account for about 45<,G produce of agriculture, forestry and cattle farming for about one-third of the total freight traffic on the Colombian National Railroads. A breakdown of this freight traffic by commodi- ties in 1961 is given in Table 1. 43. Passenger traffic in trains is mainly short haul traffic around the big cities. In 1961 railcar services accounted for 21% of all passenger- kilometers and 45% of passenger revenues. Passenger traffic in railcars is mostly long haul. Table 2 shows the development of freight and passenger traffic, average rates and fares and revenues. 44. Freight traffic from 1950 to 1955 increased at an average rate of about 2% anP at about 7.5% thereafter. The increase as of 1959 was partly due to opening of sections of the Atlantic Railroad but would probably have been greater if sufficient rolling stock had been available to meet a pent-up demand for transportation. The drop in 1960 occurred during the latter half of that year in the Pacific division owing to i) establishment of a new cement factory near consumption centers which obviated long hauls of this commodity, 2) short- age of motive power mainly due to poor maintenance and lack of spare parts, and 3) a total 22 days of traffic interruption due to river overflow and land- slides. Passenger traffic has been almost constant or slightly decreasing over the period. 45. The Atlantic Railroad is already generating a large amount of freight traffic; north bound and south bourd traffic is practically fually balanced. Almost 40% of all tonnage carried on the CNR ma'kes use of part or all of the Atlantic Railroad. Railroad freight between Barranquilla and the Cienaga rail- head moves main'y bv barge a,ong the canal between these two points. The canal rates are lower for freight than those of truckcs over the parallel high- way. Passengers use the highway. Total ton-kilometers for the CNR amounted to about 803 million in 1962, as compared to 658 million in 1961, an increase of about 225w. The figures for passenger-kilometers indicate an increase of about 3%. F. Tariff Structure and Rate Levels 46. The freight tariff structure is based. on the principle of charging what the traffic will bear. Comnodities are grouped in classes- there are also point-to-point rates which takfe into account existing conditions of road compe- tition, and special rates for large quantities. The tariff structure has been somewhat simplified concurrently with the 1962 tariff increase which is referaicn  - lJ; - to later. The CNR is studying the structure with a view to rationalization and unification of tariffs for its entire system. 47. Service for passengers includes three classes: in 1962, general (second class) was at 2.5 centavos per kilometer, special (first class) at 3.5 centavos per kilometer and diesel railcar service with reserved seats at 7 to 10 centavos per kilometer. The fares for the general and special classes are constant, while for the railcar services they decrease per kilometer for longer distance travel. 48. For each of the past several years revenues from freight and pas- senger traffic have not been sufficient to cover operating costs. Rates and fares have been too low. Average revenue per ton-kilometer of the Pacific and Central (including Cundinamarca) divisions in 1961 varied from 10 to 12 centavos, while for the Santander and IMagdalena Division it was about 20 centavos. The difference is due partly to a shorter length of haul and partly to a higher rate level on the latt3-r two divisions. In general the rates for agricultural and mining products are the lowest. 49. Since the establishment of the CNR in 1954 to the end of 1961, aver- age revenue per ton-km and passenger-km incre^sed by about )/io and 53, respec- tively though the cost of living index increased by 70%; wages in 1961 were 126% higher than in 1955, 191% higher in 1962, and 272% higher since the January 1963 wage raise. 50. The Railroadst rates and fares have not been increased to meet the needs of the system. "While the Board has authority to quote rates lower than those published, which enhances the Railroads t competitive position, the power to increase rates is vested in the Superintendency of Economic Regulations wh3se chairman is the Minister of Development. 51. The Superintendency, and prior to its creation on July 15, 1960, the Yinister of Development, have not always acted quickly on proposals for rate increases for the Railroads when needed, or have made such reductions and chianges as to leave them far short of the revenue needed to meet the costs of operation. In disapproving, or failing to act on the requests of the Railroads for increases the Authority does not appear in the past to havTe taken into ac- count the effect of its decisions on MiRts financial position. 52. A proposal for rate increases, submitted to the Superintendency in November, 1961, was ap-)rovad by it only in .Iay, 1962, and iiplemented gradually during May throug;h Au-ust, 1962. The resulting increase in the average revenue per ton-km was about 17%o and the additional freight revenue albout Ps. 12 million in 1)062, but the Railroads lost several months of revenue increases because ap- provarl was delayed. The Transportation Survey Group agreed that this rate in- crease was as much as could be applied at the time because of road competition. 53, In February 1963 the CNR applied for and received authority to increas freigbht rates by 40% and passenger f&res by varyin- pe.acentr-es to compensat? lo cost increases following the currency devaluation an. to inprove its financial prospects. During the last weeik of February and the first week in Mlarch, CLiFR  - 11 - raised its freight rates by about 35% and its passenger fares by about 50%. Freight rates were not increased by the full amount authorized because of road competition. 54. To eliminate continuing deficits in the future in CNRts operations owing to inadequate rates, the Government has undertaken that, within a reason- able time, it will introduce legislation which would authorize the CNR Board to adjust its rates and fares without prior approval by the Superintendency. Until such legislation is passed, the Gove nment has undertaken to cause the Superintendency to make arrangements whereby the CNR will be authorized with- out further approval to increase its rates and fares to compensate for increases in wages and other costs. G. Road Competition 55. There has been an intensification of competition from trucking during the past decade, brought about mainly by the growth of the vehicle fleet and the road system, and the low level of user taxes. There is a lack of effective regulation of entry into the trucking industry and of its operations; little ca-ital is required to start a business. 56. The trucking industry is largely made up of hundreds of individual ouwner-operators loosely affiliated with various management groups that supply terminal facilities, secure business, ancd purport to manage the affairs of these affiliates. Tnere is no effective control of rates, routes, operating practices, wages, hours of work, or social benefits. In all these areas the Railroads are severely and completely regulated. 57. The Transport Survey Group has recomraended to the Government a com- prehensive program of transport development investment for the next ten years, and havre made proposals for the establishment of a National Transportation Planning Board, enforcement of vehicle loading regulation and individual road user taxation, mainly by a considerable increase in gasoline tax, which would create a more equitable basis for competition between various transportation media. 58. A study by the Transport Survey Group revealed that road user charves would produce less than 10% of p.:ojected road maintenance costs, and estim-aatecd that to cover such costs the price of gasoline would have to be increased by one-third as an additional tax; to cover the costs both of construction and maintenance the price of gasoline would have to be almost doubled. The Congress is considering legislation for additional taxes on gasoline, which together witr. the Lapact of the recent devaluation of the peso (all petroleum products pro- duced in Colombia are reported to be priced on a U.S. Dollar basis) would have the effect of increasing the price from about Ps. 1 per gallon to about Ps.1.50. 59. The competitive position of the Railroads Aill be imnproved by the de- valuation as the imapact thereof on trucking costs will be greater than on the Railroadst operating costs; as an illustration of this, rough estimates indicate that the effect of the price increase for fuels due to devaluation alone on tho working costs of trucks would be 6% and for the Railroads it would be only 2 .5% Trucking rates were increased 30% - 60% in early 1963.  - 12 - 60. It is desirable for the economy of the country that road users should make a substantial contribution towards the upkeep and development of the road system, and it is vital to the Railroads' financial prospects that adequate road user charges be imposed, which would raise trucking costs and enable the Railroads to increase their rates when needed without the fear of losing freight. 61. In March 1963, the Minister of Public Works established an Advisory Board including executives of his Ministry, of the major transportation entities in Colombia and a representative of the Ilational Planning Board. The Advisory Board will review and make recommendations on investment programs for transporta- tion and make proposals for equitable road-user charges. H. Inland Waterway Competition 62. Competition with inland waterway transportation is limited to the Magdalena River between Puerto Salgar and Barranquilla. As the Atlantic Railroad, which parallels the river from Puerto Salgar to Gamarra, has only recently been opened for traffic, insufficient data are available to assess future division cf traffic between the river and the railroad with a reasonable degree of accuracy. 63. The main port of transshipment is Puerto Berrio which can be reached by even the largest river craft for about eight months a year when the level of ttie Magdalena river is adequate. Puerto Salgar, as a rule, is only used by smaller craft. During the dry season the river channels downstream from Puerto Berrio to Gamarra often change their location because of shifting sand- bars, and at some places the river becomes too shallow for the larger craft. 64. The Transport Survey Group's report indicates that dredging of the last mentioned part of the river and keeping it navigable up to Puerto Berrio the year round would be possible at relatively low cost; this operation and the expansion of transshipment facilities at Puerto Berrio have been included in the Group's recommendations on waterway transportation. 65. Even if these recommendations were to be implemented, it is believed the Railroads would continue to hold traffic because their freight rates between the major cities are competitive with combined barge plus railrcad or road rates, and because of the greater speed of the Railrcads' service. 66. Another factor of importance in this competition will be the amount of shipping diverted from Barranquilla or Cartagena to Santa HIarta. Cargo to and from Santa Marta is largely depenident on the railroad for its transporta- tion, at least to and from Gariarra. Cargo between Barranquilla or Cartagena and Gamarra and other river ports can use the Magdalena river exclusively. At present freight moves between Barranquilla and the railhead at Cienaga mainly by barge along a canal; some freight moves via a ferry across the Magdalena river and a road to Cienaga. 67. The Transport Survey Group recommends that a study be made of a nossible rail connection between Cartagena and Barranquilla and the Atlantic Railroad at a place slightly south of Fundacion; the construction would not be  - 13 - undertaken until the results of certain river training works to be constructed at Barranquilla for maintaining depth in the estuary are known, which would. be by about 1964. The costs of the engineering and feasibility study for the new line and its construction have been included in the Railroads' investment program. I. Finances and Earnings 68. The Railroads are organized as a corporate enterprise which, in principle, is expected to be self-supporting. Its record, however, has been one of regular net losses since incorporation. The capital has been provided by the Government free of charge. Part of the amount shown as "capital" on the Balance Sheet is repayable as earnings permit. The funded debt has arisen from three Bank loans for the construction and equipment of the Atlantic Railroad. Balance Sheets for the years 1957 to 1962 are sunniarized in Table 3. 69. The Balance Sheet as of December 31, 1962, may be presented as follows: Pesos Million Current assets 121 Current liabilities 79 Net Working Capital 42 Fixed Assets 1,350 Less Depreciation 69 Net fixed assets 1,281 Long-term Receivables 55 * TOTAL 1,378 Reserves for Social Security, etc. 63 IBRD loans 324 Capital 1,075 Less Accumulated Losses 04 991 TOTAL 1,378 * The Government owes CNR Ps. 54 millibn fwr various items such as accounts for the Cundinamarca line, social security payments and freight bills; Ps. 46 million is included in long-term receivables, Ps. 8 million in current essets. Yne balance ol2 ?s. 9 million in lonig-term receivables is for real-estate transactions. 70. Long-term debt to the amount of Ps. 324 million at the end of 1962 reppresents outstanding balances of the Bank loans for the Atlantic Railroad. Lecause of insufficient earnings, the service of these loans including interest and amortization has been paid by the Goveorm , t- "vo.crr:-