Romania - Railway Rehabilitation Project

Document of The World Bank Report No. 13857-RO STAFF APPRAISAL REPORT ROMANIA RAILWAY REHABILITATION PROJECT DECEMBER 15, 1995 Infrastructure Division Country Department I Europe and Central Asia Region  CURRENCY EQUIVALENTS November 1995 Currency Unit = Romanian Leu (plural Lei) Leu I = US$0.0005 US$1 = Lei 2,070 AVERAGE EXCHANGE RATES Lei per US$1 1992 1993 1994 1995 308 760 1660 2070 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy CEE - Central and East European Region CMEA - Council of Mutual Assistance EBRD - European Bank for Reconstruction and Development EIB - European Investment Bank EMU - Electric Multiple Units ERR - Economic Rate of Return ETS - Electric Traction Substations EU-PHARE - European Union Assistance Program for Eastern Europe IBRD - International Bank for Reconstruction and Development IRIS - Integrated Railway Information System MOF - Ministry of Finance MOT - Ministry of Transportation MWFPE - Ministry of Waters. Forests and Protection of the Environment OCL - Overhead Contact Lines PIP - Project Implementation Plan PMT - Project Management Team RA - Regie Autonome RAP - Restructuring Action Plan SAL - Structural Adjustment Loan SNCFR - Societatea Nationala a Cailor Ferate Romane (Romanian National Railways) UIC - International Railway Union ROMANIA - FISCAL YEAR January I - December 31  STAFF APPRAISAL REPORT ROMANIA RAILWAY REHABILITATION PROJECT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY ....................................... i 1. THE TRANSPORT SECTOR .1 A. The Transport System . B. Traffic . C. Investments .2 D. Institutions .2 E. Sectoral Issues .3 F. Sector Strategy .3 G. Previous Bank Experience in the Sector .4 H. Role of the Bank and Lending Strategy .4 II. THE RAILWAY SUBSECTOR ...................................... 6 A. Organization, Management and Staff .............................. 6 B. Railway Facilities .......................................... 6 C. Traffic ................................................. 8 D. Operations . ............................................. 10 E. Development Strategy and Restructuring Process ..................... 11 III. THE PROJECT . ............................................... 13 A. Objectives . ............................................. 13 B . D escription . ........ ........... ............ ........... .. 13 C. Cost Estimates . ........................................... 15 D. Financing Plan . ........................................... 17 E. Implementation and Monitoring ................................ 17 F. Procurement . ........................................... 17 G. Disbursements . ........................................... 19 H. Project Supervision . ....................................... 20 I. Environm ent ............................................ 21 IV. FINANCE . ................................................. 23 V. ECONOMIC EVALUATION ...................................... 28 VI. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS .... ........ 31 This document is based on the findings of a mission to Romania in October 1994, consisting of Anita George (Task Manager and Financial Analyst), Svetislav Orlic (Engineer), Jacques Yenny (Economist), Kristalina Georgieva (Environmental Specialist), Suwat Pananon (Systems Analyst) and Irina Luca (Project Officer, Romania Resident Mission). Peer reviewers were Peter Parker (EC21N) and Karim Budin (TWUTD). The Division Chief is Ricardo Halperin and the Acting Department Director is Christiaan J. Poortman  ANNEXES: 1. SNCFR Restructuring Action Plan (1995-2000) 2. Financial Projections and Sensitivity Analysis 3. Environmental Review 4. Project Implementation Plan 5. Selected Documents Available in Project File TABLES: 1. Freight Traffic by Mode of Transport (1960-1994) 2. Passenger Traffic by Mode of Transport (1960-1994) 3. Transport Sector Investment (1976-1994) 4. Romanian Railways Operational Indicators (1986-1994) 5. Passenger Traffic: Actual (1987-94) and Projections (1995-2000) 6. Freight Traffic: Actual (1987-1994) and Projections (1995-2000) 7. SNCFR's Actual Investments (1989-93) and Planned (1995-2000) 8. Track Renewal of Priority Routes 9. Modernization of Signalling and Telecommunications (1995-2000) 10. Estimated Schedule of Disbursements CHARTS: 1. Ministry of Transport Organization 2. Romanian National Railways Organization - Current 3. Romanian National Railways Organization - After Reorganization MAP: IBRD 26473 - Romania - Railway Rehabilitation Project  ROMANIA RAILWAY REHABILITATION PROJECT Loan and Project Summary Borrower: Societatea Nationala a Cailor Ferate Romane (Romanian National Railways - SNCFR) Guarantor: Romania Implementing Agency: SNCFR Beneficiary: Not applicable Amount: US$120 million equivalent Terms: 20 years, including 5 years grace at the standard variable interest rate. Commitment Fee: 0.75% on undisbursed credit balances, beginning 60 days after signing, less any waiver. Financing Plan: See para. 3.5 Economic Rate of Return: 33% Staff Appraisal Report: 13857 RO Map: IBRD 26473 - Romanian - Railway Rehabilitation Project Project ID RO-PA-36013   ROMANIA RAILWAY REHABILITATION PROJECT LOAN AND PROJECT SUMMARY Borrower: Societatea Nationala a Cailor Ferate Romane (Romanian National Railways - SNCFR) Guarantor: Romania Loan Amount: US$120 million equivalent Terms: 20 years, including 5 years grace at the standard variable interest rate Project Objectives The objective of the project is to support and deepen the restructuring and Description: process which SNCFR and the Government have initiated. The project supports a set of policy measures that will be embodied in the new Railway Law, a Restructuring Action Plan (RAP), and a Performance Contract between SNCFR and the Government. The project will only finance investments,which would be required even under pessimistic traffic assumptions and would be in line with the restructuring objectives. These include: (a) track renewal and maintenance including mechanization on priority routes; (b) integrated railway information system (IRIS); (c) signalling and telecommunications; (d) environmental improvement; (e) traction and depot improvement; (f) rehabilitation of passenger coaches and freight wagons; and (g) technical services. Benefits and Risks: Because of inadequate maintenance and renewal over the last few years, the quality and efficiency of transport services have deteriorated and operating maintenance costs have increased. Thus, the benefits of the project will be cost savings and improved safety and quality of services. Moreover, the better balance between costs and revenues, which would result from implementation of the RAP and the project, is expected to reduce the fiscal burden of SNCFR on the Government's budget. One of the main risk affecting the financial situation of SNCFR is of policy slippage due to changes in the political environment. Further deterioration of economic conditions in Romania would also pose a risk of lack of counterpart funds and reduced rail traffic. These risks have been minimized by replying upon conservative assumptions of railway traffic projections. However, since they are outside control of the Bank and SNCFR, it is proposed to hold a mid-term review to assess progress in achieving the development objectives of the project and to assess the need for further policy measures and/or restructure it as necessary. The physical components of the project do not pose significant risks since all investments are for rehabilitation of the core components of the system, which would have high priority under any restructuring scenario.  ii 1. ESTIMATED PROJECT COST ------US$ MILLION------ PROJECT COMPONENTS LOCAL FOREIGN TOTAL FEC (%) A - BANK (IBRD) 1. Mechanization of Track maintenance and overhaul 46.00 44.00 90.00 49.00 works, including track renewal on 900 kilometers routes 2. Integrated Railway Information System (IRIS) 8.00 22.00 30.00 73.30 3. Modernization of Telecommunication network (to 8.20 30.50 38.70 78.80 support IRIS) 4. Catenary tensioning machine 0.60 1.60 2.20 72.70 5. Environment - equipment - priority items 0.40 1.00 1.40 71.40 6. Technical Services 0.40 0.60 1.00 60.00 Base Costs 63.60 99.70 163.30 61.00 Contingencies 11.80 20.30 32.10 - TOTAL PROJECT COSTS (A) 75.40 120.00 195.40 61.00 B- EBRD1 1. Rehabilitation of the traction 5.80 16.10 21.90 74.00 2. Equipment for traction depots 2.70 6.30 9.00 70.00 3. Coach Refurbishment 9.00 29.50 38.50 77.00 4. Wagon Rehabilitation 3.30 8.70 12.00 73.00 Base Costs 20.80 60.60 81.40 74.00 Contingencies 4.20 12.00 16.20 - Total Project Costs (B) 25.00 72.60 97.60 74.00 C- PHARE I. Replacement of equipment at interlocking stations 6.90 26.00 32.90 79.00 2. Track material 9.60 29.20 38.80 75.00 3. Print Shop 0.30 1.10 1.40 79.00 4. Technical Assistance 0.40 1.70 2.10 81.00 Base Costs 17.20 58.00 75.20 77.00 Contingencies 3.20 11.60 14.80 - Total Project Costs (C) 20.40 69.60 90.00 77.00 GRAND TOTAL BASE COSTS (A+B+C) 101.60 218.30 319.90 68.00 TOTAL CONTINGENCIES 19.20 43.90 63.10 - GRAND TOTAL (A+B+C) 120.80 262.20 383.00 68.00 II. FINANCING: (US$ MILLION) TOTAL FOREIGN LOCAL Government 121 0 121 Bank 120 120 0 Cofinancing (EBRD and PHARE) 142 142 0 Total 383 262 121 III. ESTIMATED IBRD DISBURSEMENTS: (US$ MILLION) IBRD Fiscal Year: FY97 FY98 FY99 FY00 FY01 Annual 25.0 30.0 35.0 22.0 8.0 Cumulative 25.0 55.0 90.0 112.0 120.0  ROMANIA RAILWAY REHABILITATION PROJECT STAFF APPRAISAL REPORT 1. THE TRANSPORT SECTOR A. The Transport System 1.1 Romania is one of thie largest of the former centrally planned economies in the Central and East European (CEE) Region with a land area of 237,000 s. km and a population of 23 million, second only to Poland. Per capita income in 1994 was estimated at about US$1,100. The country has a wide range of natural resources, including a fertile agricultural base, deposits of coal, lignite, oil, natural gas and other minerals. Long a major food producer, Romania was a large exporter of agricultural products until the early eighties. 1.2 The transport system has relied primarily on the railways, which have a well developed network of 11,000 km, of which 36% is electrified and 26% is double track (para. 2.3). The road network totals 73,000 km, of which 20% are national roads carrying 60% of the road traffic. Road density, with regard to both population and land area, is the lowest among all CEE countries. The Danube offers a navigable distance of 1,075 knm in Romania and the Danube-Black Sea Canal (68 km) was opened to traffic in 1984. Ninety percent of foreign trade is handled through the port of Constanza on the Black sea. There are five major river ports on the Danube, the largest of which is Galati, accessible to ocean-going vessels up to 15,000 tons. There are 17 airports of which 4 are international. B. Traffic 1.3 Traffic on all modes has been adversely affected by the massive downturn in the economy, compounded by the restructuring of the economy away from heavy industry which was traditionally a large user of transport. Since 1990, GDP declined by nearly 30%, industrial output declined by nearly 52%, exports fell by nearly 55%, real wages declined by about 30%, investment by nearly 60%, and unemployment reached 10% of the labor force by end-1994 from near zero in 1989. The share of industry in GDP declined to 40% from 54% in 1989, and that of agriculture has risen to about 24% from 14% in the 1980s, while trading activities have almost doubled since 1989. 1.4 As in other centrally planned economies, Romania's transport sector has been heavily rail oriented. In 1960, rail accounted for over 80% of freight traffic and over 70% of passenger traffic (Tables 1 and 2). While the rail share has gone down since then, in 1989, rail still accounted for almost 70% of freight and over 40% of passenger traffic. The high share of rail freight was the result of regulation forcing all transport above 50 km to the railways. This regulation has now been abolished. Rail freight reached 300 million tons and 80 billion ton-km in the late 80s, but has fallen dramatically since then. In 1994, it was down to less than a third of its 1989 level at 25 billion ton- km. Passenger traffic held off better, going down to 45% of its earlier level. 1.5 Road traffic grew rapidly in the 70s but stagnated in the 80s as it was suppressed by physical control and regulation. Car traffic increased dramatically in 1990, but fell back thereafter as fuel prices were adjusted to reflect world market prices. Truck traffic has been less buoyant due to  - 2 - the downturn in the economy, but has been affected less than rail traffic. Road freight is now 50% less than in 1989. There is virtually no intercity bus service at this time and railways remain the essential long distance passenger carrier. 1.6 Traffic through Constanza port was around 60 million tons p.a. in the late 80s, but is also down by two thirds since then. Of the earlier traffic, about 60% was liquid bulk and another 30% dry bulk, leaving only about 5 million tons of general cargo. Container traffic was small but has increased rapidly since 1989 as Romania's markets are diversifying. Inland water traffic is insignificant at less than 4% of total land traffic. On the Danube-Black Sea Canal, traffic reached 12.5 million tons in 1989, well below the forecasts of 75 million tons made in 1979 before construction. Traffic in 1990 had fallen to some 6 million tons. Maritime traffic carried by the Romanian fleet quadrupled in the 70s from 4 to 16 million tons p.a. and more than doubled again to 36 million tons in 1989. It has since fallen to only 7 million tons. C. Investments 1.7 Investments in the transport sector have been around 10% of total investments, substantially below the level in market economies. Until the late 70s, railways got the bulk of the investments in the sector. Later, the balance shifted toward water transport (maritime, river and canals) with the construction of the new Constanza port, the Danube-Black Sea Canal and the Bucharest-Danube Canal (now abandoned) and a major increase in the maritime fleet. In the 80s, total water transport investments absorbed well over 50% of total transport investments, while rail received about 27%. By comparison, investments in road infrastructure decreased from 9% in the late 70s to less than 5% in the 80s (Table 3). In the 80s, construction started on the Bucharest metro and, between 1986 and 1990, this absorbed about twice the amounts invested in the entire road infrastructure of Romania. In recent years, investments in the sector have come to a virtual halt. For instance, in 1992, investment for the whole sector was US$35 million, only allowing for urgent capital repairs and periodic maintenance and no new investments. In 1993 and 1994, the level of investment increased to around US$70 million. D. Institutions 1.8 In 1990 and 1991, major changes took place in the transport institutions. The former Ministry of Transport and Public Works was split into two separate Ministries. The Ministry of Transport (MOT) was reorganized to concentrate on policy making and regulation functions rather then being an operator of transport means. The railways, highways and ports became autonomous units or "Regie Autonome" (RA), while road transport departments, construction departments and design or research institutes became respectively transport companies, contractor and consultant commercial companies (CC). The shares of these CC are still owned 100% by the state, but with the intention of privatization as and when feasible. The MOT was reorganized again in September 1994 to place even greater emphasis on its policy making and regulatory function, while further limiting its interference in the running of transport operations, and its staff was reduced further from 450 to 350 (Chart 1).  - 3 - E. Sectoral Issues 1.9 One of the main difficulties when assessing the justification of new investments in the sector is to evaluate the future volume and pattern of transport demand. The shift to a market economy is resulting in less emphasis on transport intensive industries such as steel, cement and petrochemicals and more on higher value added light industry such as textiles and agro-industry. The latter will require lower transport volumes and are more likely to use road transport than rail or water transport. Romania's use of energy was also very intensive. The demand for lignite and coal transport may decline as the electric power company, RENEL, switches from domestic lignite which is currently transported by the railway to imported coal. As energy subsidies are phased out, and industries conserve fuel to reduce operating costs, further reductions in coal transport can be expected. Railways are unlikely to recoup most of the lost traffic and will have to concentrate on developing new markets such as international freight and combined transport. On the passenger side, the need to increase tariffs in order to reduce subsidies could moderate travel demand somewhat. 1.10 Investments in the transport sector were skewed toward very large projects without regard for economic and financial feasibility. The result is that funds for maintenance, rehabilitation, replacement of life-expired equipment and modernization were scarce. Existing infrastructure and equipment are obsolete and service availability is low. The Bank together with EBRD is introducing the use of economic feasibility studies as a basis for improving decision making on investments. 1.11 The sector was no exception to the general distortions resulting from administrative rather than market prices. Fuel prices are still controlled, but Government policy is to ensure that they reflect fluctuations in world markets. Under the Structural Adjustment Loan (SAL) agreement has been reached that Government would adjust them periodically to reflect external price and exchange rate movements. Road transport prices are free for freight, but still regulated for public passenger transport. Similarly, railways have flexibility in setting freight tariffs, but full control remains on passenger tariffs. F. Sector Strategy 1.12 The following principles and policies are guiding the future action of Government in the transport sector: (a) Equality of treatment between private transport enterprises and state owned transport means; (b) Financial autonomy of transport companies; (c) Freedom of action by transport companies, in terms of entry, routes, cargoes, tariffs and investments; (d) Free modal choice by transport users; and (e) Investment decisions based on economic analysis.  - 4 - Regarding investments in the sector, the strategy of the Ministry of Transport is as follows: (a) Short term: to arrest the technical and operational deterioration of the system; (b) Medium term: to renovate the existing transport capacity taking into account changing demand patterns as a result of free competition between modes; and (c) Longer term: to modernize and develop the infrastructure, equipment and vehicles to match the economic and technical levels of Western Europe. This strategy is sound and is reflected in this project on the investment side as well as by the agreements reached regarding reforms to be introduced in the sector. G. Previous Bank Experience in the Sector 1.13 The Bank financed three projects in the transport sector: the Danube-Black Sea Canal Project (Loan 1794-RO) of US$100 million of January 1980; the Land Transport Project (Loan 2034- RO) of US$125 million approved in April 1981; and the Transport Project (Loan 3593-RO) in April 1993. In January 1987, OED issued the PPAR for the first project. The main conclusion was that, although completion was 17 months behind schedule, the work was generally good. However traffic did not materialize to the extent expected and therefore the financial results and economic benefits were lower than estimated. A main issue raised in the report concerns the role of the Bank. The Bank loan came five years after construction of the canal had started and mainly supplied finance (about 5% of total cost). It would have been better to participate earlier in the project cycle to have an impact on technical and economic decisions before they were made. 1.14 The second project was completed and the loan closed on schedule in May 1987. The Project Completion Report (PCR) was issued in January 1992. The overall assessment was satisfactory. Disbursements were faster than expected and the project cost was well below estimates. Economic returns were lower than expected following the downturn in the economy since 1990, but all components remain justified. Issues of past irregular procurement practices were highlighted by the Government in its commentary on the project. 1.15 The ongoing Transport Project, co-financed with European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB), was prepared rapidly and the cooperation throughout the project's preparation was outstanding, with the Bank's comments on project design, concept and implementation fully taken into account. Progress on project execution so far is good and disbursements are ahead of schedule. H. Role of the Bank and Lending Strategy 1.16 The Bank's Country Assistance Strategy (CAS) for Romania, discussed by the Board of Directors on April 5, 1994, during the presentation of the Romania Petroleum Sector Rehabilitation Project (Loan 3723-RO), aims at supporting the Government's structural adjustment program and macroeconomic stabilization objectives. It also identifies rehabilitation of infrastructure as one of the  - 5 - priority areas for Bank lending. The Bank began the process of assisting the reform of the transport sector through technical assistance for studies in the road, rail, ports and urban transport sub-sectors. The road user charges study, the railway restructuring study and the urban transport study were financed under the Technical Assistance and Critical Imports (TACI) Project (Loan 3363-RO) and were completed satisfactorily. A port master plan study for Constanza was financed by the Netherlands and completed in 1993 and European Union Assistance Program for Eastern Europe (EU- PHARE) is financing technical assistance to the sector and financial audits. These studies laid the foundation for our assistance to the sector. Real institutional reform will require continuous technical assistance over the long term, leveraged by investment lending. The Bank's first loan in the sector since lending resumed focused mainly on highway rehabilitation and maintenance. It also includes technical assistance and training in the road and rail sub-sectors as well as a small railways component for well justified and urgently needed equipment, so basic that it would be needed in any restructuring scenario. The railway restructuring study was completed in early 1994 and the Government requested the Bank and EBRD to assist with the restructuring process formulated on the basis of the study recommendations. The proposed project is consistent with the objectives of the CAS.  - 6 - II. THE RAILWAY SUB-SECTOR A. Organization. Management and Staff 2.1 Societatea Nationala a Cailor Ferate Romane (Romanian National Railways - SNCFR) was established according to Resolution No. 235/1991 of March 29, 1991 and amended thereafter. It is an independent legal entity ("Regie Autonome" defined according to Law No. 15 dated August 7, 1990), which gives the company the right to decentralize economic activities and accelerate the transition to a market oriented economy. SNCFR is divided into eight regions. Each region has 3 to 5 sub-regional units to manage railway operation activities. The Board is appointed by the Minister of Transport and consists of representatives of the Ministries of Transport, Finance, Industry, Labor, the President of SNCFR and experts. The President of the Board is assisted by four Vice-Presidents (strategy, operational, personnel and financial). This Board is responsible for determining railway policy, including tariff policy, organization and operations control. SNCFR has implemented the first stage of its re-organization under the ongoing restructuring process. The organization will be along business sector lines. When the final stage is reached in 1996, there will be five sectors as follows: (i) infrastructure; (ii) freight; (iii) passengers; (iv) traction and rolling stock; and (v) asset management. The relationship between these business sectors will be established on a contractual basis. As a first step, there will be a sixth sector regrouping all present operational activities. The plan also includes consolidation of regions. 2.2 Between 1990 and the end of 1994, the total number of staff was reduced by 65,500 (30%) (Table 4). At the beginning of 1995, SNCFR employed about 156,000 persons, of which about 66% work in transport activities and about 29% in infrastructure. During the period 1995- 1998, SNCFR, with the Government's support, plans to reduce its staff by about 41,000 or about 26%. Some 23,500 staff were dismissed during 1994. Because staff cuts to date have not matched the loss of traffic, staff productivity (measured in traffic units per employee) decreased significantly since 1989. However, it has been increasing gradually since 1993 and still compares favorably with that of many other railways at about 276,000 traffic units per year per employee in 1994. The proposed staff reduction program included in the Restructuring Action Plan (RAP) whould be complemented by an extensive training program coupled with a system of performance reward that the project will support. The RAP is presented in Annex 1. B. Railway Facilities Network 2.3 SNCFR's network is extensive (11,380 route kms of which 10,893 standard gauge, 427 km narrow and 60 km broad gauge) (IBRD Map No. 26473). About 2,970 km or 26% are double track and 3,866 km, or 34%, electrified (25 kV and 50 Hz system). The total length of the track is 22,000 km of which about 14,570 km or 66% are in open lines and 7,430 km are in stations. Track is generally in poor condition and traffic density is high on the main network (about 30 million gross tons per line-km on the most heavily-used 4,500 km or about 40% of the network). 2.4 During the last years, maintenance expenditures were drastically reduced and about 35% of SNCFR's network did not receive the required maintenance, causing speed restrictions on about  - 7 - 5,600 km of lines. Major repairs are required on some 10,800 bridges, 38 tunnels and 480 km of substructure works. To stop further track deterioration and to partially reduce the track overhaul backlog of about 2,750 km, SNCFR needs to carry out annually at least: (i) 600 km of track overhaul (400 km with new material and 200 km with used material); and (ii) capital repairs of 270 bridges and 14 tunnels. 2.5 Essential track maintenance has fallen behind because of ineffective working methods and inadequate track maintenance machinery combined with the lack of funds. Many existing track machines (tamping and ballast cleaning) date back to 1964; and about 70% are over ten years old. Their technology is antiquated, their productivity is low and their availability is less than 50%, because of a shortage of imported spare parts. 2.6 Therefore, track maintenance and procurement of track maintenance machines, together with updated technology, introduction of elastic fastening system, production of modern concrete sleepers and switches are essential. It is also necessary for safety reasons in train operation. In addition, major organizational changes and concentration of responsibilities, together with staff training, are needed. The major focus of the project is on track maintenance. Marshalling Yards 2.7 SNCFR had 27 marshalling yards. Due to significant traffic decrease (paras. 2.13 to 2.15), their rate of utilization fell drastically. In 1994, SNCFR reclassified its marshalling yards and, at present, only 9 yards remain in operation. The other yards are now used as freight stations only or as storage for unused and defective wagons. Further detailed analysis is needed to determine to what extent use of the remaining yards could be further optimized. The critical element is not their number but their optimal operation including organization and management. Signalling. Telecommunications and Electrification 2.8 Although about 4,700 km of the open lines are equipped with an automatic line block- signalling system, some 650 stations with electro-dynamic interlocking equipment, and most marshalling yards were mechanized; much of these equipments are worn out. As their maintenance costs are high and the technology obsolete (dating back to the 1930s), they need to be replaced on heavily trafficked routes to improve service and safety. 2.9 The telecommunications system on main lines is generally obsolete (some telecommunications exchanges date back to the 1940s) with a huge backlog in overhauling and a lack of spare parts. The suspended cable network (about 4,800 km) and inter-urban cable network (about 6,500 km) are very old and need urgent repairs. The electrification system, consisting of 10,900 km of contact line and 76 electric traction substations (ETS), is also in need of urgent rehabilitation and replacement, due to significant failures in power supply and in overhead contact lines (OCL). This second largest component of the project addresses the most urgent needs in these areas. Motive Power and Rolling Stock 2.10 The proportion of traffic hauled by electric traction rose from 64% in 1986 to 71% in 1994. SNCFR operates 1,060 electric, 1,200 diesel-electric and 650 diesel-hydraulic locomotives on  - 8 - the standard gauge network, of which about 20%, 75% and 85%, respectively, are over 20 years old. Availability of electric and diesel locomotives in 1994 was about 75%. All 139 units in the rail-cars and Electric Multiple Units (EMU) fleet have exceeded their scrapping age. The total passenger fleet consists of about 6,680 units with a capacity of about 460,000 seats. Almost 45% are over 20 years old. In 1994 SNCFR had about 141,000 freight wagons with a total capacity of 6.4 million tons and an average availability of 60%. Some 60% of the fleet is over 20 years old. 2.11 The technical parameters of the traction fleet remain behind in terms of speed and other performance criteria compared to Western European railways. In aggregate terms, fleet capacity for traction and rolling stock exceeds actual and expected traffic demand, but the fleet does not meet qualitative and structural requirements and should be progressively modernized, at a pace consistent with financial constraints. However, given the surplus capacity, SNCFR needs to avoid unnecessary maintenance through the scrapping of surplus capacity. Reducing the fleet is part of the RAP (Annex 1). Workshops and Depots 2.12 The manufacturing industry (locomotives, wagons, coaches, track machines) was separated from the railways in 1992 and transformed into commercial companies. Their work for SNCFR and other parties is purely on the basis of contracts. The facilities which remain with SNCFR to maintain and repair traction and rolling stock consist of 21 workshops, 32 locomotives and 90 rolling stock depots. Most of them are heavily over-staffed. The workload of these workshops will decline as the fleets of locomotives and rolling stock are reduced as indicated above. Rationalization of fleet types and spare parts inventory, combined with the introduction of maintenance practices based on component exchange rather than overhauls in workshops, will bring great economy and improved efficiency. The number of workshops and depots will be reduced significantly over the next five years as the operations are streamlined and scrapping plans progress. A plan for reducing the number of workshops and depots is included in the RAP (Annex 1). C. Traffic 2.13 The major political changes in CEE countries have been accompanied by massive economic and industrial upheavals which have profoundly affected railway traffic. With the collapse of the Council of Mutual Assistance (CMEA or COMECON), trading relationships and traffic movements between and within member countries have been undergoing vast changes in volume and patterns. Economic and industrial structures are changing; markets are altering or disappearing; old products and demand patterns for raw materials are declining; the dominance of railways, created by centrally planned command economies, is declining and demand for railway services is being eroded by emerging competition from road transport. The quality and level of railway services have deteriorated due to continued reliance on traditional operating methods, low productivity, increasing costs and inability to invest in modern working system, technology and management techniques. The requirements of the customer have not been met because the railways lack a commercial orientation and the concept of marketing is barely recognized.  -9 - Freight Traffic 2.14 Between 1989 and 1994, freight traffic fell about 70% in terms of tkm (from 81 billion to 25 billion) and 68% in terms of tonnage (from 306 million tons to 99 million). The average length of haul decreased from 265 km to 250 km. About 80% of the freight traffic is domestic, and has been affected by the level and structure of the economy and to a lesser extent by road competition. Three quarters of the tonnage is made up by six commodities: coal, petroleum products, chemicals, metallurgy products, ores and building materials (Table 6). Quarry products, ballast and construction materials, which accounted for 30% of the traffic in 1989 (85 million tons), now make up only 15% (15 million tons), reflecting the drastic reduction in construction activities in the country. International trade plays a relatively significant part in SNCFR's operations with exports accounting for about 9% of the traffic, imports about 11 % and transit about 1%. Passenger Traffic 2.15 Passenger traffic did not decrease as much as freight traffic; it went down by about 48% from 35.5 billion passenger-km in 1989 to 18.3 billion in 1994 (Table 5). This reveals that traffic decreased in direct relation with the decrease in the real income of the population. It is estimated that 15-20% of passengers travel without tickets and that the traffic is actually higher than reported. SNCFR is in the process to carry out counts in trains to verify this point. Future Traffic 2.16 In the present economic and political circumstances, both domestic and external, the uncertainties surrounding forecasts must be emphasized. Railway freight traffic may continue to hold up its new present level, provided SNCFR adopts an active market-based approach catering to identified customer needs. The restructuring process may well hold the key to success or failure here. Certain specialized international operations, such as trans-shipment through Constanza to Black Sea destinations and inter-modal operations with Western Europe shipping could, and probably will, assume importance in the future. 2.17 Passenger traffic is particularly difficult to forecast at this time, but can be expected to decline in the longer term because of the growing car ownership and particularly the potential competition of private buses which will be offering competitive services. The rate of decrease in passenger traffic will depend on general economic conditions (affecting consumer expenditure and car ownership), the outcome of the SNCFR restructuring process, fares policy and the approach adopted to public service contracts. 2.18 Taking into account recent trends in rail traffic volumes and the above-mentioned factors, it appears prudent to base the project on figures which do not assume any traffic growth from the 1994 base. Forecasts are summarized below and detailed in Tables 5 and 6. A mid-term review is proposed under the project (para 3.18) and, at that time, the forecast will be revised to take into account recent developments. This may result in some changes in investment priorities which would be taken into account under the project by reallocations between components. Two scenarios have been retained for planning purposes; the "realistic" forecast below has been used to estimate the need for traction and rolling stock and to develop the scrapping program, while a "pessimistic" scenario, with a further fall in both freight and passenger traffics, has been used for the financial forecasts.  - 10- SCENARIO REALISTIC T PESSIMISTIC YEAR 1994 2000 A. Passenger Traffic Traffic volume, number of 207.00 210.00 190.00 passengers (million) Average distance (km) 84.40 100.00 100.00 Passenger-KMS (billion) 18.30 21.00 19.00 B. Freight-Traffic Traffic Volume (mill.tons) 99.00 100.00 90.00 Average distance (km) 250.00 260.00 260.00 Net Tons-kms (billion) 24.70 26.00 23.50 C. Traffic Units (pkm + ntkm) (billions) 43.00 47.00 42.50 D. Operations 2.19 In recent years, SNCFR's operational performance declined due to the sharp decrease in traffic. The utilization of rolling stock (passenger and freight services) and the availability and utilization of electric and diesel locomotives all went down since 1989 (Table 4). SNCFR needs to avoid unnecessary maintenance of surplus traction and rolling stock. The availability rate will be lifted by first scrapping surplus wagons and then assessing whether maintenance efforts on the remaining fleet need to be intensified. Targets for utilization and availability have been agreed with SNCFR as part of the RAP. 2.20 Freight train operations have been reduced to reflect the fall of traffic. Many operations remain of the traditional "wagon load" working between a large number of terminals. Out of the 1,110 freight trains being run daily, over 50% are of this traditional type. Unit trains (290) account for 26% and direct trains another 20%. To further reduce costs, freight operations would have to be further rationalized by increasing the proportion of unit and direct trains and cancelling some of the local pick up and delivery trains. Frequent locomotive changes should be discontinued and the distance between stops for technical inspections increased. 2.21 Passenger traffic is more diffuse and widely spread than freight but there is a large number of stations with low volumes. Passenger train-km have not decreased in line with the fall in passenger demand. The RAP includes a substantial restructuring of passenger operations, including the closure of about half of the stations and reduction of train-km, combined with improved quality of service. As a first step, poorly occupied and costly long distance low speed passenger trains will be eliminated in the new timetable. After further analyses of the passenger market, services will be segregated into two categories: intercity and suburban/regional services. The recent introduction of a better quality, faster express train between Bucharest and Timisoara, at twice the regular fare, has been very successful and will be replicated on other lines.  - 11 - E. Development Strategy and Restructuring Process Basic Principles 2.22 The Government and SNCFR recognize the need to adapt the railway to the new economic situation of the country. With Bank assistance (TACI Project, Loan 3563-RO), a study on the Restructuring of the Romanian State Railways was completed in January 1994 and the Government has requested the Bank's assistance to implement the recommendations of the study. The Government subscribes to the general principles of the European Union (EU) Directive on Railways, which establishes that the railways should operate independently, in a commercial manner, according to market principles and that all social tariffs and/or unprofitable services imposed on the railways by the Government should be covered by public service obligation contracts between the Government and the railways. The state will also assume partial responsibility for infrastructure as it does for roads. The above principles have been embodied in a draft Railway Law, which has been submitted to Parliament. Measures Already Implemented 2.23 Substantial progress has been made on developing operation and action plans for restructuring. Achievements to date include: (a) the establishment, in early 1994, of an interministerial working group for the restructuring of the railways including representatives of the Council for Coordination, Strategy and Economic Reform, and the Ministries of Transport, Finance, Industry, Labor and Justice; (b) submission of a draft Railway Law to Parliament and signature of a Performance Contract between the Government and SNCFR; (c) first step of reorganization, including the creation of an infrastructure sector, regrouping all activities in this area and introduction of separate accounting for infrastructure activities; (d) staff reduction of about 23,500 persons in 1994, exceeding the targets of 20,000 set for the year; and (e) marshalling yards have been reduced from 27 to 16 in 1992 and further to 9 in 1994. Maintenance depots and other traction operating points have been reduced from a total of 134 to 98. Surveys and counts are being carried out on passenger trains to establish a basis for a revised timetable. Restructuring Action Plan (RAP) 2.24 Operational plans were developed for the various activities of the railways such as track maintenance and rehabilitation; signalling and telecommunications; traction and rolling stock needs and performances, including assets scrapping and disposal; maintenance of traction and rolling  - 12 - stock; integrated railway information system; and human resources including staff reduction and training. These operational plans served as a basis for developing a six-year RAP (Annex 1). 2.25 The RAP sets objectives for all aspects of SNCFR's activity and organization, actions needed to reach these objectives, responsibilities to carry out these actions and their timing and, finally, the operational and financial targets to be reached as a result of the actions specified in the plan. Some of the main targets are: (a) a further staff reduction of about 40,000 from the level reached at the end of 1994; (b) massive scrapping of locomotives (34% of the electric locomotives and 50% of the diesel fleet) and rolling stock (16% of the coaches and 43% of the freight cars); (c) improvement in utilization of traction and rolling stock; and (d) financial targets (working ratio and debt service coverage ratio). The RAP also deals with: (i) environment; (ii) the closing of workshops and other servicing points for traction and rolling stock; (iii) the change in status of lines and stations; and (iv) the modernization of financial management and accounting system. The RAP forms the basis for negotiating a multi-annual Performance Contract between SNCFR and the Government. The Performance Contract, to be updated annually, will govern respective SNCFR and the Government responsibilities and specify operational and financial objectives, staff reductions, public services support. capital contribution for infrastructure and investment plan. At negotiations, the RAP was confirmed (para. 6. l(a)) and it was agreed that the Performance Contract will be updated annually in consultation with the Bank (para 6.1 (b)).  - 13 - III. THE PROJECT A. Objectives 3.1 The objective of the project is to support and deepen the restructuring process which SNCFR and the Government have initiated. The project supports a set of policy measures that are embodied in the new Railway Law, the RAP, and the Performance Contract between SNCFR and the Government as described in paras. 2.22-2.25. B. Description 3.2 The project will only finance investments, which would be required even under pessimistic traffic assumptions and would be in line with the restructuring objectives. They are: (a) Track Renewal and Maintenance on Priority Routes (41 % of project cost) Given SNCFR's difficult financial situation, resulting in backlog of required overhaul, track conditions have deteriorated over the last five years. As a result, train speeds have been reduced (speed restrictions affect some 5,600 track km, about half of the length of main lines), safety is becoming a concern and operating and maintenance costs are increasing. Unless progress is made soon, track condition will become an increasingly serious impediment to all other efforts SNCFR is making to recover its financial and commercial position. The project includes: renewal of over 900 km of priority lines over a period of five years, together with introduction of new technology, improved sleepers and fastening and re-equipment of the rail welding workshops (financed from local funds) and replacement of track maintenance machines together with a catenary tensioning machine financed by the Bank; (b) Integrated Railway Information System (IRIS) (9% of project cost) SNCFR computers are mostly obsolete with little residual value and of little utility due to their insufficient capacities, lack of terminal equipment in operating units and lack of communication circuits in working condition available to the computers. The existing application systems support only a limited set of SNCFR's operation or administrative functions. The project includes an integrated information and network technology in a contemporary architecture and consisting of: (i) central and regional computers; (ii) interfaces to the upgraded telecommunications network; (iii) user equipment (mostly personal computers); (iv) system, data base, program development and application software; (v) expert support and training during introductory stage; and (vi) spares and initial supplies. The freight and passenger information system would cover the entire network and organization of SNCFR in on-line operation. In addition, software will be introduced for track maintenance. A modern financial information system with a business orientation will support SNCFR's reorganized financial and accounting functions. The Bank will finance all hardware and software, including application software related freight and passenger information system, the track maintenance system and the financial information system. Included in the  - 14 - Bank's share of financing would also be the required front-end processors to the upgraded data network and the training of SNCFR staff to take over and operate the new application systems and computers; (c) Telecommunications (12%) and SiLnalling (10%) (22% of project cost) Most existing facilities are technically obsolete and below modern safety standards. Furthermore, the diverse types of equipment complicates maintenance. The project would start solving these problems by: (i) modernization of the telecommunication network to support the IRIS; and (ii) replacement of worn-out equipment on critical network nodes. The Bank will finance the cable (about 1800 km) and digital transmission equipment for the optical fiber backbone network. Signalling, including replacement of equipment at interlocking stations, will be financed by EU-Phare. (d) Environmental Improvement (0.5% of project cost) To improve the environment at priority sites, SNCFR will procure equipment including measurement and controlling instruments, installations for evacuation of residuals and gas filters for oil remaining in depots. This component will be financed by the Bank; (e) Traction and Depots Improvements (10% of project cost) The project includes: (i) major overhaul of locomotives; and (ii) equipment and tools at selected maintenance depots located at the main nodes of the network. These would remain in use after the ongoing rationalization process and would be expected to take the extra work from depots being closed. The overhaul of 20 electric locomotives: 7 diesel-electric and 8 diesel hydraulic locomotives together with two wheel tyre lathes; replacement of existing equipment; and control and testing devices will be financed by EBRD; (f) Rehabilitation of Passenger Coaches and Freight Wagons (16% of project cost) This is necessary for SNCFR to retain its customers in intercity services and special freight and to be able to raise tariffs, reflecting improvements in quality of services. Under this component, which will be financed by EBRD, 160 coaches and 900 wagons will be refurbished; (h) Technical Services (1 % of project cost) To ensure that the objectives of the project are attained, complementary training and equipment will be needed in particular for: SNCFR restructuring process, marketing, finance and accounting, human resources, change management skills and technical and operation. Assistance under the proposed project provides for about 202 staff-months  - 15 - at SNCFR for high, middle management and specialist training estimated to cost about $2.3 million in total (Annex 4, Table 1) to be financed by the Bank and PHARE. C. Cost Estimates 3.3 The total project cost (including contingencies, taxes and duties) is estimated to be about US$383 million equivalent with a foreign exchange component of US$262 million or 68% of the total project cost. Cost estimates were prepared by the SNCFR departments on the basis of quantity estimates from substantially completed engineering, and using unit prices from similar projects under implementation in other countries. A detailed analysis of costs has been made to determine the foreign exchange component and local costs. All project costs have been estimated in US$ on the basis of mid-1995 prices at the exchange rate of 2,000 Lei per I US$. The import duties (15%) and VAT of 18% of total costs have been calculated and added to the local component. About 40% of the local cost consists of taxes and duties. Physical contingencies (from 5% to 10%) have been included to cover possible increases in quantities and price contingencies have been applied to base costs following the Bank's present forecast of international inflation (it is expected that the exchange rate will adjust to the evolution of domestic prices and of external inflation).  - 16 - 3.4 The costs of the project components are given below: PROJECT COST ESTIMATE COST ESTIMATES (US$ M) PROJECT COMPONENTS LOCAL FOREIGN TOTAL FEC (%) A - BANK (IBRD) I. Mechanization of Track maintenance and overhaul works, 46.00 44.00 90.00 49.00 including track renewal on 900 kilometers routes 2. Integrated Railway Information System (IRIS) 8.00 22.00 30.00 73.30 3. Modemization of Telecommunication network (to support 8.20 30.50 38.70 78.80 IRIS) 4. Catenary tensioning machine 0.60 1.60 2.20 72.70 5. Environment - equipment - priority items 0.40 1.00 1.40 71.40 6. Technical Services 0.40 0.60 1.00 60.00 Base Costs 63.60 99.70 163.30 61.00 Contingencies 11.80 20.30 32.10 - TOTAL PROJECT COSTS (A) 75.40 120.00 195.40 61.00 B - EBRD I. Rehabilitation of the traction 5.80 16.10 21.90 74.00 2. Equipment for traction depots 2.70 6.30 9.00 70.00 3. Coach Refurbishment 9.00 29.50 38.50 77.00 4. Wagon Rehabilitation 3.30 8.70 12.00 73.00 Base Costs 20.80 60.60 81.40 74.00 Contingencies 4.20 12.00 16.20 - Total Project Costs (B) 25.00 72.60 97.60 74.00 C - PHARE 1. Replacement of equipment at interlocking stations 6.90 26.00 32.90 79.00 2. Track material 9.60 29.20 38.80 75.00 3. Print Shop 0.30 1.10 1.40 79.00 4. Technical Assistance 0.40 1.70 2.10 81.00 Base Costs 17.20 58.00 75.20 77.00 Contingencies 3.20 11.60 14.80 - Total Project Costs (C) 20.40 69.60 90.00 77.00 GRAND TOTAL BASE COSTS (A+B+C) 101.60 218.30 319.90 68.00 TOTAL CONTINGENCIES 19.20 43.90 63.10 - GRAND TOTAL (A+B+C) 120.80 262.20 383.00 68.00 I/ The local component financed by SNCFR includes: local materials and installations, custom duties (15%) and value added tax (VAT of 18%).  - 17 - D. Financing Plan 3.5 The foreign costs of the project would be financed by the proposed Bank Loan ($120 million), EBRD ($72.6 million) and PHARE ($69.6 million). The EBRD financing package may include suppliers' credit or other co-financing, including from European Union (EU) sources. Local costs are to be funded by SNCFR. The proposed EBRD Loan and PHARE grant are being processed in parallel to this operation and are critical to the financial viability of the project. Hence, a condition of Loan effectiveness is that all conditions for the effectiveness of the EBRD loan (other than that related to the effectiveness of the Bank Loan) have been met (para. 6.2(b)). The only effectiveness condition of EBRD is that the Bank's effectiveness conditions have been met. E. Implementation and Monitoring 3.6 The proposed Bank Loan for US$120.0 million equivalent would be made to SNCFR. The project would be implemented by SNCFR, which would assume direct obligation towards the Bank on the matters under its jurisdiction. A project management team (PMT) has been established. Its members include a Chairman and higher level officials in managerial positions, at least one for each project component, and a procurement specialist familiar with the Bank's procurement procedures and requirements. 3.7 PMT will review and follow-up on procurement procedures and bidding documents, monitor and coordinate every aspect of the project implementation and assemble, in quarterly reports, all project implementation information using the methodology adopted during negotiations. PMT will prepare detailed work schedules, with phasing, critical activities and responsibilities and coordinate project activities. PMT will also be responsible for liaising with and coordinating all the cofinanciers' project tasks and keeping direct contact with their missions. During negotiations, it was reconfirmed that PMT will remain in operation and be satisfactorily staffed throughout the project execution (para. 6.1 (d)). 3.8 The project is scheduled to be completed by June 30, 2001. The project's implementation schedule is shown in Annex 4, Table 5. The proposed Loan would close on December 31, 2001, six months after the project Completion Date of June 30, 2001. Proposed monitoring indicators, including selected targets in the RAP, were agreed with SNCFR and progress will be covered in quarterly reports prepared by PMT. During negotiations, agreement was reached on the project implementation schedule, monitoring criteria, and reporting arrangements (para. 6.1(e) and Annex 4). F. Procurement 3.9 Procurement arrangements for the Bank financed project elements, their estimated costs and proposed methods of procurement are summarized in the Table below and in the Project Implementation Plan, Annex 4, Tables 2 to 5. Procurement for all Bank-financed items would be made in accordance with the Bank's procurement guidelines, including the Bank approved Standard Bidding Document for Goods for Romania. Consulting services would also be procured in accordance with the Guidelines for the Use of Consultants by World Bank borrowers.  - 18 - Procurement Arrangements for the Bank Financed Items" (US$ Million) Procurement Methods Project Elements ICB Other NBF' Total 1. Mechanization of track maintenance and track overhaul 53.0 54.6 107.6 (53.0) (-) (53.0) 26.5 9.5 36.0 2. Integrated Railway Information System (26.5) (-) (26.5) 36.6 9.8 46.4 3. Telecommunications (36.6) (-) (36.6) 2.0 .6 2.6 4. Catenary tensioning machine (2.0) (-) (2.0) 1.2 3' 0.5 1.7 5. Environmental Equipment (1.2) (-) (1.2) 6. Technical Services 0.74' 0.4 1.1 (0.7) (-) (0.7) 118.1 1.9 75.4 195.4 T O T A L (118.1) (1-9) (-) (120.0) Note: 1/ Cost estimates include contingencies and duties and taxes. Figures in parentheses are the respective amounts to be financed by the Bank. 2/ NBF: Not Bank Financed. Includes amounts financed by SNCFR (procurement of material for track overhaul local financed works and taxes). 3/ International Shopping (US$1.2 million) for the environmental equipment anid material. 4/ The selection of consultants, if required for Technical Services and Training, will follow Bank Guidelines. 3.10 Goods. Goods (US$55.0) to be financed from the Bank Loan proceeds would consist of track maintenance heavy and light machines and materials, catenary tensioning machine, light machines and spare parts. These would be procured in eight packages, of which most would exceed US$2.0 million (Annex 4, Table 4), which would encourage supplier interest. There will be a prequalification of bidders for the modernization of the telecommunication network estimated to cost US$36.6 million and for the IRIS to cost US$26.5 million. These two items will be procured in seven packages. There will be no Bank-financed civil works contracts in the project. All contracts estimated to cost the equivalent of US$300,000 or above for materials and equipment would be procured under ICB. Goods manufactured in Romania will be granted a preference of 15 % or related duties, whichever is less, provided that the value added in Romania is more than 20% of the ex- factory bid price of such goods. The environmental equipment, instruments and materials (US$1.2 million) would be procured (for contracts estimated to cost less than US$300,000) through International Shopping based on the comparison of price quotations obtained from at least three suppliers from two eligible countries.  - 19 - 3.11 Consultants' services. Consultants' services envisaged in the project and financed by the Bank would be focused on the SNCFR restructuring process and particularly the restructuring of the financial system including assistance with project implementation and training. Total costs of technical assistance services and training estimated at US$0.7 million will be procured in five packages in accordance with Bank Guidelines. A detailed description of the consultancy services is given in the Project Implementation Plan in Annex 4, Table 1. 3.12 Country Procurement Assessment. A Country Procurement Assessment Report (CPAR) for Romania is under preparation. Laws and regulations regarding local procurement procedures and practices in Romania are being reviewed in the Bank in order to reach judgement as to whether local procedures are acceptable for Bank financed contracts. During negotiations, it was agreed that the Borrower would use the 1995 Bank Procurement Guidelines for all procurement under the project. 3.13 All contracts estimated to cost the equivalent of US$300,000 or more (over 99% of total project cost) would be subject to prior review and approval by the Bank. Other contracts will be reviewed ex-post by supervision missions. All procurement will be done in 23 packages, of which most exceed US$1.0 million (Table 4, Annex 4). Procurement information will be included in the quarterly project progress reports agreed with the Borrower. The Borrower will also promptly inform the Bank regarding procurement plans, solicitations, proposed contract awards and progress in the implementation of their procurement activities. The PMT will be responsible for the procurement processing and will have a procurement specialist familiar with the Bank's procedures. SNCFR staff have gained familiarity with the Bank's procurement procedures, through implementation of the Railway component of the ongoing Transport Project (Loan 3593-RO). During negotiations. agreement was reached with SNCFR on all procurement arrangements, including the list of equipment and materials and the procurement timetable (para. 6.1(f) and Annex 4). G. Disbursements 3.14 The proposed Bank Loan would be disbursed against the project components as follows: Amount Category (US$ Million) % of Expenditures 1. Goods 113.0 100% of foreign, 100% of local (ex- (materials, factory cost) and 80% of local equipment and expenditures for other items procured software) locally. 2. Consultants' 0.7 100% of expenditures. Services 3. Unallocated 6.3 TOTAL 120.0 3.15 Withdrawal applications for contracts above US$300,000 would be fully documented and for contracts valued at US$300,000 equivalent or less would be made on the basis of statements  - 20 - of expenditures (SOE). Documentation to support expenditure financed under SOE would be maintained by the Borrower in one location and made available upon request, for review by Bank representatives in addition to being audited by auditors acceptable to the Bank. During negotiations, agreement was reached on the foregoing arrangements (para. 6.1(y)). 3.16 An estimated schedule of disbursements is given in Table 10. To maintain an adequate flow of funds for eligible project expenditures with a minimum of administrative delay, the Borrower will establish a special account with an authorized allocation of US$7 million at a bank of its choice that is acceptable to the Bank. The initial deposit will be limited to US$2 million, and the additional remaining portion of the allocation will be disbursed when total disbursements have reached US$10 million equivalent. Applications for replenishment of the special account would be submitted on a quarterly basis or when one-third of the amount deposited has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment applications would follow the same procedure as described in para 3.13. In addition, monthly bank statements of the special account which have been reconciled by the Borrower would accompany all replenishment applications. Records of the special account proceeds and outlays would be available for review by the Bank's supervision missions and subject to annual audit. The foregoing arrangements were confirmed during negotiations (para. 6.1(h)). 3.17 SNCFR will establish and maintain project related accounts. Such accounts shall be maintained in accordance with recognized accounting principles and practices satisfactory to the Bank. SNCFR will also provide quarterly reports and annual financial statements to reflect the financial performance and the position of SNCFR and of the project. An independent auditor's opinion and report satisfactory to the Bank on the annual financial statements, should be provided within six months of the close of each fiscal year. The foregoing project accounting, financial reporting, and auditing arrangements should provide adequate and timely information to the Bank for supervision of the project. These arrangements were agreed during negotiations (para. 6.1(i)). H. Proiect Supervision 3.18 A Project Implementation Plan (PIP) has been prepared jointly with SNCFR to ensure a shared understanding of the activities to be carried out and their timing (Annex 4). At negotiations. SNCFR confirmed its commitment to carry out said plan in a timely manner and to review it and adiust it as necessary during the proposed mid-term review (para. 6. 1(j)). In addition to direct monitoring and assistance on day to day matters, which will be provided from the Resident Mission in Romania, three two-week Bank supervision missions per year during the first two to three years of project implementation would be needed to supervise all project activities. Thereafter, this could be reduced to two missions per year. The missions would be staffed by a railway engineer, a financial analyst and an economist, responsible for all engineering, financial and economic aspects of the project. To supervise the IRIS component of the project, an information technology expert should visit Romania about once a year and assist with review of the bidding process at headquarters. A project launch mission will take place soon after Board presentation, to assist with preparation of procurement documentation and help resolve any pending issues. A mid-term review will be conducted in 1998; its scope was agreed at negotiations on the basis of the outline provided in Annex 4 (para. 6. 1(j)). In sum, proposed project supervision from headquarters would require about 20 staff weeks from FY96 to FY2001.  - 21 - I. Environment 3.19 The project has been classified as "B" for purpose of O.D. 4.01 on Environmental Assessment, meaning that only a limited environment review is required. A preliminary environmental review was carried out during project preparation to identify benefits, examine potential negative impacts and propose mitigation measures where needed (Annex 3). The appraisal team concluded that the type of rehabilitation and maintenance envisaged for the project would have relatively minor effects largely limited to the area of the railroad itself. Railway rehabilitation would improve the competitiveness of the railway versus its main competitor, automobile transport, and would bring overall environmental benefits. No resettlement issues have been identified. 3.20 The proposed railway restructuring would eliminate inefficient activities, and reduce the number of lines and stations in operation. The environmental consequences of lines/stations closures (e.g. polluted loading and unloading areas, abandoned underground and above ground storage tanks used for hazardous chemicals, transformers and other facilities, waste disposal areas) should be subject to environmental auditing. A draft Environmental Law, currently in Parliament, is expected to impose auditing requirements to restructuring operations. Until this Law is approved, restructuring activities with expected environmental impacts should be reviewed by authorized joint teams of the Regional Environmental Branches and the railways or by representatives of the Ministry of Waters, Forest and Environment, depending on the scale of any operation. 3.21 Normal concerns for railways such as disposal of waste (including oil), cleaning of tank settlements, water treatment, use of chemicals for track maintenance, and transport of hazardous materials are covered by the national environmental legislation and regulations, and mitigation measures are in place in SNCFR's practice. Since 1991, SNCFR has been taking steps to improve environmental protection management. Environmental expert positions were created in the central administration and in the regions. A total of 400 SNCFR's staff are currently employed in environmental protection activities, including car hygiene and landscape maintenance. However, there are still problems exist, resulting from past neglect, current financial difficulties and weak enforcement of environmental standards and regulations. Among those are: (i) rapidly deteriorating equipment in hygiene stations; (ii) shortage of chemicals for car cleaning and track maintenance; (iii) outdated waste water treatment facilities in some depots and maintenance stations; (iv) insufficient distribution of safety instructions and procedures for operations involving hazard to human health; and (v) operational staff negligence to environmental protection requirements. 3.22 During negotiations, assurances were obtained from the Government and SNCFR that they will take the following steps to improve the environmental conditions of rail operations as included in the RAP (para 6. 1(k)). (i) Environment Management Capacity Building. The environmental specialist position in the central administration would be clearly defined in detailed Terms of Reference; training would be provided; and proper documentation and communications among the departments established; and  - 22 - (ii) Setting Environmental Priorities. An environmental performance review for SNCFR would be prepared and decision made for targeted use of funds according to the identified priorities on the basis of environmental, economic, and financial considerations. The project includes financing of environmental equipment to address priority areas for environmental improvement.  - 23 - IV. FINANCE A. Background 4.1 The Financial Organization of SNCFR matches the current organizational structure, with each of the nine regions preparing separate financial accounts, which are then consolidated at the Headquarters. In the past, the focus of the Finance Department in the Headquarters has been on consolidation of information, control of funds and preparation of financial reports. Cash is collected at the local level and then transferred via local bank accounts to the Headquarters. In turn, the Headquarters transfers funds to the regions to cover outstanding liabilities and payroll. The highly centralized cash system results in delays, lack of flexibility and autonomy at the regional level. The lack of financial authority also results in the absence of accountability at the local level. 4.2 The new Railway Law, recently submitted to Parliament, will allow SNCFR to operate as a commercial enterprise with financial autonomy, accountable for performance levels agreed to in a Performance Contract signed by the Government and SNCFR. The Law will give SNCFR greater freedom in setting its tariffs. In particular, the Law would allow SNCFR to negotiate with its customers appropriate freight tariffs based on market conditions. Regarding passenger tariffs, consultation with the Government would still be required. However, if adequate increases to cover costs are not granted, the Government would have to compensate SNCFR for the revenue shortfall it imposes on the railway. The Law also states that the Government will contribute to the cost of infrastructure and SNCFR will be charged a rail user fee which would be in line with the general principles of the EU Directive on Railways. 4.3 The RAP includes the reorganization of SNCFR into five autonomous business sectors. The financial organization and accounting systems will be revised to match the new organization. As a first step, SNCFR plans to separate infrastructure and operation costs. The reorganization of SNCFR into business and profit centers will allow better financial management. 4.4 Accounting. SNCFR's accounting policies are in line with legal requirements in Romania. The features of the accounting system can be summarized as follows: - standardized across all R6gies Autonomes and throughout SNCFR; - principally manual based resulting in difficulties in carrying out meaningful financial analysis; - revenues and costs are not split according to services; - capital overhauls booked as direct operating costs; and - inadequate revaluation of fixed assets to reflect inflation results in under calculation of depreciation expense which is based on Government directives rather than on accepted accounting criteria. At the same time, the value of assets are overstated to the extent that they include significant amount of assets that are obsolete and only have scrap value.  - 24 - 4.5 The lack of a good cost accounting system makes it difficult for SNCFR to apportion costs across different activities. A study, carried out under Phase IV of the Railway Restructuring Contract (financed under the TACI project - Loan 3363-RO) with DE-Consult (Germany), provides the basis for separation of operation and infrastructure accounts. It also establishes the methodology of cost allocation for various activities matching the proposed new organizational structure. SNCFR plans to introduce a computerized costing and financial management system. This new system will be linked to IRIS to be financed under this project. 4.6 Audit. Until 1995, SNCFR had no external audit of its financial statements and internal audits largely focused on random checks in locations where cash was collected. Under its obligations for Loan 3593-RO, SNCFR has engaged external auditors to carry out an audit of its accounts for 1994. External audits by independent auditors will continue to be carried out through the course of this project. At negotiations, it was confirmed that audits of financial statements including project related accounts, the special account. SOEs and compliance against Loan covenants will be carried out by independent external auditors and that the audit reports should be available to SNCFR management and sent to the Bank within six months of the close of each fiscal year. (para 6.1 (c)) B. Recent Financial Performance 4.7 Financial Results. Prior to 1989, SNCFR was profitable since most of the freight and passenger traffic was directed to the railway. As a result of reduced traffic and rising costs, SNCFR began making operational losses. The net deficit, after depreciation and interest charges, was Lei 42.6 billion (US$138 million) in 1992, Lei 89.3 billion (US$126 million) in 1993, and Lei 420 billion (US$ 250 million) in 1994. The situation is improving in 1995, with an expected deficit around US$215 million. 4.8 Costs. Operating cost in SNCFR declined by 19.6% in constant terms between 1991 and 1993, as a result of a 10% reduction in the number of staff between 1991 and 1993 and energy cost savings resulting from reduced traffic and operations. However, the decline in costs is only half the decline in revenues of 42% in constant terms during the years 1991 to 1993, resulting from reduced traffic and on account of tariff policy. 4.9 Tariffs. Over the period 1989 to 1993, freight tariffs increased 150 fold, well above inflation for the period, as prices increased about 55 fold on average. Tariffs for passenger services were increased 42 fold since 1989, and did not keep abreast with inflation. Revenues from freight services cover 160% of cost and cross-subsidize passenger services which cover only 34% of direct costs. Since December 1993, there was no increase in tariffs till May 1995, although inflation for the year 1994 was 62%. In May 1995, freight tariffs were increased by 18% and passenger tariffs by 30% to 200% depending upon the type and class of service. Through reclassification of commodities and passenger trains and services, the average freight revenue increased 30% and the average passenger revenue almost 90%. 4.10 Government Contribution to operations have declined from US$43 million in 1991 to US$22 million in 1992, and nil in 1993. In 1994, the Government compensated SNCFR for subsidized tickets to retired persons and students. The large part of the Government's contribution in the past has been towards capital overhaul of rail infrastructure. SNCFR includes the cost of capital  - 25 - overhaul in its direct operating costs, according to current accounting practices in Romania. The costs booked for capital overhaul depends, in part, on the budgetary resources available to carry out such investment. Support from the Government for capital overhaul was US$128 million in 1991, US$35 million in 1992, US$41 million in 1993, and US$155 million in 1994. These amounts have not been adequate to address the backlog of capital overhaul that has accumulated over the past several years. The total amount of Government's contributions to SNCFR in 1994 and 1995 is about 0.6% of GNP, and is consistent with the fiscal targets agreed with the International Monetary Fund (IMF). 4.11 Accounts Receivable. SNCFR has been able to reduce accounts receivable from two months of sales in 1993 to 1.6 months of sales equivalent to US$71 million in 1994. Of the US$71 million, about US$25 million are from foreign railways including the former Yugoslav railways. Since there is no approved accounting policy on write off of doubtful receivables, these amounts continue to be carried on SNCFR books. Under the Financial and Enterprise Sector Adjustment Loan (FESAL), the Governrnent and Regie Autonomes, including SNCFR, have agreed on a policy on writing off and/or rescheduling doubtful receivables. Of the remaining US$50 million of accounts receivable, about half are receivables from other Regie Autonomes. SNCFR has stepped up efforts to use aggressive collection measures such as refusal to release wagons unless past dues have been paid. Such measures are expected to result in a reduction in accounts receivable which is part of the FESAL loan conditionality. 4.12 Accounts Payable. SNCFR makes a distinction between payables to the Government and to others. Payables to domestic suppliers, contractors and foreign railways is equivalent to 2.9 months of energy costs or US$47.3 million in 1994. The tight cash flow position of SNCFR in 1994 has decreased its ability to pay suppliers, contractors and foreign railways on time. SNCFR also owes US$79 million equivalent to the Government for social security payments and taxes on salaries. SNCFR is negotiating with the Government to reduce these payables to half, with a commitment to pay the remaining half over a mutually agreed period of time. 4.13 Debt Service Obligations of SNCFR in 1994 was close to US$21 million. The outstanding long-term debt as of 1994 is a total of US$96 million equivalent, comprising a Deutsche Mark loan of US$75 million, and a Bank Loan of US$20 million under the Transport Project (Loan 3593-RO), as well as US$1.2 million to the Bank under the Technical Assistance and Critical Imports Project (Loan 3363-RO). C. Financial Forecasts 4.14 The financial forecasts, presented in Annex 2 (Table 1) are based on the operational targets and staffing levels of the agreed RAP. The level of freight traffic and passenger traffic estimated for 1995 is expected to remain constant in future years. 4.15 Future Tariff increases for freight and passenger services are projected at the levels given in the Financial Recovery Plan (FRP) of SNCFR, which has been approved by the Government and forms part of the FESAL loan agreement. Real increases in freight tariffs are projected only for 1996, after which freight tariffs are kept constant in real terms. SNCFR plans to increase base tariffs for passenger services in real terms, so that they will cover about 80% of passenger service costs before 2000.  - 26 - 4.16 Other revenue sources. SNCFR has many assets which have a potential commercial value. In particular, the RAP indicates the surplus of motive power and rolling stock. SNCFR plans to prepare all available scrap in the system for sale. Options for leasing and selling assets within legally authorized means are being developed by SNCFR. If the domestic steel industry cannot absorb all the scrap generated, SNCFR will explore options for sale of scrap abroad. Revenue generation through sale of scrapped wagons and locomotives is estimated at about US$ 78 million. This amount has been included in the financial projections, spread over the years 1996 to 1998. 4.17 Government Contribution. Once passenger tariffs have been increased in real terms to cover costs of these services, there should be no contribution from the Government for operations, except for those services which the Government would like SNCFR to continue under public service obligation contracts. The level of Government capital contribution for infrastructure will determine the level of expenditure on capital overhauls. Since SNCFR has a huge backlog of maintenance, the financial projections assume Government capital contribution starting at US$150 million in 1995 and declining to US$100 million in 2000. At present, these figures are consistent with the macro economic targets agreed with the IMF, and roughly amount to 2.8% of the public sector's investment budget. If the projected amounts are not allocated to SNCFR due to budgetary constraints, the planned external overhaul will be deferred accordingly. SNCFR's budget, including the level of Government's contribution, would be reviewed annually together with the Performance Contract (paras. 2.25 and 6.1(b)). 4.18 Operating Costs. In the financial projections, total operating costs are expected to decline by about 3% in constant terms each year. This reflects a reduction in the number of staff but also includes an increase in wages per employee since the type of staff required will be better trained and qualified. Energy costs are also expected to fall each year. Anticipated real price increases for fuel will be contained through efficiency improvements. 4.19 Arrears. The financial forecasts target a reduction in accounts receivable from 1.6- months of sales in 1994 to one-month of sales by 2000, by stepping up collection efforts. SNCFR plans to reduce total accounts payable from 2.9 months of energy and material costs to 1.6 months of energy and material costs by 2000. These targets are incorporated in the financial forecasts presented in Annex 2 (Tables 1-2) and are consistent with the FESAL requirements. 4.20 Financial Targets. Based on the above described assumptions on tariff increases, traffic levels, and Government contributions for capital overhaul, the financial performance of SNCFR is expected to progressively improve throughout the life of the project. The financial targets included in the RAP and confirmed at negotiations are: (a) working ratio not to exceed 1.2 in 1996, 1. 1 in 1997 and 1988, and 1.0 from 1999 onwards; and (b) debt service coverage ratio of 1.1 or higher in 1996, 1.2 or higher from 1997 to 1998, and 1.5 or higher from 1999 onwards. SNCFR will not incur any additional debts without prior Bank concurrence if the debt service coverage ratio falls below 1.5. As a condition of Loan effectiveness, the Borrower will provide to the Bank satisfactory evidence that measures have been taken allowing the Borrower to achieve the working ratio for 1996 specified in the RAP. 4.21 Sensitivity Analysis has been carried out based on the following: (i) a decline in passenger traffic by 10% from the base case; (ii) no real increases in tariffs in 1996; (iii) a reduction in operating costs by 5% per year in constant terms; and (iv) a reduction in Government's  - 27 - contribution for overhaul of infrastructure by half from the assumed level in base case; (v) and no reduction in operating costs (salaries, energy, operation and maintenance) each year. As indicated in Annex 2, in cases more unfavorable than the base case, SNCFR would have to adjust the amount of capital overhaul to reduce costs. If traffic declines from the levels assumed in the base case, SNCFR would probably need to further deepen its downsizing program. Such actions would be considered during supervision and discussed in detail at the proposed mid-term review (para 3.18).  - 28 - V. ECONOMIC EVALUATION 5.1 With the traffic shortfall experienced over the last few years, SNCFR has excess capacity but, due to years of skimping on maintenance and renewal, the quality and efficiency of services have deteriorated. As a result, operating and maintenance costs are high. Project components are directed to the rehabilitation of various parts of the system, such as track, telecommunications, signalling, motive power, rolling stock and workshops. There are no capacity increasing investments. Benefits of the project will be cost savings, improved safety and quality of service. The better balance between costs and revenues, which would result from implementation of the RAP and the project, is expected to reduce the fiscal burden of SNCFR on the Government's budget. Track Renewal and Maintenance on Priority Lines 5.2 This is the largest component, accounting for about 40% of total project cost. It includes track renewal on major routes as well as plant and equipment for track maintenance. The proposed project focuses on selected track renewal on major lines, all on the European network, which are also the main priority rail routes in Romania and have a total length of about 6,100 track km or about 30% of the total network. Track renewal and medium range maintenance are already overdue on much of this network, considering the two standard criteria of accumulated gross ton- kilometers and the number of years since the last major maintenance investment. Because regular maintenance has also been curtailed, and poor quality materials were used in previous rehabilitation work, nearly half (2700 km) the total length of these priority lines are currently subject to speed restrictions due to track condition. Priority sections for renewal (about 900 km) have been identified on the basis of a thorough analysis of track conditions and importance of the traffic. 5.3 Poor track condition causes SNCFR serious problems: (a) speed restrictions must be imposed and these mean that a larger fleet of locomotives and other rolling stock is required to carry a given volume of traffic; (b) in some cases additional restrictions on permissible axles loadings are necessary; (c) sub-standard track condition increases the cost of maintaining locomotives and rolling stock; (d) many passenger services now take a longer time than competitive bus services could offer on the same route and this, together with passenger discomfort, reduces the attractiveness of the railway and will exacerbate the loss of traffic to road; (e) inadequate track maintenance increases the risk of derailments which carry a heavy penalty in terms of operation disruption, and can result in damage to the environment or, in a worst case, death and injury; and (f) when timely track maintenance is not undertaken, the subsequent cost of bringing the track back to its normal operating condition increases substantially. Furthermore, the accumulated backlog of track maintenance becomes an increasingly significant burden - both financial and operational - on SNCFR. 5.4 Benefits. Restoring the track to its normal operating condition would give rise to benefits which would result from: - reduced overhaul and maintenance costs, including future maintenance costs; - removal of speed restrictions; - reduced maintenance cost of traction and rolling stock; and - reduced incidence of derailments.  - 29 - 5.5 The evaluation period is taken as 20 years. Traffic on the 15 lines to be improved under the project is estimated to comprise 25 % of total traffic. Based on the above, the internal economic rate of return (ERR) of the investment in track renewal and track maintenance equipment is about 30%. Detailed analysis of the benefits and calculations are presented in the Project File. Integrated Railway Information System (IRIS) 5.6 The introduction of improved management information system would bring the following benefits: reduce expenditures on foreign wagons used in Romania and better control of domestic freight cars; reducing their empty running; and better control of sales of passenger tickets, which combined with improved financial management, will improve cash flow management and result in reduced interest costs. The ERR for this component is estimated at 52%. Modernization of the Telecommunications Network 5.7 The modernization of telecommunications is a condition for improving the management of the railways and the successful implementation of the IRIS and for supporting the renewal of certain signalling systems. The main benefits will be savings in maintenance costs of the existing overage system and expected revenues from non-railway users. The ERR is estimated at 27%. Alternative technologies have been considered, including the replacement of existing cables with similar copper cables technology. Lately, fiber optic cables have become available at one fifth of the cost of traditional copper cables and this solution has been retained for the project. Excess capacity will be leased to other large users such as Banks and tourist organizations. Even if such leasing is delayed the ERR will remain acceptable. Risks 5.8 Given the political uncertainties in Romania, there is a risk that some of the more difficult decisions embodied in the RAP regarding staff reductions and tariff increases will be delayed. There is also a risk for further shift of traffic away from rail if SNCFR does not improve its commercial orientation and compete for traffic with private truckers. The measures taken up-front (para. 2.23) have been very significant and indicate that SNCFR and the Government are committed to restructuring. The proposed mid-term review (para. 3.18) would provide an opportunity to assess the situation and recommend any additional measures or changes in the project that may be required. The physical components do not pose significant risks, since all investments are for rehabilitation of the core components of the system which would have high priority under any restructuring scenario.  - 30 - 5.9 The sensitivity of the various project components to variations in cost and benefits is summarized below: ERRs (%) Component: Track IRIS Telecom. Renewal and Maintenance Best Estimate 30% 52% 27% Costs + 20% 24% 35% 19% Benefits delayed by 1 year 23% 31% 23% Benefits (traffic levels) - 20% 1' 23% 31% 23% Costs + 20% and Benefits - 20% 18% 16% 16% 1/ Since most benefits are directly linked to traffic levels, a reduction in benefits is equivalent to a commensurate reduction of traffic levels from those used in the best estimate.  - 31 - VI. AGREEMENTS AND RECOMMENDATIONS 6.1 During negotiations, agreements were confirmed on the following: - with SNCFR and the Government on: (a) draft Performance Contract and RAP (para. 2.25 and Annex 1); (b) carrying out annual reviews of the Performance Contract, in consultation with the Bank, including SNCFR and Government actions necessary for the subsequent year in order to achieve the objectives of the RAP (paras. 2.25 and 4.17); - with SNCFR on: (c) auditing of SNCFR's financial statements by independent auditors and submitting audit reports acceptable to the Bank, six months after the close of the year (para. 4.6); (d) continuation throughout project implementation of a satisfactorily staffed Project Management Team (para. 3.7); (e) the implementation schedule, monitoring indicators, and reporting procedures including preparation of the Implementation Completion Report for the project (para. 3.8); (f) the procurement procedures (para. 3.13); (g) the documentation supporting expenditures financed under SOEs and its annual auditing by independent auditors (para. 3.15); (h) the procedures for the special account and its annual auditing by independent auditors (para. 3.16); (i) the establishment and maintenance of project related accounts and their annual auditing by independent auditors (para. 3.17); (j) a project implementation plan and a mid-term review (para. 3.18 and Annex 4); and (k) measures needed to improve the environmental conditions of rail operations (para. 3.22 and Annex 3).  - 32 - 6.2 The following are conditions of Loan effectiveness: (a) that the Borrower (SNCFR) shall have provided to the Bank satisfactory evidence that measures have been taken allowing the Borrower to achieve the working ratio for 1996 specified in the RAP; and (b) that all the effectiveness conditions of the EBRD loan (other than those related to the effectiveness of the Bank Loan) have been met (para.3.5). 6.3 With the above assurances and conditions, the project would be suitable for a Bank Loan of US$120 million equivalent to SNCFR, with the guarantee of Romania, for a 20-year term including a five-year grace period.  - 33 - ROMANIA RAILWAY REHABILITATION PROJECT Table of Contents ANNEXES: 1. SNCFR Restructuring Action Plan (1995-2000) 2. Financial Projections and Sensitivity Analysis 3. Environmental Review 4. Project Implementation Plan 5. Selected Documents Available in Project File TABLES: 1. Freight Traffic by Mode of Transport (1960-1994) 2. Passenger Traffic by Mode of Transport (1960-1994) 3. Transport Sector Investment (1976-1994) 4. Romanian Railway Operational Indicators (1986-1994) 5. Passenger Traffic: Actual (1987-94) and Projections (1995-2000) 6. Freight Traffic: Actual (1987-1994) and Projections (1995-2000) 7. SNCFR's Actual Investments (1989-93) and Planned (1995-2000) 8. Track Renewal of Priority Routes 9. Modernization of Signalling and Telecommunications (1995-2000) 10. Estimated Schedule of Disbursements CHARTS: 1. Ministry of Transport Organization 2. Romanian State Railways Organization - Current 3. Romanian State Railways Organization - After Reorganization MAP: IBRD 26473 - Romania - Railway Rehabilitation Project m:\ag\rom\railway\sar\annexes   Annex 1 Page 1 of 12 R O M A N I A RAILWAY REHABILITATION PROJECT 1995-2000 SNCFR Restructuring Action Plan (RAP) NO. OBJECTIVES/ISSUES ACTIONS RESPONSIBILITIES TIMETABLE FOR ACTIONS 1 2 3 4 5 A. Institutional Main Obiective: The creation of an institutional framework within which SNCFR can pursue its commercial objectives alongside its responsibilities under a public service obligation. 1. To operate a business orented SNCFR a new To draft and President of By end 1995. railways law should be adopted covering operation submit to SNCFR, President in a commercial manner, including freedom to set Parliament the of Board, MOT, tariff: content and requirement of Public Service Railway Law MOF, and the Obligation (PSO) and GOR financial support for Government' infrastructure and promoting private sector involvement. 2. To identify and agree with GOR, SNCFR's To prepare, adopt SNCFR, MOT, Signature by performance and expected GOR support for a 3-5 and implement the MOF and others Government year period as mentioned by the law. Performance credrtor and SNCFR by Contract organizations end 1995 and Implementation thereafter. 3. To strengthen railway safety inspectorate. To decide on MOT and SNCFR Completed responsibilities, December appoint and 1994. monitor. B. Organization and Management Main Obiective: To create and operate a business oriented structure, with effective relationships with government and customers and a management style encouraging responsibility, initiative and decisions at the lowest effective levels and producing business and related investment plans giving satisfactory financial results.  - 35 - Annex I Page 2 of 12 NO. OBJECTIVES/ISSUES ACTIONS RESPONSIBILITIES TIMETABLE FOR ACTIONS 2 3 4 5 t. Implement Restructurino Proposals Consider, adopt, Board of SNCFR New Organiza- a. Finalize an organization structure along appoint, develop President and VPs tion Structure business lines with timetable for implementation and implement. of SNCFR and implemented including: Departmental December Managers (DM). 1994. (i) Separations of account of infrastructure from the First separate To be prepared other SNCFR's accounts profits and loss for the financial statement year 1995. (ii) Internal reorganization of SNCFR ensuring rail infrastructure to be established as a separate cost center (iii) Reorganization of SNCFR for Business Management: Stage 1: Implementation by end 1994 of the followina business centers ImpLemented - Infrastructure December - Traffic Operations 1994. - Freight - Passenger - Mechanical Stage 2: Imrlementation by mid 1996 of the Implementation following structures: by mid-1996. - Infrastructure - Freight - Passenger - Mechanical Engineering - Assets' Management b. Allocate sub-un'is within the structure. c. Appoint key staff and establish management contracts d. Develop management skills e. Develop MIS (with all departments) f. Provide an economic analysis capacity 9. Identify objectives for each department. h. Create 'Change Management team i. Establishment of a consumer protection system 2. Prepare the first 1996-2000 operational and financial Prepare, adopt and Board, President, Adopted by targets. implement VP and all end 1995 and departments of implementation SNCFR thereafter. 3. Reshape the network including change the status of Prepare, Board, President, Implementation lines, yards, and stations. Business activities of implement and VP and all started 1995. SNCFR to meet its new role and objectives, progress departments of Ongoing task. I continuously. SNCFR  Annex I - 36 - Page 3 of 12 NO. OBJECTIVES/ISSUES ACTIONS RESPONSIBILITIES TIMETABLE FOR ACTIONS 2 3 4 5 4. Develop, separate and eventually involve the private Identify SNCFR, raiiway During 1995- sector in ancillary and support activities. opportunities and industry, MOT and 2000 period. implementation. other ministries 5. Implement external and internal audit procedures. Consider and Finance department - Auditors implement in lead, cooperation appointed in procedures. with all departments April 1995; of SNCFR - First audit for 1994 by end 1995 and annually thereafter. 6. Pursue Improvements in Railway safety. On-going Monitoring by On-going task. awareness of President and all requirements. departments of SNCFR C. Ooerations Main Objective: Become aware of the transport market in Romania and based on the strengths and weaknesses of railways, identify the opportunities open. Select and develop specific freight and passenger traffic flows to maximize SNCFR's market advantage in terms of volume, net revenue and important customers. Devise and operate railway services to meet these requirements with efficiency, economy and safety. Freight Traffic 1. Examine the characteristics of existing SNCFR Study and President, VPs and On-going task. freight flows and identify those which can be implement the all departments developed as trainloads, block loads, container results. involved. services and wagon load. Timetable improvement. a. Develop cost structure methodology for each Study. SNCFR with Methodology category of service and flow including the technical by end 1995 appropriate market pricing. assistance. and continuous refining and implementation b. Identify the necessary reciprocal action plan by Marketing & On-going. customers associated with each traffic flow to Operation Dept. achieve mutual benefits and implement the action. 2. Introduce combined transport service. Study and President, VPs and The services negotiate with all departments already started customers, identify involved. and to be private sector continued interest to invest. during 1995. 3. Further improve the train plans (timetable) to Introduce more Operation, On-going task maximize fleet efficiency/productivity, including productive working Marketing, Traction beginning from changes in the format of the public timetable book diagram for and Rolling Stock 1995 schedule traction, rolling Departments. and to be stock and crew. continued thereafter.  Annex 1 - 37 - Page4of 12 NO. OBJECTIVES/ISSUES ACTIONS RESPONSIBILITIES TIMETABLE l_____________ FOR ACTIONS 2 3 4 5 4. a. Assess effects of changing status of marshalling Continuous review President, VPs and On-going task. yards, stations, terminals, branch lines, route and permanent responsible infrastructure facilities and determine future actions. departments. shape of the network to meet commercial and operational objectives. b. Effect resulting rationalization of staff from infrastructure, yards, depots, stations by number and quality, on professional competence and performance criteria Passenger Service 5. Analyze the countrys passenger market, identifying Market research President, VPs The study competition, costs, and price, obtaining details for including external research, carried out in bus, air and private car travel. In addition, segregate needs. marketing, 1995 and the market into two categories: operation, and applied in 1996 a. intercity - financially self-supporting commercial timetable, b. suburban and regional under Public Service departments. further on- Obligation Contracts going task. 6. Examine present SNCFR passenger business Research and on- President, VPs and The study including train loading, flows at all stations, service going related carried out in pattern, frequencies and quality and identify improvement. departments. 1995 and resources needed for better quality of service. applied in 1996 Timetable, further on- going task. 7. Increase in operating efficiency by 25% Realize all agreed President, VPs and Up to end of operational targets related departments 1998 0. Marketina Main Obiective: Identify the opportunities open for SNCFR and achieve fullest market shares through plans for each segment, major flow and important customer by maximizing mutual advantages. 1. Establish marketing structure, including its Review, implement President, VPs and Establish objectives, procedures, methodologies, posts, and educate staff other responsible structure by appoint and train staff. (and customers). departments. end 1995 2. Prepare a Business Plan for each market segment, Study work and President, VPs and Study by end commodity type and passenger group, key freight apply. related of 1995 and customers and passenger markets and maintain departments. update constructive relationships with major customers. continuously. 3. Prepare and administer tariff autonomy system and Continuous MOT, Board, On-going task. pricing policies reflecting cost recovery, commercial actions. President, all principles such as offering discounts and contracts related departments and major customers. E. Infrastructure Main Obiective: Maintain and develop track structure, signalling and telecommunications and electric traction systems and maintenance facilities to meet the capacity, quality, and reliability  ~ 38 - Annex 1 Page 5 of 12 NO. OBJECTIVES/ISSUES ACTIONS RESPONSIBILITIES TIMETABLE FOR ACTIONS 2 3 4 5 (a) Civil Engineering 1. Prepare 1995-2000 Operational Plan for the Track Study, MOT, President, VP Study by end maintenance improvement including track machinery procurement, and and Track 1995 and and tools, introduction of new technology, high implementation. Department and implementation quality rails, fastening and a new sleeper. unts thereafter. (i) the infrastructure will be improved to ensure Plan updated maximum transport speed of 160-200 km/h for one annually. of the main lines with high traffic density and up to 160 km/h on other main lines. (ii) to improve traffic flow, there will be modernized the Ongoing task. border railway points (b) Signalling and Telecommunications 2. Prepare 1995-2000 Operational Plan, including the Study, obtain President, VP Study by end development of signalling regulations (based on UIC equipment and Installation 1995, and standards); extending safety system, replacement of implementahon. Department, implementation out-dated signalling system, finishing uncompleted together with thereafter. but essential projects and development of Operation, communication system Marketing, Traction Plan updated and Rolling Stock, annually. Finance and Accounting Departments. 3. Introduce the Integrated Railway Information System Study work - Board, President, Operational (IRIS) consisting of sub-systems: prepare an VP EDM and Plan by end operational plan, Installation in 1995 and a. Sales Marketing provide supply, cooperation with all implementation installation and departments. thereafter. b. Traffic Operations testing works. Plan updated c. Maintenance and Repairs annually. d. Human Resources e. Financial and Accounting (c) Overhead Contact Lines (OCL) 4. Prepare 1995-2000 Operational Plan including: Study work and President, VP, Operational implementation. Installation Plan by end a assessment of rehabilitation needs and Department with 1995 and installation of material and equipment; Traction, Rolling implementation Stock, Operation thereafter. b develop technical competence and ensure and Marketing infrastructure management. Departments. Plan updated annually. (d) Station. Yards. lines and services closures Plan 5. Preoare 1995-2000 Plan of Station, yards economic Study work and lines and service closures implementation  - 39- Annex I Page 6 of 12 NO. OBJECTIVES/ISSUES ACTIONS RESPONSIBILITIES TIMETABLE FOR ACTIONS 2 3 4 5 (e) Workshops 6. Separate and develop workshops for all Study work and MOT, Board, Study by end infrastructure facilities to facilitate private sector implementation President, VP and 1995 and progressive involvement related .implementation departments. thereafter. F. Traction and Rolling Stock Main Obiective: Provide, maintain and develop/scrap locomotives, wagons, coaches, multiple units and maintenance facilities needed to meet the capacity, - quality and reliability. 1. Establish and adopt 1995-2000 Operational Plans for Study work and President, VP, The Plan by Traction and Rolling Stock Fleet, to ensure SNCFR's implementation of Traction and end 1995, commercial competence and competitive the adopted Rolling Stock, implementation development by undertaking the following measures: measures. departments with thereafter. other related departments. Plan updated (a) sizing of the fleet in accordance with traffic annually. demand; (b) improving the efficiency of motive power and Starting with rolling stock utilization so as to achieve the 1996 timetable. targets agreed in the Attachment hereto. Such measures shall include the following: (i) Improvement of locomotive activities planning and personnel roistering, systematic checking the rosters; (ii) Systematic checking and shortening the time provided for the preparation and end- of-shift duties; (iii) Improvement of locomotive control methods; launching of quality standards and control programs; (iv) Improvement of the fleet maintenance efficiency; Starting in 1996 (v) Refurbishing rolling stock and electric and completing locomotives together with modernization of up to 1998. diesel electric locomotives and to meet customers expectations (vi) Execution of an urgent procurement program of spare parts for diesel-electric and electric locomotives and test equipment for workshops and depots.  Annex I 40 Page 7 of 12 NO. OBJECTIVES/ISSUES ACTIONS RESPONSIBILITIES TIMETABLE FOR ACTIONS 1 2 3 4 5 2. Prepare 1995-2000 Operational Plan for traction and Study and President, VP, The Plan by rolling stock maintenance taking into account: implementation Traction and end 1995 and Rolling Stock implementation (a) rationalization and reduction depot and shed departments, with thereafter. pattern and number to reflect cost reduction and depots and productivity improvement workshops. Plan updated annually. (b) the on-going changes in maintenance methods and service specifications including introduction of the Part exchange system; (c) improving technical facilities at remaining depots; (d) Provide in SNCFR or contracting out of the Contracting. President and VP By end 1996 railways cleaning of passenger coaches and improvements in station cleanliness, provision of information and specific changes to Bucuresti Gara de Nord G. Human Resources Main Obiective: Provide and maintain a quality of highly motivated and well-trained staff with skills, capacity standards and productivity consistent with the market I requirements. 1. Prepare 1995-2000 Human Resources Development Prepare, review Board, President, The Plan by Plan, including staff reduction through retirement, and operate Plan. Trade Unions and end 1995 and attrition, severance payments and other personnel all departments. implementation developments (appraisals, promotions, career thereafter. development, discipline and retraining) Plan updated annually. 2. Identify training needs of SNCFR by preparing 1995- Prepare, review Board, President, The Plan by 2000 Training Program. and implement. VP and all end 1995 and departments. implementation thereafter. Plan updated .___ __ __ _ _ _annually. H. Investments Main Objective: Define the investment proposal commensurate with resources, based on the best possible justification for each project, place in priority order and implement those investments which will ensure the survival of SNCFR and bring the physical assets back to a condition which is safe and reliable and will enable SNCFR to meet its commercial objectives. 1. Develop and pursue the 1995-2000 Investment Plan Technical MOT, Board, The Plan by of the high priorities components based on the preparation, President and end 1995, criteria mentioned above which will provide safety acquisition and related thereafter and better performance, support restructuring, implementation. departments. updated reduce costs and improve market competitiveness in annually. the future.  - 41 - Annex I Page 8 of 12 NO. OBJECTIVES/ISSUES ACTIONS RESPONSIBIUTIES TIMETABLE FOR ACTIONS 2 3 4 5 2. Obtain funds from all possible sources - 1995-2000 Continuous acton MOF, MOT, The Plan by Financial Plan based on debt service capability. with Government SNCFR end 1995, and other creditor thereafter an ._____ _____ ______ _____ ______ _____ ______ ___ _ organizations on-going task. I. Finance Main Obiective: Provide a financial management service. Cor.struct, coordinate and monitor annual budgets and investment plans sources consistent with the commercial objectives of SNCFR and the performance obligations o