Argentina - Buenos Aires Urban Transport Project

Document of The World Bank ReportNo. 15951 AR STAFF APPRAISAL REPORT ARGENTINA BUENOS AIRES URBAN TRANSPORT PROJECT April 11, 1997 Infrastructure and Urban Development Division Country Department I Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS Currency Unit = Peso US$1 = 1 Peso WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS AMBA - Buenos Aires Metropolitan Area (Area Metropolitana de Buenos Aires) ATAM - Metropolitan Area Transport Authority (Autoridad de Transporte del Area Metropolitana) CONAMBA - National Comission for the Buenos Aires Metropolitan Area (Comisi6n Nacional Area Metropolitana de Buenos Aires) CoNTA - National Commission for Motor Transport (Comisi6n Nacional de Transporte Automotor) EA - Environmental Assessment FA - Argentine Railways (Ferrocarriles Argentinos) FEMESA - Metropolitan Railways (Ferrocarriles Metropolitanos, S.A.) GFCNRT - Successor to UCPF (Gerencia Ferroviaria de la Comisi6n Nacional de Regulaci6n de Transporte) ICB - International Competitive Bidding IERR - Internal Economic Rate of Return MCBA - Municipality of the City of Buenos Aires NCB - National Competitive Bidding NGO - Non-Governmental Organization NPV - Net Present Value OCRABA - Agency responsible for urban motorway concessions PIP - Project Implementation Plan PPF - Project Preparation Facility Pre-ATAM - Technical group, conceived as precursor to Metropolitan Area Transport Authority (Apoyo a la Creaci6n de la Autoridad de Transporte del Area Metropolitana) SBASE - Buenos Aires Subway (Subterraneos de Buenos Aires, S.E.) SOPyT - Secretariat of Public Works and Transport (Secretarfa de Obras Publicas y Transporte) TBA - Suburban Railway Company (Trenes de Buenos Aires) TUAMBA - Transport Planning Unit - Successor to Pre-ATAM (Transporte Urbano del Area Metropolitana de Buenos Aires) UCP - Project Coordination Unit - (Unidad Coordinadora del Proyecto) UCPF - Coordination Unit for the Railway Restructuring Program (Unidad de Coordinaci6n del Programa de Restructuraci6n Ferroviaria) UEP - Project Implementation Unit (Unidad de Ejecuci6n del Proyecto) Vice President Shahid Javed Burki Director Gobind T. Nankani Division Chief Asif Faiz Task Manager Gerhard Menckhoff  ARGENTINA BUENOS AIRES URBAN TRANSPORT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY ............................................. ; I. THE URBAN TRANSPORT SECTOR ............................................. I A. BACKGROUND ............................................. 1 B. INSTITUTIONAL FRAMEWORK ............................................. 2 C. SECTOR ISSUES ............................................. 2 D. LESSONS LEARNED IN PAST BANK PROJECTS ............................................. 3 E. RATIONALE FOR BANK INVOLVEMENT ............................................. 3 F. SECTOR STRATEGY ............................................. 4 II. FRAMEWORK OF URBAN RAIL CONCESSIONS ............................................. 6 A. BACKGROUND ............................................. 6 B. THE CONCESSION PROCESS ............................................. 6 C. INITIAL BENEFITS OF CONCESSIONING URBAN RAIL SERVICES ............................................. 9 D. REGULATORY ISSUES ............................................. 10 E. THE METROVIAS CONCESSION ............................................. 10 III. THE PROJECT ............................................. 12 A. PROJECT OBJECTIVES ............................................. 12 B. PROJECT DESCRIPTION ............................................. 12 C. PROJECT COSTS AND FINANCING ............................................. 15 D. PROJECT RISKS AND BENEFITS ............................................. 15 E. ECONOMIC EVALUATION ............................................. 17 F. FINANCIAL EVALUATION ............................................. 18 G. ENVIRONMENTAL IMPACT ............................................. 19 H. PUBLIC PARTICIPATION ............................................. 20 IV. PROJECT IMPLEMENTATION ............................................. 21 A. INSTITUTIONAL RESPONSIBILITIES ............................................. 21 B. IMPLEMENTATION SCHEDULE ............................................. 21 C. PROCUREMENT ............................................. 22 D. DISBURSEMENTS AND SPECIAL ACCOUNT ........................................................ 24 E. AUDITING ........................................................ 25 F. PROJECT MONITORING AND REPORTING ........................................................ 26 G. PROJECT SUPERVISION ........................................................ 26 V. AGREEMENTS REACHED AND RECOMMENDATION ............ ................................. 27 This report is based on the findings of an appraisal mission which visited Argentina during October 1996. The mission comprised Messrs. Gerhard Menckhoff (Task Manager and Urban Transport Specialist, LA3EI), Moazzam Mekan (Financial Analyst, LA1IU), Juan Quintero (Environmental Specialst, LATEN), Llvo Pino (Financial Management Specialist, ACTCO); Bernard Montava (consultant), and Frank Raltek (consultant). Ms. Sabine Cornelius (Economist, AFTUI), and Messrs. Ken Gwilliam (Economist, TWUTD), Jorge Rebelo (Transport SpeciaUst, LA1 IU), Lou Thompson (Railways Adviser, TWUTD), and Surhid Gautam (consultant) also particpated In the preparation of the project. Messrs. Jitendra Bajpai (EAI IN) and John Flora (TWUTD) are the Peer Reviewers. Mr. Craig Leisher edited the report. Ms. Sandra Alborta and Mm.. Margarita Lannon assisted in the production of the report. Messrs. Asif Faiz, Orville Grimes and Gobind T. Nankani are respectively the managing Division Chief, Projects Adviser, and Department Director.  ANNEXES: Page No. A. Transport in Metropolitan Buenos Aires-Issues and Outlook ..................................... 29 B. Project Implementation Plan, as Defined by the Borrower ........................................ 37 C. Detailed Project Costs ......................................................... 45 D. Implementation Schedule, Monitoring Indicators, and Project Supervision . ....................................... 47 E. Disbursement and Procurement Schedules ................................................... 53 F. Summary of Urban Transport Study Terms of Reference ........................................................ 55 G. Economic Evaluation ........................................................ 59 H. Financial Evaluation ........................................................ 70 1. Environmental Aspects .................................. 75 J. Air Pollution in Buenos Aires .................................. 79 K. Selected Documents Sent to the Project File .................................. 83 MAPS: Suburban Railways Operated by Private Concessionaires - IBRD No. 28384 Buenos Aires Subway System - IBRD No. 28385  -i- ARGENTINA BUENOS AIRES URBAN TRANSPORT PROJECT LOAN AND PROJECT SUMMARY Borrower: Argentine Republic Implementing Agency: Public Works and Transport Secretariat (SOPyT) of the Ministry of Economy and Public Works and Services Beneficiaries: Residents of the Buenos Aires Metropolitan Area, particularly those who use public transport. Poverty: Not applicable. Amount: US$200 million (including up to US$20 million in retroactive financing). Terms: Repayment in 15 years, including five years of grace, at the Bank's standard interest rate for variable LIBOR-based US Dollar single-currency loans. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Onlending Terms: Not applicable. Financing Plan: See para. 3.13. Net Present Value: At 12 percent: US$239 million for the Metrovias concession; US$338 million for subway Line A; and between US$0.68 million and US$24.82 million for the road/rail grade separations. Staff Appraisal Report: No. 15951-AR, dated April 3, 1997. Maps: IBRD No. 28384 and IBRD No. 28385 Project ID: AR-PA-39584   1. THE URBAN TRANSPORT SECTOR A. Background 1.1 Argentina is one of the most urbanized countries in Latin America. Over 87 percent of the total population lives in urban areas of 2,000 or more inhabitants. Despite its high level of urbanization, Argentina is still experiencing significant growth in its urban population. Between 1980 and 1991 urban areas grew from 23.2 million to 28.4 million inhabitants (1.9 percent per year). Today 12.4 million persons, or almost 38 percent of the country's population, are concentrated in the Buenos Aires Metropolitan Area (AMBA).1 Population densities are high with nearly 14,800 persons per km2 in the city of Buenos Aires (roughly the same as Paris). The city population (3 million) is growing at a rate of 0.7 percent per year. Yet some of the suburban municipalities are growing at a rate ten times faster (17 percent per year). Sound urban transport management is critical for meeting the growing transport needs of the AMBA. 1.2 There are nearly 6.5 million motor vehicles in Argentina. On the average week day, 2.5 million cars circulate in the AMBA alone. Private car ownership has been on the rise, with about 150,000 vehicles being added to the fleet in the AMBA every year. Largely because of the rapidly increasing car ownership, the share of public transportation in the AMBA has fallen from 75 percent of motorized trips in 1970 to 61 percent in 1994. On the other hand, trips by car have increased from 2.7 million trips per day in 1970 to 4.5 million per day in 1991, a 60 percent increase. 1.3 The sharp increase in traffic in the city of Buenos Aires, particularly in the central area's narrow streets, has led to growing congestion, rising air pollution, and an increasing number of traffic accidents. As a result, the National Congress announced a state of traffic emergency for the city of Buenos Aires in 1994 and created a special committee comprising representatives of the Transport Secretariat and the Municipality of Buenos Aires. Since then several measures have been implemented to help alleviate the rising congestion problem. Most cars, for example, are now restricted from circulating in the central area (Microcentro) during the hours of 10 a.m. to 8 p.m. These measures, had a marginal impact in the Microcentro, but car congestion accentuated by 10,000 buses and 40,000 taxis persists in most other parts of Buenos Aires. Substantial social costs are generated by travel delays, fuel consumption, and health problems from air pollution and traffic accidents. Strengthening public transportation is a crucial step in reducing these costs. The subway and suburban railways have a strong potential for alleviating many traffio-related problems in the AMBA. 1.4 Public transportation in the AMBA is provided by 15,000 private buses, by a 44-km subway network, and by seven suburban railway operations 900 km in length. The rise in the number of private cars and the deterioration of the subway and suburban rail services led to a drop in the number of people using public transportation. Between 1984 and 1993, suburban rail usage dropped more than 30 percent; the number of subway passengers decreased by more than 20 percent during the same period. 1.5 Until 1993, unreliable schedules and security concems contributed to the decline in ridership. Compounded by inefficient management, the results were unsustainable operating deficits. At US$150-250 million per year, operating losses on the AMBA suburban railway accounted for 25-40 percent of the entire annual deficits for the Ferrocarriles Argentinos, the Government organization that operated all the railways in Argentina. With a view towards reducing operating subsidies by increasing efficiency, quality and thus ridership, the Argentine Govemment decided in 1991 to concession both Ferrocamles Argentinos and the Subterrfneos de Buenos Aires (the subway) to private operators. 1.6 The state-owned Ferrocamles Argentinos used to be the sole provider of both railway passenger and cargo services. In 1991 the Govemment called for bids on operating concessions for various rail packages as a means of introducing private sector participation in Argentine railways. The privatization program included six inter-urban rail packages (mostly freight) and seven suburban The Buenos Almes Metropolitan Area, as defined by "Pre-ATAM," includes the municipality of Buenos Aires and 36 other municipaltes boated within a 60-km radius.  passenger packages in the AMBA. By mid-1993, most inter-urban passenger rail services were discontinued. The responsibility for those which remained was transferred from the National Govemment to the provincial govemments. 1.7 Passenger service in the AMBA, including the subway, was reorganized under the Coordination Unit for the Railway Restructuring Program (UCPF). The privatization of commuter rail service in the AMBA was initiated by subdividing the network into seven packages to be concessioned together with the five subway lines and the pre-metro2 line. It was envisaged that the concessionaires would operate the awarded lines and execute the capital investments specified in the contract. Under the concession, the Govemment would continue to own the infrastructure and rolling stock, and would finance investments to modemize antiquated parts of the system. 1.8 As detailed in Chapter II, bids for 10-year concessions (20 years for the subway and Urquiza line) were solicited based on service parameters set by the National Govemment, including frequency, capacity and fares. The winning bidder was the one requiring the lowest Govemment payment on a net-present-value basis. In January 1994 a 20-year concession became effective for the subway along with the suburban Urquiza line (having the same track gauge as the subway system). With the transfer of the Mitre/Sarmiento systems in May 1995, the entire passenger rail system of the AMBA is now operated by the privaite sector. 1.9 The initial results of private operation are encouraging. In 1996 suburban passenger volumes were 95 percent above the level of 1993, and subway ridership had increased by 37 percent. While some of the increase in paying passengers is attributable to a reduction in fare evasion, the net increase is primarily due to improved service quality. B. Institutional Framework 1.10 Transportation in the AMBA is subject to the regulatory and fiscal policies of the national, provincial and municipal govemments. The National Govemment is responsible for construction and maintenance of national highways, for financing investments and operating subsidies for the suburban railways and the subway, and for regulating the 147 commuter bus lines (connecting the city with suburban districts of the AMBA) which represent roughly half of the 15,000 buses that operate in the AMBA, and for regulating the approximately 3,000 buses operating entirely within the city of Buenos Aires. Furthermore, the National Govemment's Traffic Police Division is responsible for traffic control and enforcement. 1.11 The Provincial Govemment of Buenos Aires is responsible for the construction and maintenance of provincial roads and for the rail passenger services between Buenos Aires and Mar del Plata. It also controls 59 provincial (inter-municipal) bus lines which account for about 20 percent of the AMBA bus fleet. The Municipality of the City of Buenos Aires (MCBA) is the owner of the subway infrastructure and rolling stock and is in charge of road and traffic management within the boundaries of the city. 1.12 One of the major sources of existing inefficiencies in the AMBA transport system is the lack of coordination and planning among the various jurisdictions and among the agencies responsible for road management and public transport provision. The results are high social costs from the congestion, pollution, traffic accidents, uneconomic investment programs, and decreasing levels of service in many areas. C. Sector Issues 1.13 Institutional Issues. Various attempts have been made to improve coordination among the three independent jurisdictions. To date, however, the AMBA is still lacking a consistent, coherent and cooperative approach to urban transport management. The quality, regulations (including motor 2 S Nhe it rail trarsit.  vehicle emission standards), enforcement and administration vary widely among the three jurisdictions. In addition, neither intermodal nor intramodal fare integration has been achieved, resulting in avoidable costs and travel time increases. 1.14 Proposals were formulated in 1991 to create a multi-jurisdictional entity to facilitate joint planning, regulation and control of urban transport in the AMBA. Based on an agreement signed by the Mayor of Buenos Aires and the Minister of Economy, a working group called Apoyo a la Creaci6n de la Autoridad de Transporte del Area Metropolitana (Pre-ATAM) was created to define and develop an autonomous Metropolitan Area Transit Authority (ATAM). The ATAM would have been responsible for planning and regulating the AMBA transport system. The political environment, however, was such that the bill to create the ATAM failed to be passed by the Argentine Congress. The Pre-ATAM by default assumed some of the functions of the proposed ATAM, although with a much more limited mandate, and grew into a widely respected entity of transport specialists. It was recently converted into a Transport Planning Unit (TUAMBA) under the Ministry of Economy and Public Works and Services. 1.15 Financial and Economic Issues. Priority investments to rehabilitate and modemize the subway and suburban railways were identified, and a detailed investment program for each line was included in the concession agreements. The concessionaires are undertaking the physical improvements on a repayment basis as specified in those agreements. As Government payments for completed works lag some 30 days behind the concessionaires' expenses for the improvement programs, the concessionaires are obliged to bridge the financing gap from their own resources during this time. The main financial issues relate to the successful continuation of the concessions and the availability of the resources necessary to further modemize and expand the systems. This may require the renegotiation of the concession contracts to extend them beyond their current duration, taking into account the experience gained by the concessionaires and Govemment. 1.16 Environmental Issues. A recent World Bank Study3 concluded that traffic-generated air pollution has become a major problem in the inner sections of Buenos Aires. One of the study's recommendations, to establish a modem system of air pollution monitoring, is the basis of the project component described in Annex J. D. Lessons Learned in Past Bank Projects 1.17 Bank Experience in the Argentine Railway Sector. To date, the Bank has undertaken three lending operations in the Argentine railway sector. The first two operations focused on investments in infrastructure and rolling stock. One of the main lessons emerging from these operations is the need for demand-oriented investment planning. In both cases, neglect of demand factors adversely affected cost recovery. The third lending operation, the Public Enterprise Reform Adjustment Loan (Ln. 3291-AR), helped in restructuring the Argentine railways while providing a safety net for about 70,000 redundancies. 1.18 Bank Experience with Similar Projects Elsewhere. Bank-wide experience with private railway concessions is still quite limited. There is, however, significant experience from Brazil in formulating a comprehensive urban transport approach from which the following lessons can be gleaned: (a) lack of counterpart funds is one of the primary causes of project delays; (b) effective regulatory agencies are critical to private sector participation; (c) clear institutional responsibilities greatly improve the effectiveness of implementation; and (d) proposed investments and institutional changes should be compatible with an overall regional transport plan. E. Rationale for Bank Involvement 1.19 The Bank's country assistance strategy discussed at the Board on May 4, 1995, and an update, discussed on April 25, 1996, aim to: (a) consolidate macroeconomic reforms, particularly by strengthening weak public institutions; (b) rebuild deteriorated infrastructure; and (c) help Argentina's poor adjust to the country's fast-paced changes. The proposed project would directly address the first two 3 World Bank 1995, Arentinan-Manalng Environmental Poluion: Issues and OpOons, Report 14070-AR, Washington, D.C.  objectives by supporting recent reforms in the AMBA's urban transport sector and by financing the rehabilitation of long-neglected transport infrastructure. Further, it would deepen the Bank's previous involvement, through the Public Enterprise Reform Adjustment Loan, in the privatization of the Argentine railways. Buenos Aires is now in the forefront of private mass transit, but its reforms are still quite recent and potentially fragile. The Bank's continued support could be vital for the viability of increased private sector participation in urban rail services-an approach that could be replicated in other large urban areas, fitting with the proposed CAS, which highlights provincial reform and development as one of the three current key development objectives. F. Sector Strategy 1.20 Buenos Aires has no urban transport sector strategy per se. There is no single institution responsible for urban transport planning in the metropolitan area. The proposal to create such an authority (ATAM) failed to gain political support. The body set up as a precursor (pre-ATAM) has been acting successfully as an informal coordination group, achieving positive actions such as the implementation of reserved bus lanes; it was recently renamed Transporte Urbano del Area Metropolitana de Buenos Aires (TUAMBA) with a view to establish it as a permanent planning group under the Secretariat of Public Works and Transport (SOPyT) within the Ministry of Economy. Responsibility for the elements which together determine the nature of urban transport in Buenos Aires remains fragmented. There is relatively little formal collaboration or coordination of policy in areas in which the jurisdictions overlap. For example, public transport and some major road investments in the AMBA are the responsibility of SOPyT, while investments and maintenance of the vast majority of the road network are handled by the provincial or municipal govemments. 1.21 The issues arising from rail privatization at the national level have been analyzed in a recent Bank report.4 Those issues which relate to the Buenos Aires subway and suburban railway system were taken into account in the preparation of this project. As there are no recent evaluations of the other aspects of urban transport in the AMBA, the Bank's project preparation team conducted an independent assessment which is described in Annex A and summarized below. 1.22 From the viewpoint of the Bank's experience in the urban transport sector, the transport characteristics of the AMBA present a mixed picture. The emphasis on private rail and bus operation compares well with international experience on supply efficiency in urban transport. The existence of competition between overlapping routes in a regulated framework for the bus industry also appears to be a good practice. 1.23 What is missing at present is any effective planning and implementation of traffic management, any coordination of road traffic and public transport policy implementation, and any concerted effort to deal with the safety and environmental problems associated with metropolitan transport. To some extent that is a matter of intemal coordination between the Transport and Public Works Agencies. One of the aims of the project is to improve that relationship through association in the management of a technical group for metropolitan transport planning. 1.24 Despite the constraints on what is immediately possible, the case for improved interfunctional and interjurisdictional coordination remains. The philosophy of the project is therefore to help introduce measures aimed at increasing commitment to a greater level of metropolitan transport coordination. It is believed that this can best be achieved by demonstrating the possibilities and advantages of coordinated action, based on strong technical capability, to deal with commonly recognized problems. The strategy of the project is to encourage this in three ways: (a) the development of a core group of technical skills in metropolitan transport planning to ensure a sound technical basis for the design and implementation of metropolitan transport and traffic measures; 4 World Bank 1996, Argenbn,-Transport Pnvaizabon and Regulaton: The Next Wave of Chalenges. Report 14469-AR, Washington, D.C.  (b) the carrying out of an urban transport study which would require the cooperation of diverse agencies throughout the metropolitan area, and produce planning tools and projections useful to all of them; and (c) the creation of a management committee, which would include representatives of the different functions and jurisdictional levels, to identify problems common to the separate jurisdictions and to provide policy guidance to the technical core group. 1.25 The development of the technical capacity to adequately address the complex interactions within the urban transport system is at the center of the strategy for institutional strengthening. The first part of the strategy is to establish a project implementation unit for the World Bank project, which would be technically oriented and have close links with the new core group developed for metropolitan transport planning. These groups would be the agencies responsible for the assembly of the metropolitan transport data base and analysis capability and would have staff representation from road and transport agencies. 1.26 The second part of the strategy is to associate those entities, who would benefit from a more coordinated approach, in the management of the technical group and the urban transport study. The purpose of the management committee (representing the various functional and jurisdictional authorities) would be to identify issues of common concern suitable for analysis at the metropolitan level; to address these issues the skills of the technical group would be made available. The initial approach to coordination is thus problem-oriented, boUtom-up," but with a long-term view of converting the committee into a permanent body responsible for transport planning for the entire metropolitan area.  - 6 - II. FRAMEWORK OF URBAN RAIL CONCESSIONS A. Background 2.1 The AMBA is among the world's largest metropolitan areas. In 1991 nearly 5 billion trips were generated in the area, of which 3.4 billion were by public transport. Passenger railway services carried 209 million passengers annually in 2,000 trains over a network of 900 km and 267 stations. The AMBA's 44-km subway system served another 144 million annual trips. 2.2 Prior to the Govemment's decision to restructure the suburban rail services through concessions in 1990, the network had been in rapid decline. Between 1970 and 1991, while the population of the metropolitan area rose from 8.4 to 10.9 million people, both the subway and the suburban railways lost nearly half of their passengers. 2.3 Since 1961, passenger services had been organized under Fefrocamles Argentinos (FA). Under this arrangement each of the six divisions operating in Buenos Aires was responsible for freight and passenger services. This latter category of service had grown to nearly 500 million paying passengers per year at the time of FA's creation. For most people, the railways were the predominant mode of transportation. 2.4 The reasons for the decline suffered by the passenger services were similar to those experienced by Argentina's railway system as a whole. Due to a lack of a commercial outlook, the focus was more on production targets than on satisfying user needs. Management was also heavily influenced by the interests of labor unions and equipment suppliers. There were too many employees, outdated operating practices, little maintenance, and no new investments. Even though the potential market for mass transit had grown and services had been attractively priced, the progressive deterioration of service quality, reliability and security led to a rapid decline in passengers from the 1 960s onwards. 2.5 By the end of the 1980s, FA passenger services had become unreliable, stations had deteriorated, fare evasion was extremely high, and grade-crossing accidents were increasing in frequency. In March 1990, at the height of a 75-day railway strike which virtually paralyzed all passenger services, Metropolitan Railways (FEMESA) was created as a state-owned corporation separate from FA. FEMESA's objective was to provide commuter services within the AMBA. Subsequently, the Govemment decided to privatize FEMESA. B. The Concession Process 2.6 The concession process was set in motion with the passage of the State Reform and Public Enterprise Restructuring Law in 1989. The law's aim was to reduce the public deficit and revitalize the economy by encouraging private sector operation of major state-owned enterprises. Of all state enterprises, FA was responsible for the largest drain on the national treasury-about US$1.4 billion annually, of which approximately US$465 million was incurred by the Buenos Aires suburban rail network. Reducing the losses represented the main motivation for restructuring the railways by concessioning their operation to the private sector. 2.7 The suburban railway services were grouped into seven different rail networks that had existed in the 1950s before the creation of FA: Mitre, Sarmiento, Urquiza, Roca, San Martin, Belgrano Norte and Belgrano Sur. The subway, consisting of five underground metro lines and a surface light railway line, and owned by the Municipal Government's Subtejrrneos de Buenos Aires S.E. (SBASE), was placed in a bidding package with the Urquiza line which shares the same track gauge and is physically connected with the subway. 2.8 The concessioning of Buenos Aires' subway and suburban railways was unique. There is no precedent in the world of using the concession approach for a loss-making urban rail transit system. Buenos Aires' subway system is old and obsolete, with several original sections dating from its opening in 1913. Since the 1950s there have been few improvements. When the decision to concession the  - 7 - subway was made, the system was in need of a complete rehabilitation, including tracks, communication, signaling systems, escalators and cars. 2.9 After the multi-faceted evaluation method used for concessioning the freight railways proved controversial, the Govemment adopted a single quantifiable parameter for awarding the concessions for the suburban railways and the subway. Following an intemational competitive bidding process, the concessionaires were selected based on the lowest Govemment payment requested in the bid to operate the line and undertake the specified investment program.5 Under this arrangement, the concessionaires operate the lines and the Govemment (i.e., FEMESA in the case of the suburban railways and SBASE in the case of the subway) continues to own the infrastructure and rolling stock. Table 2.1 summarizes the main features of the metropolitan railway concessions. Table 2.1: Features of the Metropolitan Railway Concessions Length 10 years (20 years for the subway and the Urquiza line) plus optional 10-year extensions indefinitely. Ownership The National Govemment (the City in the case of the subway) remains the owner of the fixed facilities, including track, stations, and rolling stock. Labor Concessionaires can introduce whatever labor practices they consider necessary to increase labor productivity. Labor redundancy was financed by the Govemment. Operations and All operations are performed by the concessionaires, who are also Maintenance responsible for the maintenance of track and rolling stock. The concessionaires either receive an operating subsidy or pay a 'fee' for the use of the infrastructure. The Govemment sets minimum service level and service quality for each concession. Tariffs The Govemment sets maximum fares which are subject to automatic increases according to the service quality achieved and increases in the cost of providing the service. Non-achievement of quality levels results in financial penalties. Capital Investment Concessionaires undertake project-specific annual investments as specified in the terms of the concession but financed by the Government (except for Line A). Line A investments are to be financed and undertaken by the Government. Financial Net monthly subsidy/fee payments defined for each service corridor for the Performance entire concession period. Source: World Bank, 1996, Argenna- Transport Pnvatizaton and Regulaton: The Next Wave of Chalenges, op. cit. 2.10 The Govemment accepted from the start that public financing would be required to operate passenger rail services and undertake the investments needed to rehabilitate the system. For each corridor the Govemment defined both maximum fares and minimum service frequencies. The latter were defined in terms of rail cars per hour for each 24-hour service cycle and for each day of the week. In addition, service quality standards were defined for each corridor, including percentage of on-time trains and percentage of canceled trains. If concessionaires reached or surpassed these service standards, they would be entitled to increase tariffs beyond authorized maximum levels, as a performance incentive. Chronic failure to comply with service standards could result in specific penalties. The rehabilitation of subway Line A was left out of the concession process due to legal problems. An Italian firm had already signed a contract to rehabilitate Line A, but irregularities sent the involved parties to arbitration. (In the end, the case was decided In the Govemmenfs hfvor and the planned works were not carried out). While the rehabilitation of Line A had to be excluded from the subway and Urquiza concession, the tender documents and subsequently the concession agreement between the Government and the concessionaire committed the Government to separately rehabilitate Line A by December 1997, in addition to its other obligations.  - 8 - 2.11 According to the terms of the concessions, the Govemment was to own the rolling stock and infrastructure, all of which would be assigned to the concessionaire. The concessionaire would have full responsibility for all rail activities, ranging from marketing to maintenance of rolling stock and infrastructure. A key design feature in concessioning the suburban railways and the subway was that a monthly payment (combining operating subsidies and investments for the rehabilitation program) was to be made to the successful bidder for each service corridor over the entire terms of the concession contract. The schedule of monthly payments, adjusted for inflation, was negotiated Lip-front,"before the concession was awarded. 2.12 Concessionaires assumed the risks inherent in most business activities. For example, if actual ridership (and revenues) exceeded estimates, incremental net income accrued to the concessionaires. If, on the contrary, actual numbers proved lower than estimates made at the time the contract was finalized, concessionaires absorbed the resulting loss and were not entitled to additional subsidy. The same principle applied to operating expenses. Cost savings would accrue to the benefit of concessionaires and cost overruns to their detriment. Concessionaires, however, could not attain lower costs by compromising the levels of service to which they were contractually committed. Concession contracts included several mandatory service standards, such as number of cars to be dispatched per hour, maximum allowable canceled and delayed trains, and equipment maintenance and availability standards. In fact, concessionaires had a strong incentive to exceed these service standards. Only then could they claim a fare increase. 2.13 The characteristics of the successful bids for each railway package are summarized in Table 2.2. The calls for bids were staggered; first, the Mitre, Sarmiento and Urquiza/Subway; second, the Roca and San Martin lines; and finally the Belgrano Norte and Belgrano Sur lines. On January 31, 1992, seven consortia consisting of 114 local and foreign companies submitted qualifying bids. Construction firms with no previous railway operating experience were the most prevalent bidders. Companies with rail operating experience accounted for only 26 percent of those who bid. In all winning consortia there was a significant participation of private bus companies or groups associated with them. Table 2.2: Winning Bids for the Metropolitan_Railway_Concessions Oper. Subsidy Est. Passengers in Line Concessionaire Takeover Date No. of bids or (Fee) Capital Investment Year 5 Proposed (US$ million) (US$ million) (million) Staffing Mitre TBA 5/27/95 3 84.1 221.2 63.9 1,660 Sarmiento TBA 5/27/95 3 (177.9) 193.2 106.1 1,528 Urquiza Metrovlas 1/1t94 3 101.7 37.8 26.0 697 Subway Metrovias 1/1/94 3 (438.4) 399.2 171.0 2,129 Roca Trainmet 1/1/95 4 (70.0) 136.0 150.5 2,062 San Martin Trainmet 4/1/94 4 (44.7) 62.7 63.7 867 Belgrano Sur Trainmet 5/1/94 3 166.1 43.8 19.1 788 Belgrano Norte Ferrovfas 4/1/94 2 196.7 58.7 28.2 830 Total (182.4)_ 1,152.6 628.5 10,561 2.14 By the end of 1992, three consortia were selected for the seven service packages: Metrovias for the concession of Mitre, Sarmiento, and Urquiza/Subway; Trainmet for Roca, San Martin, and Belgrano Sur; and Feffovias for Belgrano Norte. The investors for Metrovias later on divided themselves into two groups, Metrovias and Trenes de Buenos Aires (TBA) responsible for the Urquiza/Subway and Mitre/Sarmiento concessions respectively. The total amount of Govemment payment requested by the winning consortia amounts to about US$1 billion (June 1992 USS value). Most  -9 - of this amount is intended for capital investment, as opposed to the Government subsidies before privatization which mostly financed operational deficits. The real estate assets necessary for the operation of the concessions (e.g., platforms, ticketing, etc.) were transferred to the concessionaires. All other assets remained with FEMESA who became custodian of these assets until their final disposed. FEMESA is exploring a number of possibilities, including expanding the use of these assets through the involvement of the private sector to construct shopping malls similar to Union Station in Washington, transfer stations, etc. C. Initial Benefits of Concessioning Urban Rail Services 2.15 The concessioning process for the suburban railway system and the subway which started in October 1991 finally concluded on May 27, 1995 with the transfer of the Mitre and Sarmiento lines to TBA. Based on the performance of the concessions so far, they are generally considered to be a huge success. Recent data for the revenue passengers carried indicate an impressive growth rate over the last three years. An important reason for this immediate improvement has been the anti-fare evasion measures adopted by all private operations. However, even in the case of the subway where fare evasion was a relatively minor problem, 1996 ridership was up by 37 percent compared to 1993, the last year before its concession. The traffic gains have also been fostered by the improvements in service reliability and security, particularly at stations. Other service indicators, such as punctuality, interruptions and cancellations, also show major improvement. A survey conducted for the Government in early 1995 found that 96 percent of the travelers on four suburban lines felt the service was as good or better than before, with a majority stating that it was better. Furthermore, unlike other privatizations, railway consumers did not have to pay higher prices for this quality improvement. Table 2.3: Evolution in Passenger Volumes and Service Quality (January-December Comparison) Passengers (in million) Capacity (in million car-km) On-time Operation 1993 1996 A% 1993 1996 A% 1993 1996 A% Suburban.... Ra.. lway.. ...................................................................................................................................................................................................... Mitre 34.4 69.8 103% 16.3 21.7 33% 76% 96% 26% Sarmiento 60.5 99.3 64% 20.3 23.7 17% 73% 95% 30% Urquiza 16.8 24.7 47% 8.5 9.7 15% 92% 94% 2% Roca 64.9 136.0 110% 26.0 43.1 66% 81% 96% 19% San Martin 21.7 43.5 101% 13.5 15.6 16% 83% 90% 8% Belgrano Norte 11.8 28.8 144% 8.5 10.5 24% 85% 85% 0% Belgrano Sur 2.0 11.1 462% 2.1 6.4 206% 46% 95% 107% Passengers (in million) Capacity (in million car-km) Minutes of Disruption ... ................................................................................................................................................................................................................. Subway 145.3 198.9 37% 20.1 26.8 33% 23,165 9,013 -61% 2.16 From the Govemment's financial perspective, the implications of the restructuring process can be evaluated based on a comparison of the total subsidies in the concession contracts with the actual deficits before restructuring. The operating deficit of the suburban railway in 1993 alone was estimated to be US$465 million. Additionally, the subway was losing US$40 million per year. In comparison, the Government payment required to operate all the systems over the life of the concessions amounts to US$680 million in present value terms (in 1992 US$). The main portion of this payment (US$560 million) goes toward capital improvement for rolling stock, track, communications, signaling systems, and stations, and only US$120 million represents an operating subsidy. At the end of the concession period (20 years for the subway and Urquiza, and 10 years for the other lines), the Government is expected to have saved US$5.5 billion in payments and in the process have acquired an improved and well-functioning passenger railway system. 2.17 Another benefit of the restructuring process has been a reduction in the economic costs of operation, mainly through increased labor productivity and more efficient use of capital. FEMESA, at its creation in 1991, employed about 16,000 people to carry a volume of 209 million paying passengers.  -10- In 1996, the suburban railways carried 413 million passengers with about 8,400 employees. Thus, labor productivity increased nearly four-fold: from 13,000 passengers per employee to 49,000 passengers per employee. D. Regulatory Issues 2.18 The Government's early attempt to create a regulatory agency (ATAM) to oversee urban transport in the AMBA, including the railways, did not materialize. In practice, the concessions are regulated by the Unidad de Coordinaci6n del Programa de Restructuracion Ferroviana (UCPF) of the SOPyT, which had been responsible for the design and implementation of the concession process. The main role of the UCPF is to enforce the terms of the contract and to monitor and certify the progress of the government-financed investment program. The ultimate authority regarding contractual and tariff changes rest with the Minister of Economy. Since the concession contracts restrict the ability of the concessionaire to raise tariffs and require minimum service standards, the approach not only provides simplicity from the perspective of regulation but also provides a strong incentive for the concessionaires to increase ridership. 2.19 As the concession process has matured, several issues have arisen which were not foreseen due to the pioneering nature of the process. The growth in ridership has been beyond expected levels, and there is little provision in the existing contracts to accommodate this rapid growth in traffic. The investments are fixed in time and can only be brought forward at the concessionaire's expense. Since the concessionaires do not own the assets, they find it difficult to obtain financial resources within the short time frame of the concessions. Since the ridership pattern changed, there is a need to modify the govemment-financed investment program to undertake more efficient investments in response to increasing ridership. To address these problems, the bicameral commission of Congress responsible for overseeing the nation's privatization process gave the Government permission in April 1996 to re- negotiate the contracts with private concessionaires to allow for a change in the terms of the contract as well as to extend the length of the contract. TBA, the concessionaire for Mitre and Sarmiento lines, already has prepared an ambitious program of investment equivalent to US$900 million, which would completely revamp its network with new cars, electrification, signaling, communications and elimination of at-grade road/rail crossings. 2.20 Another issue is the inability of the Government to meet some of the conditions in the concession contract in a timely manner. The delays stem from higher-than-expected ridership, worse- than-expected condition of the rolling stock and facilities, and a lack of funding for the rehabilitation of Line A. While the proposed project would help alleviate some of the delays, there is still the issue of the extent to which the concessionaires should be compensated for these delays. In the case of the so-called "automatic tariff increases" that are triggered by changes in the cost of service, delays are common and there is no clarity on the compensation to the concessionaire for the delays in payment due to the time it takes the Govemment to institute the changes in the contract to permit a tariff or subsidy increase. E. The Metrovias Concession 2.21 The original Metrovias consortium was selected for the subway/Urquiza, Mitre, and Sarmiento concessions which together account for over 50 percent of all metropolitan rail passengers. Its owners were a large construction company (Benito Roggio y Asociados, 33.33 percent), a consortium of bus operators (Cometrans, 30.33 percent), a rolling stock manufacturer (Morrison Knudsen Argentina S.A., 16.67 percent), a foreign operator (Burlington Northem, 16.37 percent), and a small construction firm (SKS, 3.00 percent). During the final stages of contract negotiations for the Mitre and Sarmiento concessions, Cometrans, Morrison Knudsen and Burlington Northern formed the new consortium Trenes de Buenos Aires (TBA) and released some of their shares in Metrovias to Benito Roggio. Likewise, Benito Roggio transferred its interest in Mitre and Sarmiento to Cometrans. Metrovias is now majority owned by Benito Roggio y Asociados with small participation from Cometrans and others. 2.22 The concession held by Metrovias for the Buenos Aires subway and the Urquiza line began on January 1, 1994. This concession differs from other passenger railway concessions in that it is  -11- for a period of 20 years instead of 10. The increased length of the concession was based on the amount of the investment program (US$493 million plus about US$120 million for Line A), and Includes some technological change. Under the contract, Metrovias will receive decreasing operational subsidies for the first five years of the concession (until 1998). Starting in 1999, it will begin making payments (fees or canon) to the Govemment which increase every year until the termination of the concession in 2013. 2.23 Over the 20-year life of the concession, Metrovias will pay the Govemment about US$26 million for the concession and receive about US$208 million in Govemment payments for undertaking the specified investment program6. In addition, the Govemment will provide about US$120 million worth of improvements in Line A. This is advantageous to the Govemment, considering that in 1993 alone the subway and the Urquiza line incurred an operational deficit of US$54 million. Metrovias' offer was based on an expected increase in traffic of 60 percent over the length of the concession compared to 1993. In the same period, expenses were projected to decrease by 36 percent. 2.24 Given that the concession has now been under private operation for more than three years, a clearer understanding of its results is available. Prior to the takeover, traffic on the Urquiza line was declining at a rate of 4.7 percent per year; the decline in the subway was 2.7 percent per year. By 1996, ridership on the subway had increased by 37 percent compared to 1993; on the Urquiza line it was up by 47 percent during the same period. By the end of 1996, the subway traffic had surpassed year eight forecast for the traffic as included in the concession documents (see Chart 2.1). On the other hand, ridership on the Urquiza line grew slightly less than expected during this period. Nonetheless, Metrovias total revenues were up by more than US$20 million in 1995 compared to the projections in the concession contract. Chart 2.1: Passenger Projections for Metrovias Concession 350 e Start of Private Concession:,.- 325 - Actual | January 1, 1994 - - 300 - Revised Projection _ --. Concession Cortract 250- 1980 85 90 95 20D0 5 10 AssumpUons: an nual growth of 6 percent In 1996-7 which decreases to 4 percent during 198 99 because of the planned resbliatalon of Une A. Fadlowing tre rehabilitaoon period, total ridership is epected to bounce back to a grpwth of 6 prcent In 2000. Thereater, growth in traffic is sxpected to slow down gradually to I percent by 2005. Between 2005 and 2013, tratfic is projcted to grow by I percent each year which is slightly above the norrnal growth rate of population (0.67%) in the municipality of Buenos AJres. In prent vle terrn at a discount rate of 12 percert.  -12- III. THE PROJECT A. Project Objectives 3.1 The Project's objectives would be to: (a) support the private-public partnership in improving the service quality and coverage of mass transit; (b) support the infrastructure improvements defined in the concession agreement between the Govemment and the private sector; (c) assist in improving the conditions of traffic safety and environmental quality; and (d) help in developing an integrated urban transport (road and rail) system for the AMBA. B. Project Description 3.2 The project would comprise a package of actions and investments aimed at the following: (a) finance the rail equipment and infrastructure which are critical for the upgrading of public transport services; (b) promote the integration of the transport system by upgrading transfer stations among rail lines, building better transfer facilities between rail and road-based transport, and generally improving road access to rail stations; (c) improve traffic safety and environmental conditions through the construction of grade separations at high-volume crossings, the enhancement of controls at road/rail grade crossings, the development of a complementary program of road safety actions, and the introduction of systematic air pollution monitoring; and (d) strengthen the institutional framework which would ensure the continued operation of an economically and environmentally sustainable transport system in the metropolitan area. 3.3 The proposed works, goods acquisition and technical assistance have been grouped into the following five subprojects: (a) support of the basic investment program of the Metrovias concession (36 percent of total project costs net of project administration); (b) rehabilitation of subway Line A (31 percent); (c) integration of the transport system (9 percent); (d) environmental monitoring and traffic safety program, including road/rail grade separations (16 percent); and (e) strengthening of the institutional framework (8 percent). 3.4 Basic Investment Program of the Metrovias Concession: The 1992 tender documents for the subway/Urquiza concession included a detailed investment program, which is now part of the Govemment's concession agreement with Metrovias. A $142.9 million slice (about three years, 1997-1999) of that program would be considered part of the project; $50 million of this would be funded from the World Bank loan. In accordance with Article 3.13(a) of the procurement guidelines, works and goods required for the basic investment program would be procured by Metrovias, using its own procedures. 3.5 The specific improvements would include: Rehabilitation of subway Lines B, C, D and E, including: (a) partial track renewal; (b) renovation of electric substations and transmission systems; (c) automatic signals and operations control center; (d) station improvements and the rebuilding of escalators; (e) workshop improvements; and (f) renewal of ventilation and drainage systems. Slightly over 10 percent of the total would be for similar improvements on the Urquiza line.  -13- 3.6 Rehabilitation of Subway Line A. This subproject would include the complete renewal of track, three new electric substations, renewal of the power transmission system, renovation of the signal and communications system, installation of a new control center, replacement of drainage pumps, new ventilation systems, renewal of station escalators, and the integration of the existing Lima and Piedras stations at a location which would greatly improve transfer conditions with subway Line C. These works would be grouped into five contracts for (a) track renewal; (b) other civil works; (c) electrical equipment; (d) signals and communications; and (e) expansion of the traffic control center. 3.7 Integration of the Transport System. This subproject has been defined as a sectoral program. The specific criteria and procedures, including those related to environmental assessment and consultation with neighboring communities and businesses, are currently being defined and will be contained in an Operational Manual, the approval of which would be a condition for civil works disbursements under this subproject. 3.8 The subproject would complement civil works at transfer stations which have already been agreed under the concession agreement. It would include the works and actions detailed below, which aim to achieve better synergy among the existing rail and road-based services. (a) Transfer centers at or near major rail stations where transfer conditions for public transport passengers would be greatly improved through the incorporation of off-street bus terminals, pedestrian facilities, car parks, and drop-off areas. Preliminary analyses have been carried out for an initial 14 locations, identifying the main issues and recommending improvements. Feasibility studies are underway, including preliminary cost estimates and the preparation of traffic circulation plans. It is expected that, by loan effectiveness, preliminary engineering will be completed for eight stations; final designs and bidding documents will be prepared thereafter. (b) Improvements near outlying rail stations to ease the access for buses, pedestrians, cars and/or bicycles. These would largely consist of road and traffic engineering improvements, such as bus priorities, traffic signals, geometric changes to provide space for passenger drop-offs or to correct traffic bottlenecks near the station, walkways, sidewalk improvements and bicycle facilities. Such schemes would be designed by SOPyT and be implemented in close collaboration with the municipalities concemed. (c) Some station improvements would include secure facilities for bicycle parking. In this regard, a promotional program would be developed to encourage bicycle access to outlying railway stations. Increased bicycle use at these locations is expected to raise rail ridership as the area of influence of those stations would be expanded and benefit some low-income rail customers who could save the additional fares needed for feeder bus services. (d) Other station improvements, especially where improved transfer conditions between two rail lines or between rail and road-based transport would yield significant benefits to passengers and thus make mass transit more attractive. 3.9 Environmental Monitoring and Traffic Safety Program. This subproject would combine the initiation of air pollution monitoring with an action plan that SOPyT has defined to reduce the high number of traffic accidents at road/rail crossings. The air pollution monitoring component is described in Annex J. With regard to the traffic safety program, environmental assessments and public participation exercises were carried out for two proposed road/rail grade separations, selected from an initial list of 20 schemes on the basis of economic retum. This experience is being incorporated an Operational Manual, the approval of which would be a condition for civil works disbursements under this subproject; it would include the following components:  -14- (a) construction of ten to twelve grade-separated road crossings over/under suburban railway lines; (b) development of a comprehensive strategy to improve the safety at grade crossings between the road and the rail systems on the basis of a study to be funded under the project; and (c) improvements to the system of barrier-controlled road/rail crossings. 3.10 Strengthening of the Institutional Framework. A key element of the overall project would be the strengthening of coordinated transport planning at the metropolitan level, and support for the creation of a Transport Planning Unit which would be responsible for the formulation of common policies on pricing, financing, project evaluation and selection. It would also aim to develop policies which improve cost recovery and increase the long-term financial sustainability of the operating agencies involved. The activities below would be included. (a) Preparation of a transport model suitable for testing altemative transport investments, rail integration projects, bus route franchising options, tariff policies, and street congestion pricing. The last comprehensive survey of travel characteristics was carried out more than 25 years ago, and is no longer a useful basis for investment and policy decisions regarding transport in Greater Buenos Aires. Numerous and often contradictory proposals are being promoted by various agencies and interests to extend the subway system, upgrade suburban railways beyond the scope currently envisaged in the concessions, and to further enlarge the system of urban motorways. The proposed transport survey and model would establish a sound footing on which the feasibility and relative priorities of these (and other) proposals can be determined on a quantified basis. The study, to be conducted by a consulting firm jointly with a govemment team forming the nucieus of a permanent transport planning unit (see (d) below), would receive guidance from a steering committee which would be composed of representatives of key agencies responsible for metropolitan transport and road planning and management. (b) Formulation of a program to improve the city's traffic and street environment, which could include such aspects as: (i) updating of the street hierarchy, especially in the micro-center where through traffic, buses, trucks, and pedestrians could be better separated; (ii) definition of a traffic calming program for selected streets or areas; (iii) consideration of area-wide traffic demand management through regulatory, pricing and/or physical measures; and (iv) improvement of pedestrian facilities, such as additional pedestrian streets, sidewalk widening and repairs, and better refuges, signals, and markings at intersections. (c) Technical assistance to SOPyT to provide advice on technical, financial, environmental, and social aspects during project execution. (d) Establishment of a Transport Planning Unit (TUAMBA), funded by the Govemment and primarily consisting of personnel previously working for the Pre-ATAM, which would initially constitute the counterpart staff of the transport study consultants and, after the study's conclusion, be responsible for continued transport planning in the metropolitan area. (e) Training to professionals of the national, provincial and municipal govemments in such fields as urban transport planning and economics, environmental management, and especially traffic engineering and traffic safety management.  -15- C. Project Costs and Financing 3.11 While the Line A rehabilitation consists of a number of dearly defined works with a distinct cost estimate (US$81.9 million net of contingencies and taxes), the other project components are ongoing or future programs which would be supported under the proposed World Bank loan. This permits a certain degree of flexibility in defining the size and financing of individual project components, taking account of the following fixed points: (a) the proposed loan would total US$200 million, of which US$50 million would be allocated to the basic investment program of the Metrovias concession; and (b) the Govemment would provide counterpart funding in an amount equal to the Bank loan. 3.12 The following cost table presents the overall project financing plan, which was confirmed at negotiations. Table 3.1: Project Cost Estimate (US$ million) Subprj World Bank Government Total ....................................................... n ......... ..................................................................... ............................................................................................................................ Metrovias Concession 50.0 92.9 142.9 Rehabilitation of Subway Line A 64.8 17.1 81.9 Transport System Integration 13.6 11.9 25.5 Environmental Monitoring and Traffic Safety 24.3 20.6 44.9 Institutional Framework 16.4 6.9 23.3 Project Administration 6.7 - 6.7 Subtotal 175.8 149.4 325.2 Taxes -- 35.8 35.8 Contingencies 24.2 14.8 39.0 Total 200.0 200.0 400.0 3.13 The total project costs are Table 3.2: Financing Plan estimated at US$400 million including taxes - _ and contingencies, with an estimated foreign Source Local Foreign Total % of Total cost of US$157 million or about 39 percent of Government 200 -- 200 50 the total cost (Table 3.2). Taxes and duties World Bank 43 157 200 50 are expected to account for approximately 9 Total 243 157 400 100 percent of the total cost, or US$35.8 million equivalent. Physical contingencies amount to 20 percent for Line A (allowing for lack of experience with similar contracts), 0 percent for the concession because of its fixed price, and 10 percent for all others. Price contingencies amount to 2.3 percent per year. Base costs are expressed in December 1996 prices. D. Project Risks and Benefits 3.14 Risks. To some degree, the usual risks associated with investment projects-cost and time overruns-apply to this project. They are partly offset, however, by the fact that the largest component (Metrovias concession) is already being implemented on the basis of agreed prices laid down in the concession agreement. 3.15 The investment is in well-known technology, available from many sources. Little technological risk is therefore involved. Commercially, the contractually agreed fixed terms of remuneration for the concessionaire shift any financial risk associated with the basic investment program of Metrovias to the concessionaire. The risks thus become the risks of the concession failing. Three main  -16- reasons may be suggested for failure of the concession, namely: (a) financial failure of the concessionaire due to commercial eventualities; (b) failure due to default by the Govemment on its payment obligations; and (c) withdrawal of the concessionaire from the concession agreement for reasons other than direct financial failure. 3.16 In respect of the financial viability of the concession, the evidence available so far indicates that traffic and revenue are substantially higher than anticipated. There is also some anecdotal evidence that concessionaires are obtaining supplies at prices lower than those anticipated in their concession bids. The increase in aggregate costs being quoted appears to be primarily related to increased quantity of service supplied. Given the growing passenger demand for rail transport in Buenos Aires, the risk of direct financial failure appears small. 3.17 In respect of Govemment default on its obligations, there is also no immediate reason to view the risk as high. The National Govemment has so far made payments to all the rail concessionaires fully and on time. The most significant problem was the fact that the Line A rehabilitation would not be completed by December 1997, the deadline provided for in the concession contract. However, because of the inclusion of that component in the project, a modification of the concession agreement was signed on January 22, 1997, which indicates June 1999 as the new estimated completion date for the Line A rehabilitation. 3.18 A less direct risk of the contract being upset may be associated with the changing political status and management of the Municipality of the City of Buenos Aires (MCBA). Although the concession contract for the subway is between the concessionaire and the National Govemment, the subway is formally owned by the Municipality. Last year's move to local democratic election of the mayor, in place of direct appointment by the National Govemment, opens up the possibility that the management of the subway could become a direct political issue. If, for example, responsibility for public transport fare control were to pass to the Municipality of Buenos Aires (as is formally the case for the municipalities within the Province of Buenos Aires), there would be a possibility that the Municipality might introduce fare constraints or policies which undermine the contract. Even in the event of such a transfer of responsibility, however, it seems unlikely that the Municipality would wish to undermine the concession so long as the financing of the concession remains a National Govemment responsibility and the average subway tariff remains below the bus tariff. Maintaining this responsibility thus seems to be the best way of mitigating this risk. 3.19 The risk of the investment being invalidated due to the concessionaire voluntarily abandoning the concession concems the possibility that, at some early stage of the concession, before the present value of the contract to the Govemment had become positive, the concessionaire would find it more attractive to withdraw than to remain in the concession. In practice, the phasing of the financial flows under the concession contract are such that at all times during the life of the concession the present value of the payments under the concession is less than expected Govemment payments without the concession. In the event of termination of the concession the investment would revert to the Govemment. The Govemment would then have enjoyed a positive value of financial flows during the concession, and a higher capital stock at the termination of the concession than would have occurred without the concession. Experience with other rail companies suggests that it would also then be possible for the Govemment to relet the concession to mutual advantage. Regardless, the investment program under the concession mainly materializes towards the middle to later part of the concession period, thus making it unlikely for the concessionaire to walk away from the concession after reaping the profits from the investment phase of the concession. 3.20 Benefits. Quantifiable and non-quantifiable benefits are expected from the proposed project, including cost savings, time savings for the users, and fewer accidents and fatalities. By supporting private sector participation in Argentina's railways, the proposed project would decrease the financial burden on the Govemment. In addition, there would be a positive environmental impact through the reduction of fossil fuel consumption and motor-vehicle related emissions, the introduction of an air pollution monitoring system, and the reduction in road congestion with a consequent improvement in air quality and noise pollution.  -17- E. Economic Evaluation 3.21 The Subway Investments. The concession awarded to Metrovias involved the rehabilitation and operation, over a period of 20 years, of the subway network and the Urquiza suburban railway which connects with it. One of the terms of the concession was that Line A of the subway was to be rehabilitated on the Govemment's account. The present project consists of the investments necessary for the Govemment to meet that obligation. If the investment were not to be made, the whole concession would be at risk. Economic evaluation was thus applied both to the concession as a whole and to the Line A rehabilitation Itself. 3.22 The basic assumption made in the appraisal of the concession is that, without the concession, the subway would continue to run at the initial level of service, with annual expenditures by Govemment equal to those made in the final year before concessioning. This is treated as the "do- nothing" case. In the year prior to concessioning the subway carried 145 million passengers and required US$40 million in operating subsidy. In addition, the Urquiza line, with which the subway is linked in the concession, was losing over US$11 million a year, giving a total cost to Govemment of US$51 million. It has been assumed that these losses would continue in the absence of the concession. 3.23 In the years before concessioning, the cost to Govemment had been increasing, while the level of service and of patronage had been declining. Moreover, maintenance expenditures were being deferred so that the likely future expenditures to keep the system in operation would have had to increase in any event. In the case of Line A, the oldest line, it is estimated that inability to maintain obsolete equipment would have led to closure within five years. The "constant cost to Govemment" assumption for the status quo is thus very conservative. 3.24 The net present value of the stream of payments by Govemment on the assumption of constant subsidy in the absence of the concession agreement amounts to US$401 million at a 12 percent discount rate. The stream of payments under the concession (adding together operating subsidies, capital expenditures and the fees payable by Metrovias) has a net present value of US$162 million. The net benefit in present value terms is thus estimated to be US$239 million (see Annex G). 3.25 There are three logical limitations to relying solely on the financial evaluations of the concession. The first is if there are external disbenefits of the concession, the overall social benefit of the concession might be negative notwithstanding a financial benefit for the Govemment. The second is that even in the context of a successful concession, it would not be desirable for the Bank to finance a specific investment which was not economically viable. The third is that there might be a possibility to retain the overall concession benefits by substituting some alternative investment program mutually acceptable to the Govemment and the concessionaires. All three of these issues are addressed through an economic evaluation of the Line A rehabilitation investment itself (see below). 3.26 Line A. The evaluation procedure used is a conventional cost-benefit analysis in which the level and performance of traffic in the affected network is estimated with and without the investment under consideration over the effective life of the project (taken in this instance to be the 20 years of the concession). The basic calculation only covered a single direction of traffic-outward along Avenida Rivadavia. The total benefits of the project should be at least double this because the inward joumey in the corridor is forced to use parallel streets of lower capacity, for which exclusive bus lanes to improve performance are not feasible. 3.27 The assumptions of this appraisal were that without investment, Line A would collapse after a period of five years (some sensitivity tests were undertaken to allow for a longer period before total collapse). With the abandonment of service on the line, the traffic would be carried predominantly by public bus service. Given the limited road capacity in the Line A corridor (Avenida Rivadavia) this would involve slower joumey times for those transferred from subway to bus, increased costs of bus operation, and increased joumey time for private transport travelers in the corridor.  -18- 3.28 The economic evaluation considered a number of altematives, with and without the proposed project to determine the correct level of investment and "project". Even though the rehabilitation of Line A was thought to be the optimal project, other complementary investments were considered on Avenida Rivadavia where it is possible to introduce an exclusive bus lane, regardless of whether Line A is closed. 3.29 Because the bus lane improves traffic flow in any event, the effect of introducing it reduces the calculated rate of return on keeping the Line A open. A range of altematives for the bus lane, both with and without the subway, were considered. The calculated NPV for one-direction movement along Rivadavia only, varies between US$334 million (assuming no bus lane either with or without the subway) and US$168 million (assuming that an exclusive bus lane was introduced over the whole route whether or not the subway was maintained in operation). The results of the investigation demonstrate that the altemative project (implementing a bus lane) would still be beneficial even if Line A was rehabilitated. The Line A project, however, is shown to be superior to the altemative (bus lane) since the NPV, calculated for the project compared to the without situation that includes a full bus lane, is higher than the NPV obtained for just introducing the bus lane. 3.30 Assuming that inbound traffic would generate at least the same benefits as the outbound traffic on Rivadavia (actually the benefits will be more because there is no good altemative on the parallel streets for retuming traffic), net benefits in present value terms exceed any other possible altemative by at least US$340 million. It is worth noting that these calculations exclude any evaluation of environmental beneft associated with traffic taken by subway rather than by road vehicle. They are, therefore, extremely robust for the Line A investment. 3.31 Grade Separations. A detailed scheme of economic evaluation has also been established for the proposed road/rail grade separations. This evaluation procedure calculates time and operating cost savings for road and rail operators and passengers, as well as accident cost savings. The calculations also include the effects on both road and rail system users during the period of construction, including those of reduced speed of rail operation and diversion of road traffic to other crossings in the interim period. Details of the evaluation procedure are contained in Annex G. 3.32 The economic evaluations completed under these conventions adopted give intemal economic rates of return in the range of 14 to 90 percent and NPV at 12 percent between US$0.68 million and US$24.82 million. However, the results are conservative due to the way in which accident impacts are estimated (on the basis of averages unrelated to volumes of various traffics at the specific sites) and evaluated (on the basis of lost future eamings associated with deaths and injuries). In addition, the economic benefits resulting from higher rail frequency due to complete elimination of grade crossings on the Roca line between Plaza Constituci6n and Temperley were also estimated to be about US$7 million per year starting in the third year of the completion of the grade separations (against a total investment of US$9 million). Due to the rapid increase in ridership since the concessions were let, the barrier down-times have exceeded those stipulated in the concession agreements. This means that the impact of site-specific traffic conflicts is likely to be under-represented, and that the level of rates of return is thus likely to be underestimated. F. Financial Evaluation 3.33 Metrovias was awarded the concession following a competitive process which ranked the bids on the basis of minimum net present value7 of the Govemment payments (operating subsidy and capital investment) required to operate the system at a defined tariff and service level. Since tariffs are fixed by the Govemment and cannot be changed by the concessionaire, the profitability of the business depends on Metrovias' ability to lower its operating costs and to generate new traffic. In order to take into account the effect of rising prices over the long concession period, the contract provides for an automatic adjustment in the subsidy/tariff level (choice of the Govemment) based on an increase in the cost of providing the contractual level of service. 7 Calculated at a discount rate of 12 percent.  -19- 3.34 Metrovias is a private company which holds a 20-year concession for operating the Buenos Aires subway and the Urquiza line. According to the terms of concession, Metrovias is to receive declining levels of operating subsidy during the first five years of its concession. During the next 15-year period, Metrovias must make payments to the Govemment for the use of infrastructure on an increasing basis. Over the life of the concession, Metrovias is to make payments equivalent to US$360 million and receive from the Govemment US$65 million in operating subsidies8. In 1993, the year before Metrovias took over the control of the system, the Government paid out US$54 million in operating subsidies for the subway and the Urquiza line. 3.35 The financial and operating results for the first two years of private operations (Annex H), 1994-1995, show the concession to be a success thus far. Total revenues were up by about 25 percent in each of the operating years. In 1996, total ridership was up by 37 percent over 1993. In fact, the level of ridership attained in 1996 for the subway was equal to that of year eight (2001) of the proposal. On the Urquiza line, passenger volumes in 1996 were 48 percent above the 1993 level. Total revenues in 1995 surpassed the forecast by about US$21 million. Metrovias also did well on non-operating revenue which, in 1995, was more than double what was included in the concession proposal. 3.36 The high growth in ridership and the requirements for taking over the concession increased the cost of providing the service. In 1995, labor costs of US$61 million were up by 14 percent when compared to the projections. Similarly, energy costs also increased by about 40 percent during this period. On the other hand, maintenance costs were nearly half of the projection. The biggest increase, by about US$14 million, was in the expense category 'other expenses" which is probably used to balance the difference between revenues and expenditures to the levels indicated in the concession agreement. Based on the financial performance so far, there is very little likelihood that Metrovias would abandon the concession. G. Environmental Impact 3.37 The rapid increase in motorized traffic and an accompanying reduction in all public transport modes, especially rail-based, has led to a deterioration in the urban environment due to an increase in air and noise pollution and congestion. Although a favorable wind regime has helped to keep air pollution relatively low in the AMBA, traffic fumes accumulate to unhealthy levels during working hours in narrow, heavily traveled streets of the city center. While air pollution is primarily an inner city problem for workers, shoppers and residents who are subject to vehicle pollution, other externalities such as accidents, noise pollution and congestion are rampant problems in many parts of the metropolitan region and have contributed to the degradation of urban space. 3.38 Unfortunately, a system to monitor the level of air pollution does not exist in Buenos Aires. It is, therefore, difficult to develop effective policies and practices aimed at limiting pollution without knowing the seriousness of the problem. As part of project preparation, an air quality and noise monitoring program has been defined for Buenos Aires. The proposed project would support the implementation of the recommended monitoring system, including procurement and installation of the monitoring equipment and an associated training program at an approximate base cost of US$2 million (see Annex J). 3.39 In the case of the traffic safety subproject, a preliminary environmental screening was conducted for all proposed road/rail crossings (see Annex I). None of the proposed crossings was found to have adverse environmental impacts. No residential resettlement is envisioned, neither for the traffic safety nor for any of the other subprojects. However, the operational manuals for the traffic safety and transport integration subprojects would set out the procedures to deal with impacts on commercial and residential properties, in accordance with a declaration of principles contained in a Social and Environmental Letter, which was agreed during loan negotiations and issued by SOPyT in March 1997. Govemment payments required in this respect would be considered part of project costs (see Table 4.2). 8 These are contractual obligations which differ slightly from the Metrovias initial proposal.  -20- Moreover, the institutional subproject would include technical assistance to provide advice on environmental and social aspects of project execution, under terms of reference acceptable to the Bank. 3.40 Positive environmental impacts would result from a reduction in cars and bus traffic and thus a reduction in air pollution, noise levels, traffic congestion, and road accidents. Other positive impacts include the decrease of fatal accidents resulting from the construction of grade separations at the most dangerous road/rail crossings. H. Public Participation 3.41 The final designs for most transfer centers and road/rail grade separations would be developed with the participation of the affected population. Summarized in paras. 6 and 7 of Annex I, this process would be detailed in the operational manuals for these subprojects, taking account of a successful pilot consultation exercise carried out prior to appraisal for one road/rail crossing site. With regards to the road/rail crossing component, once the grade separations have been ranked according to the selection criteria based on maximum economic rates of return, 10 - 12 crossings out of the total 20 studied would be presented to the affected communities as possible projects. If any crossings were to require residential resettlement or otherwise face strong opposition by the affected communities, they would be replaced by others on the list. On the other hand, if the communities were to object to the design and not the crossing itself, the design details would be modified by the municipalities in consultation with the affected population. Two aspects of design would be especially important: (a) providing acceptable access to the properties adjoining the roads which lead to the underpasses below the railway track; and (b) provision for the use of the crossing by pedestrians as well. To address the former design issue, service roads would normally be provided adjacent to the underpass ramps. In the latter case, pedestrian passages would need to be well-lighted, secure, and easily accessible in order to maximize their utility. Similar criteria would apply to the transfer center component.  -21- IV. PROJECT IMPLEMENTATION A. Institutional Responsibilities 4.1 The Govemment of Argentina would be the Borrower. Metrovias would implement its basic investment program in the same way as it currently does. The other components would be implemented by SOPyT, which would also be responsible for overall project coordination. To this effect, SOPyT would create a Project Implementation Unit (Unidad de Ejecuci6n del Proyecto - UEP) which would report to the Subsecretary of Table 4.1: Implementin A enc for Each Sub roect Metropolitan and Long-Distance Transport. The Bank would Implementing monitor the implementation of the ........ ................... . S . p..r o,e9j..cO.A.................. geny.. project in accordance with a Basic Investment Program of Metrovfas Concession Metrovfas monitoring and supervision plan Rehabilitation of Subway Line A UEP (Annex D). Integration of Transport System UEP 4.2 Project Environmental Monitoring & Traffic Safety Program UEP would be responsible for general Strengthening of Institutional Framework UEP project coordination. It would act as the liaison with the World Bank, periodically update the work plan, coordinate all technical consultants, oversee procurement practices, and act as the focal point for national, provincial and municipal interaction. It would be staffed by a General Coordinator in charge of overall operations, a Technical Coordinator in charge of technical analysis and assistance, a Project Works Coordinator responsible for the bidding, selection and award of civil works subprojects, and an Administrative Coordinator in charge of the selection of consultants, acquisition of goods, contracting of work, administration of project funds, and providing periodic progress reports to the World Bank. The UEP would be established, and its coordinator named, shortly after loan approval. The satisfactory functioning of the UEP would be a condition for loan effectiveness. 4.3 Metrovias. All the investments included in the concession contract are the responsibility of Metrovias, which generally subcontracts the works to third parties. The National Govemment's SOPyT provides independent oversight, certifies the amount of work finished each month, and authorizes payments to Metrovias for completed work. The amounts for each part of the basic investment program have been fixed in the concession contract, with a formula to adjust costs based on changes in the Consumer Price Index of the United States. B. Implementation Schedule 4.4 The loan is expected to be signed between June and August 1997. The Govemment estimates that the project would be completed within four years after loan signing. Completion in four years is possible if there are no delays. However, the bidding process for each bid may take from 7 to 12 months, including the approval of bidding documents, advertisement in the Development Business joumal and local press, bid evaluation, recommendations for award, contract signature, and contract effectiveness. The Bank thus estimates that seven years will be required for project completion; this would be more realistic, taking into account the average disbursement profiles of Argentina and of the Latin America and the Caribbean Region. Therefore, the expected project completion date is June 30, 2003 and the closing date is December 31, 2003. 4.5 The Bank's participation in financing Metrovias' basic investment program would terminate in about 1999, when the US$50 million allocated in the proposed loan is expected to have been disbursed. 4.6 If the Govemment exercises the option of carrying out advanced contracting for Line A and some road/rail crossings, the first contract could be tendered in June 1997 and contracts could be signed in October 1997. Terms of Reference for the transport study and the rail barrier study could also  -22- be issued in June 1997, giving at least four months for consultant selection and contract signing before to the loan becomes effective. C. Procurement 4.7 Procurement would be in accordance with the Bank Guidelines for Procurement of Goods and Works (January 1995, revised January and August 1996) and the Bank Guidelines for the Use of Consultants (August 1981). Standard bidding documents issued by the Bank would be used for the procurement of goods and works by International Competitive Bidding (ICB). The Bank-issued standard contract for consultant services would be used for major consultants' contracts. In the case of procurement under National Competitive Bidding (NCB), standard bidding documents agreed by the Bank would be used, taking account of the recommendations of the recent Country Procurement Assessment Review (May 1996). A General Procurement Notice was published on January 16, 1997. The procurement arrangements are summarized in Table 4.2. All procurement aspects were confirmed during negotiations. Table 4.2: Procurement Arrangements ............ ....(Estimated cost in UIS$ milli2n)- Expenditure Category ICB NCB Other N.B.F.-b Total A. Metrovias Concession - - 142.9 - 142.9 (50.0) (50.0) B. Works - Line A 117.1 - 1.2.Q' - 118.3 (76.1) (0.8) (76.9) C. Works - Transport Integration 10.0 21.4 0.5 - 31.9 (4.0) (8.7) (0.2) (12.9) D. Works - Environment and Traffic Safety 10.0 39.1 1.5 - 50.6 (4.0) (15.7) (0.6) (20.3) E. Equipment for Air Pollution Monitoring 2.9 - - - 2.9 (2.0) (2.0) F. Other Equipment 0.6 1.8 1.0 - 3.4 (0.4) (1.3) (0.7) (2.4) G. Supervision, Other Technical Assistance and Training ly - - 33.7 - 33.7 (27.9) (27.9) H. Transport Planning Unit - - - 7.7 7.7 (0.0) (0.0) I. Project Administration - - 7.6 - 7.6 (7.6) (7.6) J. Impacts Caused by Transfer Centers and Grade Separations - - - 1.0 1.0 (0.0) (0.0) Total 140.6 62.3 188.4 8.7 400.0 (86.5) (25.7) (87.8) (0.0) (200.0) Figures in parentheses are the respective amounts financed by Bank loan. b' Not Bank Financed. d Expansion of signal control center through direct contracting. y Servces to be procured in accordance wIth World Bank Guidelines: Use of Consultants by Wodd Bank Borrowers and by the Wodd Bank as Execu0ng Agency (Washington, DC, August 1981). 4.8 Concession for Subway and Urquiza Line. The ROT (Rehabilitate-Operate-Transfer) concession was tendered internationally in 1992 and awarded to Metrovias in 1993. The Bank carried out a detailed evaluation of that process and concluded that the tendering and selection procedures satisfied the Bank's criteria of transparency, efficiency and free access for potential bidders. Therefore, in accordance with paragraph 3.13(a) of the procurement guidelines, goods and works specified in the basic  -23- investment program of the Metrovias concession would be procured from eligible sources, using the procedures of the concessionaire. 4.9 Rehabilitation of Subway Line A. In 1992 the Govemment expected to receive bilateral funding (which later failed to materialize) for the rehabilitation of subway Line A. Thus the concession tenders specified that the Govemment would separately carry out those works, outside the basic investment program. Most of the rehabilitation works would be carried out under the proposed project through four large contracts: (a) track replacement and associated civil works; (b) other civil works; (c) signals and communications; and (d) electrical substations and associated works. The works would be let by SOPyT as lump-sum ICB contracts, and their execution would be supervised by consultants engaged by SOPyT. The role and collaboration of Metrovias was confirmed in an agreement signed prior to loan negotiations. Shareholders of Metrovias would be eligible to participate in the bidding for physical works, but could not at the same time be selected for construction supervision. In addition, the expansion of the signal control center to accommodate Line A would be contracted directly with the firm that Is currently assembling the control center for the other subway lines. Direct contracting (for about US$1.2 million) is necessary to achieve technical uniformity within the control center. 4.10 Other Components. SOPyT would let about twenty contracts between US$2 and US$10 million to build grade separations at road/rail crossings and to build transfer centers. In addition, there would be relatively minor works and equipment acquisition under the project. Procurement procedures for these would be as follows: (a) contracts for goods estimated to cost US$350,000 equivalent or more, and contracts for works estimated to cost US$8 million equivalent or more, would be procured through ICB procedures in accordance with Bank guidelines; (b) contracts for goods estimated to cost between US$100,000 and US$350,000, and contracts for works estimated to cost between US$350,000 and US$8 million would be awarded through NCB procedures. Standard NCB documents acceptable to the Bank would be included in the operational manuals prepared for the road/rail crossing and transport systems integration components; and (c) contracts for goods estimated to cost US$100,000 or less would be procured through local or international shopping, up to an aggregate amount of US$1 million; civil works costing US$350,000 or less, up to an aggregate amount of US$2 million, would be procured under lump-sum contracts awarded on the basis of quotations obtained from at least three qualified contractors in response to written invitations. 4.11 Procurement Review. All contracts for goods estimated to cost the equivalent of US$350,000 or more, and all contracts for works estimated to cost the equivalent of US$8 million or more, would be subject to the Bank's prior review of the procurement documentation (advertising, bidding documents, bid evaluation, and contract award). The first two NCB contracts for goods and the first two NCB contracts for works would also be subject to the Bank's prior review. For consultants services, all terms of reference would be subject to the Bank's prior review. Subject also to the Bank's prior review would be all consulting firm contracts above US$100,000, all consulting firm contracts selected on a sole-source basis, and all contracts with individual consultants above US$50,000. The thresholds for the Bank's prior review are shown in Table 4.3.  -24- Table 4.3: Procurement Thresholds Description Type of Procurement Prior Review Contract Value ............ .................................................................................... ............... .............. ............ . Works ICB All NCB First two contracts 350 to 8,000 (Price Quotations from at None < 350 least 3 Bidders) Goods ICB All NCB First two contracts 100 to 350 (Price Quotations from at None < 100 least 3 Bidders)..100 Consulting Servces Firms All > 100 Firms TOR only up to 100 Individuals All > 50 IndividualsTOon Uto5 D. Disbursements and Special Account 4.12 The bulk of the proceeds of the proposed loan, primarily related to Line A and the Metrovias concession, are expected to be disbursed over a period of four years. Another three years would be required to disburse the rest of the loan proceeds especially for traffic safety, transport integration, and institutional development components. The disbursement period, equal to the average seven-year profile for Latin America, was determined after taking into account: (a) contractual obligations of the Government to undertake the railway-related investments according to a specified schedule; and (b) ability to use