Mozambique - Beira Railway Project

Documentof The World Bank FOR OFFICIAL USEONLY ReportNo: 29992 PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OFSDR75.6 MILLION (US$ 110.0 MILLIONEQUIVALENT) TO THE REPUBLICOFMOZAMBIQUE FOR BEIRA RAILWAYPROJECT September23,2004 RevisedNovember9,2004 Transport Sector CountryDepartment2 Africa Region This document has a restricted distribution and may be used by recipients only in the performanceo f their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization.  CurrencyEquivalents US$1=21,804 Metical (as of September2004) Abbreviations andAcronyms AFTTR Africa Transport Unit KfW Kreditanstalt fur Wiederauflau (German Bilateral Aid) APL Adaptable Program Loan kmph Kilometers per hour ANE Administracao Nacionale de Estradas, (National MICOA Ministryo fEnvironmental Roads Authority) Coordination BOT Build-Operate-Transfer MP-Line Machipanda Line CAS Country Assistance Strategy Mtpa Million tons per annum C B A Cost Benefit Analysis NEPAD NewPartnership for Africa's Development CCFB Companhia dos Caminhos de Ferro da NGO Non-governmental Organizations Beira (Beira Railway Company) CRC Compensation and Relocation Committee N P V Net Present Value C F M Portos E Caminhos de Ferro de O D A Overseas Development Administration Moqambique, E.P (Mozambique Ports and Railways Enterprise) DANIDA Danish International DevelopmentAssistance PAS Project Accounts Section DGIS Direktoraat Generaal International PrU Project ImplementationUnit Samenwerking (Directorate General o f International Relations) EA Environment Assessment RAP Resettlement Action Plan EAMP Environmental Audit and Management Plan RITES Rites Limited EIA Environment Impact Assessment RMI RoadManagement Initiative EMP Environment Management Plan RPF Resettlement Policy Framework EOP Endofproject RPRP Railway and Ports Restructuring Project ERR Economic Rate o f Return SA Special Account EU European Union SADC Southern Africa Development community FINNIDA FinnishInternational DevelopmentAgency SBD StandardBiddingDocuments FM Financial Management SHE Safety, Healthand Environment FMR Financial Monitoring Report SIDA Swedish International Development Cooperation Agency GDP Gross Domestic Product SIL Specific Investment Loan GOM Government o f Mozambique SOE Statement o f Expenses GPZ Zambezi Valley Development Authority SSATP Sub-Saharan Africa Transport Policy Program IAD Internal Audit and InspectionDirectorate TA T e c h c a l Assistance IBRD InternationalBank for Reconstruction and NORAD Norwegian Agency for Development Development Cooperation I C B InternationalCompetitive Bidding USAID United States Agency for International Development IDA InternationalDevelopmentAssociation VAT Value Added Tax IRCON IrconInternational Limited Vice President: Callisto E.Madavo Country Director: Michael Baxter Sector Manager: Sanjivi Rajasingham Task Team Leader: Ani1 S. Bhandari  MOZAMBIQUE BeiraRailway Project CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE ..................................................................... 1 1. Country and sector issues........................................................................................................ 1 2. Rationale for Bank involvement............................................................................................. 3 3. Higher level objectives to which theproject contributes........................................................ 4 B. PROJECT DESCRIPTION..................................................................................................... 5 1. Lending instrument................................................................................................................. 5 2. Project development objectives and key indicators ................................................................ 5 3. Project components ................................................................................................................. 6 4. Lessons learned and reflectedinthe project design................................................................ 8 5. Alternatives considered and reasons for rejection.................................................................. 8 C. IMPLEMENTATION., ......................................................................................................... 11 1. Partnership arrangements...................................................................................................... 11 2. Institutionaland implementationarrangements (Annex 6) .................................................. 11 3. Monitoring and evaluation o f outcomes/results., .................................................................. 15 4. Sustainability......................................................................................................................... . . . 16 5. Criticalrisks andpossible controversial aspects................................................................... 16 6. Loadcredit conditions and covenants................................................................................... 20 D. APPRAISAL SUMMARY................................................................................................... 21 1. Economic and financial analyses.......................................................................................... 21 2. Technical Aspects ................................................................................................................. 23 3. Fiduciary............................................................................................................................... 24 4. Social..................................................................................................................................... 25 5. Environment.......................................................................................................................... 27 6. Safeguard policies................................................................................................................. 28 7. Policy Exceptions and Readiness.......................................................................................... 28 Annex 1: Country and Sector Background.................................................................................. 30  Annex 2: Major Related Projects Financedby the Bank and other Agencies .............................. 34 Annex 3A: ResultsFramework and Monitoring........................................................................... 36 Annex 3B: Arrangements for results monitoring.......................................................................... 38 Annex 4: DetailedProject Description......................................................................................... 40 Annex 5: Project Costs.................................................................................................................. 43 Annex 6: ImplementationArrangements ...................................................................................... 46 Annex 7: Procurement .................................................................................................................. 49 Table 7-A: Sena Line Project Components to be Financed by IDA............................................. 51 Table 7-B: Sena Line Project Components to beFinanced by the Concessionaire ...................... 54 Table 7-C: Consultant Selection Arrangements (US$ equivalent) .............................................. 55 Table 7-D: Allocation o f Credit Proceeds ................................................................................... 56 Annex 8: FinancialManagement andDisbursementArrangements ............................................ 57 Annex 9: Economic and FinancialAnalysis ................................................................................. 69 Annex 10: Safeguard Policy Issues............................................................................................... 78 Annex 11:Project Preparation and Supervision........................................................................... 81 Annex 12: Documents inthe Project File..................................................................................... 82 Annex 13: Statement of Loans and Credits .................................................................................. 83 Annex 14: Country at a Glance..................................................................................................... 85 MozambiqueMap IBRDNo.33636 .  MOZAMBIQUE BEIRA RAILWAY PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTTR Date: September 14,2004 Team Leader: Anil S. Bhandari CountryDirector: MichaelBaxter Sectors: Railways (100%) SectorManager/Director: C. Sanjivi Themes: Other financialand private sector Rajasingham development (P);Otherpublic sector governance(S) Project ID: P082618 Environmental screeningcategory: Partial Assessment For Loans/Credits/Others: Total Bank financing(US$m.): 110.00 SOURCES (IDENTIFIED) Total: Borrower:. Banco de Mocambique Maputo MozambiqueFax:258-1-421-915 ResponsibleAgency: Portos E CaminhosDe Ferro de Mocambique(CFM) Praca dos Trabalhadores P.O. Box 2158 Maputo Mozambique Tel: 258-1-307-587Fax:258-1-422-238 Companhiados Caminhosde Ferro da Beira, S.A.R.L. (CCFB)  Maputo Mozambique Is approval for anypolicy exceptionsought fromthe Board? from [ ]Yes [X]No Does the project include any criticalrisks rated "substantial"or "high"? Re$ PAD C.5 [ ]Yes [X]No Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [XIYes [ ]No Project developmentobjective Re$ PAD B.2, TechnicalAnnex 3 The main developmentobjectivesof the proposed Project are to: (a) make cost effective and efficienttransport available for the freight andpassengertraffic in the ZambeziValleyto accelerate economicgrowth and reducepoverty in the sub-region; (b)increaseinternational traffic through the Beira Railway system;and (c) ensurethe operational,managerial and financial sustainabilityof the Beira Railway system. Project description[one-sentencesummary of each component] Re$ PAD B.3.a, Technical Annex 4 Component 1. Rehabilitation,maintenanceand operationof the SenaLine (approximately 600 km)in accordancewith the terms of the Concessiqn Agreement. Component 2. Rehabilitation,maintenanceand operationof the MachipandaLine (approximately300 km)in accordance withthe terms of the Concession Agreement. Component 3. InstitutionalStrengthening. This componentcomprisesprovision of technical assistance,training and consultantservicesto CFM so as toenhanceits capacityto oversee implementationof the project, implementits restructured functions,supervisethe construction and rehabilitationworks, facilitateindependent technical and financialaudits, conduct transport sector studies, and prepare its long termrailway and ports developmentplans. Which safeguardpolicies are triggered,if any? Re$ PAD 0.6, TechnicalAnnex l0 The project triggers the followingWorld Bank Safeguard Policies:EnvironmentalAssessment (OP 4.01),Natural Habitat (OP 4.04), andInvoluntaryResettlement(OP 4.12)which have been compliedwith in the EnvironmentalAudit and ManagementPlan and the Resettlement Action  Plan prepared for this project. In accordancewith World Bank ratings,the Environmental ScreeningCategoryis "B1', Significant,non-standardconditions,if any, for: Re$ PAD C.7 Board presentation: None. Loadcredit effectiveness: (1) The takeover of the Beira Railway Systemby the Concessionaire (CCFB)has been completed; (2) A de-miningcertificatehas been issued,in form andsubstancesatisfactoryto IDA, for 10 meters on either side of the first 180kms of the Sena Line startingfrom Dondo; and (3) The Investmentand Fiscal Agreement has been duly authorizedor ratified by the Borrower and CCFB andis legallybinding upon the Borrower and CCFBin accordancewith its terms. Covenants applicableto project implementation: (1)The Borrowerwill satisfactorilyimplementthe agreed Environmental Audit and Management Plan (EmMP) and the Resettlement ActionPlan (RAP) and carry out potential future resettlementor land acquisitionin the Beira Railway System Right of Way, accordingto the sameprinciples as agreed in the approved RAP; and (2) The Borrower, as the ConcedingAuthority, shallcarry out the De-miningProgram referred to in SectionCS, in form andsubstancesatisfactoryto the Association.  A. STRATEGIC CONTEXT AND RATIONALE 1. Countryandsector issues Mozambique has sustained a higheconomic growth rate since achieving peace in 1992,mainly due to the transformationo f a centrallyplannedstate-controlled economy into amarket-oriented one. As a result o fpeace, democracy, liberalization, andprudentmonetary and fiscal policies, Mozambique's GDP growth rate has beenwell above the average for Africa. Growth averaged 9% per annum from 1997 to 2002, and i s projected at between 7% and 12% annually until2005. However, continuedeconomic growthwill require, among other actions, improvements inbasic infrastructure and reduction inimpediments to private sector growth. Mozambique i s highly dependentuponregionaltrade and investment flows and regional developments can significantly influence the pace and sustainability o f its own development. In 1999, Mozambique ratifiedthe Southern Africa Development Community (SADC) trade protocol, which aims to establish a free trade area insouthern Africa, bothreflecting GOM's importance to regional integration and givingit greater momentum at the same time. Effective functioning o f the transport sector - roads, railways, airports, and seaports- inthe country and, inparticular, withinthe Maputo, BeiraandNacalacorridors (which arepart ofthe development strategy for regionalintegration o f SADC) i s critical for maintainingthe momentum o f regional integration and for managingthe increased interdependence between Mozambique and its neighbors. However, inspite o f some improvements inthe recent past, the transport sector i s still characterized by: (i) freight transport costs; (ii) high unpredictabilityo f railway operations due to heavy detention o fwagons inneighboring railway systems; (iii) inability o fpublic sector entities inthe transport sector to generateenough surplus to keeptheir assetsina goodcondition; (iv) inadequate condition o f the rail and road infrastructurebecause o f various causes including inadequate and irregular flow o f funds for maintenance; (v) slow change due to poor incentives structure and cumbersome rules andprocedures; and (vi) highrate o f accidents, particularly on roads, mainly due to inadequate safety consciousness, poor safety training, and inadequate enforcement o f safety and environmental regulations. To addressthese issues, GOM is inthe process o f implementingwide rangingreforms inthe transport sector. The reforms inthe roads sub-sector include separating funding andplanning functions from executiono fworks, establishing the Road Fundas an autonomous legal entity, and strengtheningthe capacity o f the agencies responsible for undertaking and monitoring road works. Inthe railways andports sub-sectors, the reforms have focused on involving the private sector inthe management and operation o f railways and ports with a view to mobilizing private capital and improving efficiency o f operations. (See sector background inAnnex 1). However, the reforms have yet to impact the centralregion o fMozambique, where poor transport connectivity o f the areas located along the Zambezi river to the port o fBeira has adversely affectedthe growth o f the region and slowed regional trade and investment flows. In the past, the BeiraRailway System, consistingo f 317 kmMachipandaRailway Line and 600 km Sena Railway Line, was the maintransport system for the centralregion inMozambique. The 1  Machipandaline i s currently operational but i s inneed o f improvements. The Sena Railway Linewas damagedduringthe conflict ofthe 1980sandhasbeenout o fcommission since 1983. Prior to closure in 1983, the Sena Railway Linecarried coal, wood, cotton, fertilizer, cement, sugar, limestone and miscellaneous agricultural products. The Sena Linepassesthrough the provinces o f Sofala and Tete and additionally has a significant economic influence over Zambezia province. Overall, the line impacted a population o f over 4.0 million. However, in 1983, the line had to close and discontinue operations due to extensive damage duringthe war. Since then, inthe absence o f appropriate transport systems, poor inhabitants are forced to walk miles to reachmarkets and to satisfy social obligations. As a result of the lack o f transport infrastructure, development o f any kindo fbusiness, even agri-business i s proving difficult. If rehabilitated, the Sena Linewould have a significant impact on improving accessibility o fthis area, particularlythe eastem part o f the district o f Gorongosa, northwestempart o f the district o f Cherigoma, and southeasternpart o f Moatize. Itwould also re-establish Malawi's rail access to the Port o f Beira andprovide an altemative multi-modal (roadrail) route for internationaltraffic from Zambia to the port o fBeira. The rehabilitation o f the BeiraRailway Systemis, therefore, considered a critical priority for the Government and GOM i s keento do so through the involvement o f the private sector inboth the rehabilitation, operation and management o f the system. Efficient operation o fthe Beira Railway System i s expected to create economic activities through increasedproduction o f coal, wood, cotton and other agricultural products in the area and to increase the incomes o f inhabitants through higher consumption and investment. The rehabilitation ofthe MachipandaRailway Lineis financially viable as it has carried close to one million tons o f freight traffic as well as some passenger traffic. However, while the Sena Railway Line is economically viable and will have a significant socio-economic impact on the centralregion, it will needGOM's support to make it commercially viable and attract the private sector for rehabilitation and operation. The process to identifyan experienced private entity for the BeiraRailway System, which commenced three years ago, has already been concluded and a 25 year concession agreement with the consortiumcomprising RITES andIRCONofIndiawas signed on August 30,2004. The concessionaire will have the responsibilityto first rehabilitate the BeiraRailway System and then operate the same for the rest o fthe concessionperiod. The project i s being supported through a highshare o fpublic funding as the regionhas a weak economic base, which means that it will take time for the economic development o fthe region, for the traffic to build up, and for the system to become financially self-sufficient. However, the substantial expected economic benefitsjustify the rehabilitationo f the line. The proposed rehabilitationo fthe SenaLinewould be adequateto enable it to carry all the available andprojected freight andpassenger traffic including any coal that may be producedand exported usingthe current technology. Plans are also underway to concession the Moatize coal mines to the private sector, thoughtheprocess ofconcessioning and development ofthe coal mines and the actual availability o f coal for export could take between8-10 years. While the quantity o f coal that could actually be minedand exported i s still to be ascertained, there are indications that this could amount to between3 and 5 milliontons per year. The Sena Line rehabilitation, as currently planned, with some additional capacity enhancing investments, would enable the additional quantities o f coal, i.e., up to 5 milliontons, to be transported efficiently and 2  as per the requirements o f the coal concessionaires. Incasethe coal concessionaire decides to increase coal production and export beyond the present indications, the increased quantities could also be carried with further incremental investments but without any fundamental change inthe track infrastructuredesign. The BeiraRailwayConcession designmakes adequate provisions for negotiations among the potential coal mineconcessionaire, the rail concessionaire, and the GOM to agree on the standards and the terms and conditions necessary to satisfy the requirementso fthe additional traffic. However, the restoration o fthe SenaLinedoes not preclude the consideration o f alternative means o f transporting the coal, such as bybarge transport along the Zambezi river, depending on the actual quantity o f coal to be transported and the comparative cost advantage. 2. Rationale for Bank involvement The Bank Group is ideally suitedto help the Project. It canprovide not only full-service policy advice, but also complementary instruments to support implementation. Through its long-standingassociation with Mozambique, IDA has developed a deep knowledge o f the country's transport sector and i s well positionedto support the implementation o f Government's transport reformprogram incontinuation o f its extensive involvement inthe sector incollaboration with other DevelopmentPartners (see reference o f related Bank and other DevelopmentPartner fundedprojects inAnnex 2). Within the region, IDAi s supporting, or has supported inthepast, similar restructuring, revitalization and privatization projects inthe railway sector inneighboringcountries o fMalawi, Zimbabwe andZambia and i s ina positionto help Mozambique as well as the neighboring countries reach a common understanding for the efficient management o f the rail corridors inthe region. World wide, IDA has by now accumulated substantial experience indesigningsuccessful concessions for railways ranging fi-om the high-trafficked Latin American railways to the relatively lower-trafficked African railways. IDA i s therefore ina position to: (i) provide financial and technical advisory services and add value related to risk allocationbetween the conceding authority andthe concessionaire; (ii) internalize regulatory issues into the concession contracts; (iii) mitigate negative environmental, social, and safety impacts; (iv) minimize emergingpost-privatization issues through appropriate contract design; and (v) promote workable dispute settlement mechanisms. IDAis already supportingthe on-going Railways andPorts RestructuringProject (RPRP) in Mozambique whose main development objective i s to improve the operating efficiency o f the three major railway andport systems o fMozambique, namely the Nacala, Beira andMaputo port-railway systems, through the involvement o f the private sector intheir rehabilitation, operation and management, and through staff retrenchment and rationalizationinthe CFM. The ports o f Beira andMaputo are already beingoperated by concessionaires and concession agreements have been signed for the Nacalaport-railway system and the Ressano-Garcia railway line between the port o f Maputo and South Africa. The retrenchment o f CFM's surplus staff and their social rehabilitationis proceeding well. A total ofabout 11,300 staffhavebeenretrenched, 3  and another 2,300 are inthe process o fbeingretrenched. After completion o fthe staff rationalizationprogram, including transfer o f needed staff to the concessionaires (approximately 5,000-5,500), CFM will be left with a total o f about 500 staff, down from the original total o f 19,200. Preparatory activities leading up to the concessioning o f the BeiraRailway System were supported by IDAunder the RPRP and the proposed BeiraRailway Project will support its implementation and inparticular assist GOM inmeeting its financial commitments under the concession agreement. 3. Higher level objectives to which the project contributes The overarching objective o fthe Country Assistance Strategy (CAS, October 20,2003) is to promote economic growth, reduce poverty, expand service delivery, and improve the well being o fthe Mozambicanpeople. The GOM's growth and poverty reduction strategy paper (PRSP) and the CAS explicitly identifyincreased investment ininfrastructure as the single most efficient contributionto long-term economic growth. The proposedproject i s expected to have a catalytic impact on growth, open the Zambezi valley to private sector investments, reduce the transport cost o f exports from the central region, restore the livelihood o f thousands o f households disruptedbythe prolongedwar, andpromote regional integration. Itwill support the GOM's poverty reduction strategy by focusing on improving the investmentclimate and expanding service delivery. The Beira Railway Systemis being concessioned to the private sector, with the concessionaire havingthe responsibility to rehabilitate, operate and maintain the system for aperiod o f 25 years. The concessionaire was selected through a competitive biddingprocess and the criteria o f evaluation was the least financial support required from the GOM. At the time the CAS was finalized, the project was still at an early stage o f preparation and the final bids were not received. The total project cost as estimated by the Client was about US$146 million and the level o f support requested from the G O M was expected to be inthe range o fUS$60 millionto US$SOmillion, with the balance to be fundedby the private sector. However, after the bids were received, though the total project cost as bidbythe concessionaire who submitted the lowest evaluated bid (excluding VAT) i s close to the Client's estimate, the financial support requiredby the concessionaire i s US104.5 million(excluding VAT). The Bank was left with the burdeno f filling the financing gap, as changing the amount would have amountedto changingthe rules agreed inthe biddingprocess. Giventhe highpriority assigned to this project by the Government, who effectivelyrefer to it as "the line o f reconciliation", and the considerable positive impact expected on the socio-economic development o f the region, a decisionwas taken at the management level to support the higher requested amount. The operation i s inthe priority infrastructure sector. As observed earlier, the line passes through the provinces o f Sofala and Tete and impacts a population o f over 4 million, who have no travel alternative. The rehabilitationo fthe Sena line i s expected to have considerable impact on the economy o f central Mozambique, particularly on the production o f coal, wood, and cotton. This i s still a post- conflict intervention, eventhough the war ended in 1992, and it i s meant to reestablish connectivity inthe country. The proposed rehabilitationo f the Sena Line i s adequate to carry all the available and projectedfreight and passenger traffic andwould also enable additional quantities o f coal to be transported efficiently, subsequentto concessioning o f the Moatzie coal mines. As aresult, the scope ofthe project couldnot bereduced. Adjustments would bemade 4  to the country portfolio, indiscussions with the Government and Bank regionalmanagement, to accommodate the impact o f this higher amount on other investmentprojects. B. PROJECT DESCRIPTION 1. Lendinginstrument The SIL (Specific Investment Loan) instrumenthas beenchosen for this project. Most o f the IDA funds (close to 95%) will beusedfor financingthe rehabilitationofthe SenaLine infrastructure while the remaining funds would be usedto provide technical assistance to CFM. The Borrowerwill re-lendthe CFM-allocated funds to CFM on terms and conditions to be specified ina subsidiary loan agreement to be entered into between the GOM and CFM. The remaining funds will be on-lent to the concessionaire inaccordance with the terms and conditions to be specified ina tripartite agreement to be entered into betweenthe GOM, the concessionaire, and CFM. 2. Projectdevelopmentobjectives and keyindicators Project Development Objectives. The main development objectives o fthe proposed Project are to: (a) make cost effective and efficient transport available for the freight and passenger traffic in the Zambezi Valley to accelerate economic growth andreduce povertyinthe sub-region; (b) increase internationaltraffic through the BeiraRailway System; and (c) ensure the operational, managerial and financial sustainabilityo f the Beira Railway System. Key ProjectIndicators. The progress towards achievingthe development objectives will be measured, among others, by the following key indicators (see also Annexes 3A and 3B): Sena Lineprogressively opened to freight and passenger traffic with freight traffic reaching at least 1.O milliontons per annum by the Endo fProject (EOP); Linkto MalawiRailways established so as to offer onemore alternative routebyrail for the land-locked country; Re-opening o f an alternative multi-modal (roadrail) route for international traffic from Zambia to the port o f Beira; Internationaltraffic from Zimbabwe on the Machipanda line increased by 30% by EOP; and BeiraRailway System operating as a reliable, productive, and commercially viable system. The indicators for these at EOPbeingas follows: Reliability: 9 track under temporaryspeedrestrictions: reducedfrom 10% to lessthan2%; 9 averagekilometersbetweenlocomotivefailures: increased from 10,000 to more than 100,000; and P time lagbetweenwagon demand and supply: reduced from 4 days to 2 days; Staffproductivity: net ton-kilometers pluspassenger kilometersper staffper year increased from 0.35 millionto 1.3 million; and Commercialviability: working ratio (operating cost excluding depreciation and interesthevenue) decreased from more than 100% to less than 70%. 5  As far as the Sena Line is concerned, the above indicators wouldbemeasurable only after the line has beenrehabilitatedand opened to traffic. Duringthe periodo f rehabilitation, the implementing agency will maintainrecords o fprogress through use of appropriate project planningand management software. The following indicators would be used to measure the implementationprogress: total value o fprocurement orders finalized as a percentage o fthe total cost o f rehabilitation; materials delivered at site as a percentage o f the total value o fmaterials to be procured; and kilometers o f rehabilitation completed and certified for carrying traffic as a percentage o f the lengtho fthe Sena Line. The Projectperiodwill bejust adequate to complete the rehabilitation o f the Sena and MachipandaLines and the real impact o f the project on the cost and quality o f transport services will be felt only inthe years subsequent to the completionofthe project. 3. Project components Background. GOM, supported by the on-going Railways and Ports RestructuringProject, has awarded the concession o fthe Beira Railway Systemto a consortium o fMessrs. RITES and IRCONo f India. The consortiumwas selected following an intemationalcompetitive bidding process consistent with the Bank guidelines. The period o f the concession i s 25 years. The selected consortium has already registeredand incorporatedthe concession company called Companhia dos Caminhos de Ferro da Beira, S.A.R.L (CCFB) on July 29,2004, and the concession agreement (Concession Agreement) betweenGOM and CCFB has also been signed on August 30,2004. As the MachipandaLine i s currently operational, CCFB will be able to continue operations and undertakerehabilitation works on the line inparallel. For the Sena Line, however, operations wouldbe resumed instages. The rehabilitationworks would be taken up first, and as the line becomes fit for operations, operations would be resumedon the rehabilitated sections. The rehabilitationo f the whole line will be completed within a period o f four years according to clearly defined standards and schedules specified inthe Concession Agreement. The concession fees will comprise: (a) an entry fee o fUS$2.00 millionpayable on takeover; (b) an annual fixed fee o fUS$1.O million from year 11to 25 (included); and (c) an annual variable fee assessedas 3.0% o f CCFB's gross revenuefor traffic up to 300 millionnet-ton-kilometers and 5% between300 millionand 1billionnet ton kilometers, and 7.5% for traffic over 1billion net ton-kilometers. The Concessionaire shall ensure that the railway infrastructure i s developed insuch amanner that ithasthe capacity to handle thepotentialcoaltraffic subsequentto operationalization o f the proposed coal concession, through appropriate contractual arrangements with the coal concessionaire onthe basis of successful negotiations with the coal concessionaire andthe ConcedingAuthority. Project Components. The Project will have the following three main components (See Annex 4 for details): 6  Component 1. Rehabilitationof the Sena Line(USN27.5 million). This component comprises rehabilitation, maintenance and operation o f the Sena Lineinaccordance with the terms o f the Concession Agreement. IDA hnds (US$104.5 million) will be usedexclusively to finance part o fthe expenditures related to the rehabilitation o f the Sena Line and its spur lines, totaling 600 km. The component includes project management services and environmental and social enhancement measures. Component 2. Rehabilitationof the MachipandaLine(US$25.0 million). This component comprises rehabilitation, maintenance and operation o fthe MachipandaLine(approximately 300 Ism) inaccordance with the terms o fthe Concession Agreement. This component will be financed fully by the concession company (CCFB). Component3. InstitutionalStrengthening(US$5.5 million). This component comprises provision o f technical assistance, training and consultant services to CFM so as to enhance its capacity to oversee implementation o f the project, implement its restructured functions, supervise the construction and rehabilitation works, facilitate independenttechnical and financial audits, conduct transport sector studies, andprepare its long term railway and ports development plans. The total project cost i s $158.0 millionexclusive o f VAT and customs duties, o fwhich IDA will finance $110million equivalent, or about 70 percent (see Annex 5 for details). 7  Table 1. Project cost (excluding VAT and customs duties) Component financing (US$Million) 1.Rehabilitation and operation ofthe 127.5 81.0 104.5 95.0 Sena Line Infrastructurerehabilitation 119.3 Rolling stock and workshop 8.2 2. Improvement and operation of the 25.0 16.0 0.00 0.0 Machipanda Line Infrastructurerehabilitation 7.95 Rolling stock and workshop 17.05 3. Institutional Strengthening 5.50 5.0 Total Project Cost 158.0 110.0 100.0 4. Lessons learned and reflected in the project design Lesson 1:Massive investmentsininfrastructure, locomotives, rolling stock, and communication systems have generally been ineffective inimproving reliability or efficiency becausethe investments were not always directed at removing the most critical constraints associatedwith public sector management and operation o f complex railway systems. The proposedproject, therefore, links the financial support to the project to the participationo f the private sector through concessioning inthe Beira Railway System. Lesson 2: Financialclosure after award o f the concession, inmany instances, has taken unduly long, hence, causing costly delays intakeover o f the concessioned assets. To avoid this inthe proposed project, firm commitments from financing institutions or the concessionaire were specified as necessary conditions for qualified bids for the Beira Railway Systemconcession. 5. Alternatives considered and reasons for rejection At the time of identification ofthe Project in2001, the main focus was on supporting the rehabilitation o f the Sena Line, "the line o freconciliation" according to Mozambicans, with a view to: (a) reestablishing connectivity and so revitalizingthe Zambezi Valley; (b) inaugurating a new phase inGovernment's fight against poverty and inequality (c) impacting positivelymore than 4 millionpeople livinginthe provinces surrounding the Beira Railway system; (d) providing a catalyst for private sector ledpoverty reduction and economic growth incentral Mozambique; and (e) significantly improving regional integrationby connecting the port o f Beira to Zimbabwe, Malawi, and with aroad link, Zambia. The Bank agreed to support the Project only after a strong economic rationale was established. The Project was also made contingent on the Government selecting a concessionaire through a competitive process to rehabilitate and subsequently operate the line. At that time, no assumption was made o f large- scale transport o f coal since any possibility o f such transport appeared quite distant. 8  However, as the Sena Line rehabilitationproject preparation progressed, interest inthe Moatize coal concession was rekindled. This inevitably gave rise to questions about the way the rail concession would be structured to ensure satisfactory transport of coal incase the coal concessionaire opted to transport it over the Sena Line. It also gave rise to questions about the design and capacity o f the line, about the tariff structure for transporting the coal ,about the investmentsbythe concessionaire, and about the change over from a socio-economic nature o f the rail transaction to a commercial one. Nevertheless, evenassuming that a coal mining concession couldbe agreed and financed, the possibilityo f coal inlarge quantities for transport byrailwas many years away, estimatedbetween8-10 years at that time (now, 6-7 years), and there was no clear estimate of the quantity o f coal that would be available. Moreover, viability o f any coalproject would dependuponthe results o fthe feasibility analysis, particularly on whether satisfactory answers couldbe found for the disposal of steam coal, the financial viability o f coal export inthe event o f a decline incoal prices, the extent o f coal reserves, the quality o f coal, and so on. Itwas, therefore, not possible to designthe rail concession with definitive provisions for coal. Duringdiscussions within the Bank and with CFM, a number o f alternative ways to deal with the issue o fpossibly handlingcoal traffic at some time inthe future were discussed and eventhough no single alternative was considered ideal, the designpresented in this document represents the bestpossible consensus. The various alternatives that were considered are discussed below. Itwas also argued bypotentialcoal developers that the rail concessionaire couldreap awindfall profit once the coal traffic materializedinlarge quantities, giventhe fact that IDA funds would have been providedon concessional terms. Inview o f this, the concession designwas modified to include a variable concession fee, which will start at 3% o f the gross revenue and gradually increase to 7.5% o f the gross revenueas the traffic increases. With coal traffic, the revenues will be inthe upper range and the concessionaire would be requiredto pay a fee of 7.5% o f the gross revenue. The concessionaire will also be requiredto make additional investment on locomotives androlling stock and capacity enhancements. Taking all factors together, the chances o f a windfall profit would seem remote. Evenso, provisions have beenincluded inthe rail concession agreement for negotiations betweenall parties concerned ingood faith whenthe need to transport coal by rail from the Moatize coal concession becomes a reality. Alternative 1. An integrated coal/mines/ports/railway concession. This alternative o f awarding the concessions for the Beira Railway Systemand the Moatize coal mines together would have: (a) allowed the concessionaire to have a first hand control over the railway design and tariff structure for the transport o fcoal; and (b) satisfied the coal developers' needs for certainty over railway services for coal transport. However, this alternative was rejected because: (a) this would have requiredwaiting for Sena Line rehabilitationuntil the exploration, pre-feasibility and miningstudies were completed and a coal concession was signed (expected in8-10 years); (b) giventhe continued uncertainty over the miningproject, the Government was seriously concerned that it mightnever happen; (c) itwould have beenpolitically and economically very costly for Zambezi regionto wait for all the components o f the project to fall into place; and (d) with the management o f the line being inthe hands o f the coal concessionaire, service to other important customers could have suffered. As a result, given the highpriority that GOM placed on post-war reconstructionand development o f 9  the Zambezi valley, it was decided to proceedwith the concessioning o f the railway system immediately, but with adequate provisions inthe concession agreement to provide for commercially viable rail transport o f coal when the coal concession materializes. Alternative 2. Designing theproject as an APL. Another option considered was to design the project as a two-phase APL coinciding with a two phase concession design, with the first phase focusing on the rehabilitation o fthe Sena Lineto somewhat lower standards to service the non- coal traffic on offer and the second phase focusing on full-fledgedrehabilitationto carry all traffic, includingthe coal traffic expected when the coal concession becomes operational. However, committing financial support for both the phaseswithin one project was not considered feasible due to the uncertaintyo f the coal concession andthe resultingcoal traffic, nor was this found acceptable to the potentialrail concession bidders for the same reasons. Alternative 3. Rehabilitating the SenaLine to the ultimate standard in onephase. This alternative was considered becausethe total cost o frehabilitating the Sena Lineto the ultimate standards (including signalization, communications etc.) right away could be marginally lower than the total cost o frehabilitatingthe line intwo phases as proposed inAlternative 2. However, this alternative was rejected, first, becausethe savings were considered marginal, and second, again, because o f the uncertainty o f the timing ofthe coal concession. It i s understood that the feasibility o f exporting coking coal from Moatize is contingent upon the steam coal, a by- product, beingeither exported also or sold to a power generating plant. Export o f steam coal appears unprofitablebecause o f the lower market price while sellingit to a power plant requires settingup aplant o f 1000megawatt capacity or more at site. This could cost upward o fUS$1.O billion and take up to eight years to be operational. This would have meant that the additional investment inthe rail line could sit idle for a long time and the interest on the capital tied up would have beenmuch more than the possible savings. Alternative 4. Separating the rehabilitationprogramfrom concessioning. Again, giventhe uncertainty o f the coal concession process, there was a concern that the BOT type of concession for the railway may not be attractive to potentialbidders. The alternative was to rehabilitatethe line usingpublic funds and then offering it to the private sector as a concession for operation and management o fthe railway lines. Moreover, since the potential concessionaires wouldnot need to invest heavily, they wouldbeprepared to pay a highconcession fee and the GOMwould get an adequate retum on its investment. This alternative was rejected for three reasons: (a) GOM does not have the capacity to finance the rehabilitation and would need financing from bilateral or multilateral financial institutions, who would behesitant to support the government ina venture which would require it to bear the full risk o f the proposed investment; (b) the uncertainty o f the coal concession could makethe investment sit idle for a long time (see discussion under Alternative 3); and (c) the future concessionaire could find fault with the quality o frehabilitationand that could create a contentious relationshipwith the GOM. Alternative 5. Separating concessionsfor the Machipanda and SenaLines. This alternative o f separating the concessions for the Machipandaand Sena Lines was considered because the Machipanda Linei s an operational andprofitable line and there would be enough investors willing to bidfor the concession. However, the alternative was rejected for three reasons: (a) the overall value o f thejoint concession i s perceivedto be higher than the sum o f the two individual 10  concessions; (b) the systems are integrated and two separate concessions would have necessitated use o f the Dondo-Beira common corridor by two concessionaires - an approach riddledwith potentially contentious issues o f access pricing and responsibility for the operation o f the common section; and (c) without the Machipandaconcession, the concessioning o f the Sena Linewould have become evenmore difficult. The FinalDesign. The final designo fthe concession draws on the ideas inAlternatives 2 and 3. The concessionaire, with support from IDA funding, would berequiredto rehabilitatethe Sena Line track to the final axle load and speed standards (dividingthis work into phaseswould prove to be very expensive), but limitingthe design o f other infrastructure such as signaling and telecommunications, passing loop lengths, and additional stations to the requirements o fthe essentially non-coal traffic. Interms o f line capacity, this arrangement would be sufficient to carry all the freight traffic currently on offer including coal producedby the existing technologies and some coal produced subsequentto the coal concession, but not all. As and when coal output increases substantially, the concessionaire would berequiredto make the additional necessary investments insignaling, telecommunicationsystems and other capacity works inorder to carry all the coal traffic. The biddingdocuments specify a three way discussion between the GOM and rail and coal concessionaires to finally decide on the line capacity to be established, the terms and conditions o f operation, andrevisedconcession fees, C. IMPLEMENTATION 1. Partnershiparrangements This operation is solely financed by IDA, GOM and the private sector, and does not involve funds from any other DevelopmentPartners. However, a number ofDevelopmentPartners (including Italy, France, Nordic Countries, USA, UK, Germany, Canada, EU, Portugal and Netherlands) have been and continue to be involved insupporting the railways and ports in Mozambique, as indicated inAnnex 2. 2. Institutionaland implementationarrangements(Annex 6) Implementationperiod: The project implementation period i s five years (January 1,2005 to December 31,2009). The concession duration i s 25 years. Institutionalarrangement. The management o frehabilitationo fthe SenaLinewill be separatedfrom its subsequent operation and maintenance and that o f the operation and maintenance o f the Machipanda Line. As far as operations and maintenance o f the two lines i s concerned, it will be the sole responsibilityo f the Concessionaire. Machipanda Linei s currently operational and CCFB will commence operations on the line from day one after takeover, and rehabilitate the line and liquidatethe backlog o fmaintenance while continuing operations. The maininstitutions andentitiesproposed to have arole inthe project include: (i) The ConcessionCompany(CCFB), establishedbythe winningbidder together with CFM (withthe shares beingheldinthe ratio o f 51:49); (ii) The JointVenture Company(RICON), formed by CCFB to provide Project Management Services; (iii) ProjectImplementationUnit (PIU), established by CCFB to supervise constructionworks; (iv) CFM, whose role would be two-fold, 11  one as a 49% equity shareholder inthe concession company, and two, as a representative o f the conceding authority to monitor the Concessionaire's compliance with the terms o f the Concession Agreement and maintainan account o f all fixed infrastructure and mobile assets conceded or leasedto the Concessionaire; (v) IndependentSupervisionEngineer,engaged by CFM to certify, inter alia, quality and quantity o f completed works during the rehabilitation period; and (vi) The RegulatoryBody,which i s proposed to be established sometimes later. Very little economic regulationis requiredfor the railandport sectors. Evenso, GOMis considering setting up a regulatory body for the whole transport sector to ensure that issues`of unfair practices and monopoly abuse, ifraisedby the users or providers o f transport services, are appropriately addressed. The body could also have responsibility for technical, safety and environmental regulation. Technical assistance for establishing the regulatorybody i s being financed through RPRP. MethodStatementfor the Track Rehabilitationprogramfor Sena Line. The Concessionaire and the Conceding Authority have agreed on the basic parameters of the track rehabilitation program, the details o fwhich are also given inAnnex 6. The Method statement covers: (a) survey; (b) collectionandreview o f all existing data from CFM; (c) generation o f a design based on the operating parameters for the system; (d) carrying out the field survey andrefinement o f the base model work plan; and (e) specialised work packages, bridgerehabilitation, track laying and finishing, general works and goods packages, and consultant andtraining services. The method statement will be formalized ina technical manual to be prepared by RICONin collaborationwith CCFB and CFM for internaluse andreference. ConcessionImplementationProgram. The Concession Agreement with CCFB was signed on August 30,2004. CCFB is expectedto complete the due diligencework, finalize the assets and staff to be taken over, and meet all conditions precedent to the takeover o f the Beira Railway Systemby October 1,2004, prior to the effectiveness ofthe proposed Credit. Procurement ProcurementPlanfor rehabilitationof Sena Line-IDA-financedcomponent. The procurement responsibility will be that o f CCFB. As the Concessionaire has been competitively selected following the procedure satisfactory to the Bank, the Concessionaire i s free to choose hisownmethodofprocurement ofgoods, services andworks, subject to the Borrower (Conceding Authority) approving the proposed procurement procedures inconsultationwith the Bank. After the Bank clears the Concessionaire's procurement plan, the Bank's no objections duringtheprocurement process will no more berequired.Hence there will beno prior review for goods, works and services procuredunder this component. A list o f goods, works, and services to beprocured for this component under IDA-financing i s attached inAnnex 7 (Table 7A). The Plan details the packages for the procurement o f works, goods, project management, and other services, the procurement method for each package, and the estimated costs. The cost for this component (net o f V A T and custom duties) to be financed by IDA i s estimated at US$104.5 million. 12  ProcurementPlanfor rehabilitationof Sena Line-CCFB-financedcomponent.The packages to be financed by the Concessionaire are detailed inAnnex 7 (Table 7B). The total cost i s estimated at US$14.84 million. ProcurementPlanfor the MachipandaLine. This component will befully financed bythe Concessionaire and rehabilitation will be undertaken while operating the line. The Concessionaire will planrehabilitation works after takeover and taking account o f the needto maintain operation o f the line. ProcurementPlanfor the InstitutionalStrengtheningcomponent. This component will support: (a) an independent supervision engineer; (b) training insafety, environment and regulation; (c) technical advisor to CFM Board; (d) technical and financial audits; (e) incremental operating costs o f CFM units involvedinthe management o fthe project; (f) sector studies; (g) implementation of EMP and RAP. The consultants under this component will be selected usingthe World Bank guidelines for the selection o f consultants. SpecialProcurementPrinciples. Theprocurement principles givenbelow will be applicable in all cases o fprocurement including procurement usingproceeds o fthe IDA Credit for Components 1and 2: Inspection and certification o fmaterials and work outputs would be undertakenby an independentsupervision engineerto be engagedby CFM under component 3 ofthe Project; The terms and conditions o f the tenders will be framed keepinginview the agreed technical standards; The tender documents above US$3 millioninvalue will bebased on the FIDIC documents for works contracts and on World Bank documents for supply o f goods contracts; The method of open or limitedcompetitive biddingshallbe followed dependingonthe value o f procurement, nature and urgency o f work etc.; Incase o flimitedcompetitive bidding,CCFB willmakethe shortlistofapproved suppliers/contractors; Memberso fthe concessionaire consortiumor their associated ventures will be eligible to bidandwill be awardedthe contract providedtheir bidis within 15% ofthe lowest acceptable offer; Incaseofsupplycontracts covering items producedwithinMozambique, localbidders will be entitledto a domestic preference of 15% ;and 13  (viii) Inthe caseof items (vi) and (vii) above, the biddingdocuments will clearly state the preference clause and the criteria for its application. Procurement plans, procedures and guidelines will be included inthe proposed Financial Procedures Manual. FinancialManagementandAuditing Similar to the management arrangements o fthe on-going IDA-hndedRailways andPorts RestructuringProject (RPRP), the BeiraRailway Projectwill bemonitoredby a Supervision Committee and a Finance Committee. The Director o f Finance o f CFM will be the "Accounting Officer" for the project, assuming the overall responsibilityfor accounting for the project hnds and reporting to the Finance Committee. Aspects such as certification and technical implementationwill be handledby an IndependentSupervision Engineer andthe PIUinCCFB, with oversight from the CFMheadquarters. The day-to-day financial management work will be conductedby the Project Accounts Section (PAS), which has beenset up under the RPRP. (Please see Annex 8 for details). Theproject financialmanagement system inCFM has strengths andweaknesses as detailed in Annex 8. However, overall, CFM is awell-established company with adequately qualifiedand well experienced personnel inaccounting and complies with the statutory financial accountabilityrequirements. Nevertheless, the nature o fthe transactions may be complicated due to their technical content and the fact that payments will bebasedon sophisticated quantity and quality reviewsby engineers. The presence o f an Independent Supervision Engineerwill, however, substantially attenuate this challenge. Internalaudit. The Direktoraat Generaal International Samenwerking (Director o f Internal Audit & Inspection) will ensurethat the project expenditures are subject to internal audit testing on a random basis. Responsesto audit queries are required to be submitted directly to the Chief Executive o f CFM. Externalaudit. The entity financial statements o f CFMwill beauditedby external auditors (currently Ernst & Young) inaccordance with the legislation' andthe audited financial statements along with the audit report will be submitted to IDA within 6 months after the financial year-end. The external audit o f the project financial statements will be carried out by a private sector auditing firm, which will cover both the World Bank and Concessionaire funds at all levels o f project execution. The auditors will be required to (a) express an opinion on the project financial statements, incompliance with International Standards on Auditing (IFAC pronouncements); (b) submit the audit report within 6 months after the financial year-end; and (c) prepare a detailedmanagement letter containing the auditor's assessment o f the internal controls, accounting system, compliance with financial covenants inthe IDA Credit Agreement, and suggestions for improvement and submit to CFM management for follow-up. Disbursementof IDA Funds 1Decree No. 32/90 institutes compulsory audits incountry. 14  Disbursementsfrom IDAwould, for the duration ofthe project, bemade on the basis o fincurred eligible expenditures (transaction based disbursements).IDA would make advance disbursement from the proceeds o fthe Credit by depositing funds into a CFM-operatedSpecial Account (SA) to expedite project implementation. The initial deposit inthe SA would be $5.0 million, which would be usedby CFM to finance IDA'Sshare o f project expendituresunder the proposed Credit. Replenishmento f funds from IDA to the SA will be made upon evidence o f satisfactory utilization o f the advance, reflectedinstatement of expenditures (SOEs) and/or on full documentation for payments above the SOE thresholds. Strengthening its accounting and financial management capacity will enable CFM to maintainan effective financial management and accounting system. Certificationby the independent supervision engineer will be an important internal control measure inthe disbursement process. RetroactiveFinancing. The eligible expenditures incurred after January 1,2004 and prior to the signing o f the Credit agreement would be reimbursedretroactively up to a limit oms$3 million. Inaddition, all disbursementsprior to the date the IndependentSupervisionEngineer starts functioning shall beprocessedbased on certificationby the Project ImplementationUnit o f CCFB. 3. Monitoring and evaluation of outcomeshesults The Borrower, through the PIUofthe Company, will beresponsible for the regular monitoring, evaluation, and reporting o f implementationprogress andproject outcomes/results. The main tool for monitoring the project performance will be the results framework and monitoring arrangements identifiedin Section B2. The main outcome indicators will be the increase in national andinternationaltraffic volumes over both the Sena and Machipanda Lines. However, the Projectperiodwill bejust enough to complete the rehabilitation o fthe Sena Line andremove the bottlenecks on the Machipanda Line. The real impact o f the availability o f these lines on the cost and quality o f transport services will be felt only after the completion o frehabilitationand improvement works. Duringthe Project period, with the progressive opening o f the Sena Line, freight traffic will reach 1milliontons by end o f Project (EOP), international traffic from Zimbabwe on Machipanda Linewould increase by 30%, i.e. from 0.7 million tons to 0.9 million tons per year and the transit time for international traffic on Machipanda Line i s expected to reduce by about 50%. Completion o fthe Sena Linerehabilitation should trigger the rehabilitationo fthe railnetwork inMalawi south o f Blantyre to enable part o f the Malawi export and import traffic, currently movingby roadto Beira, to move by rail. It i s also expected to re- vitalize the traffic from Zambia over the road link to the Sena Lineproviding an alternative roadhail route to the port o f Beira. Staffproductivity will progressivelyincrease from the current level o f 350,000 net ton-kilometers plus passenger-kms per employee per annum to about 1.3 millionper employee per annum. To ensure that these results are achieved, rehabilitation, operation and management o fthe Beira Railway System will be subjected to quality control and inspectionon a regular basis. The Conceding Authority (CFM) shall appoint an Independent SupervisionEngineer, satisfactory to the Bank, to certify and report on, inter alia, quantity and quality o f the rehabilitationworks for 15  the Sena Line, adherenceto the agreedprocurement procedures and eligibility for disbursement o f funds, or any other matters relating to the execution o f the project as defined intheir TORS. 4. Sustainability The long-term sustainabilityo fthe BeiraRail System inMozambique would beconsiderably enhancedunder the Project because of: (a) the involvement o f the private sector inthe rehabilitation, operation, and management o fthe system, which, as per the experience so far, should lead to improvedmanagement and establishment o f a more effective system o f incentives and accountability; (b) a long concession period, 25 years, which will allow the Concessionaire to implement long-term strategies for improving and sustaining performance; (c) addressing the implementationissues early inthe project cycle and articulating insufficient detail the obligations o fboth the Concessionaire and the Conceding Authority as well as the consequences o f non-performance on either side inthe Concession Agreement so as to preempt any possible disputesand legal action; (d) detailed advance planning: and (e) strengthening the institutional capacity o f the Conceding Authority inproject management, quality control, environmental management, safety regulationandmonitoring and evaluation. The Concessionaire's financial model indicates an expected rate o f returnon equity o f 17% andthat should sustain the concessionaire's interest inthe concession and, consequently, the continued efficient operation o fthe BeiraRail System. Furthermore, the Sena Linewill have a great impact on the provinces o fthe central region (Sofala, Tete, andZambezia), which are directly served by this line or are within its area o f economic influence. Excludingthe population o f Beira, about 1.26 millionpeople living directly along this line will see their socio-economic development prospects greatly improved. Inthe long-term, the operation o f the line would enhance investor confidence and interest to participate inthecoal concessioning andother businessventures,thus generating sustainable employment opportunities. 5. Criticalrisksandpossiblecontroversialaspects Beyond the financial support provided through IDA, the Government will not assume any commercial or constructionrisk. The concessionaire will be solely responsible for any losses incurred iftraffic falls below the projectedlevel, including traffic from the neighboring countries, and the Governmentwill be under no obligation to support revenues. GOM's financial support will beprovidedpro rata as the project advances and will be restricted to what i s finally agreed inthe Concession Agreement and correspondinglyreduced if the total project cost turns out to be less thanthe estimate. CCFB will be fully responsible for financing any cost overruns, and since CFM has 49 percent equity inthe company, it will have to bear the proportionate cost o f any overrun. GOMwill, however, be responsible for retrenchingall the surplus staff, i.e., the staff that i s not taken over by the concessionaire. The arrangements for the retrenchment o f surplus staff are already inplace under the on-going RPRP. The retrenchment program i s progressing smoothly with full agreement o fthe trade unions. Demining. Much o fthe area surrounding the SenaRailway Line was minedduringthe war. However, with the aid o f several Development Partners, the Government has succeededin 16  demining most o f the area. The National Institute for Demining i s responsible for managing the demining program inthe country and for issuing certificates to that effect. CFMhas obtained such a certificate for demining o f 10 meters on either side o f the Sena Line for about 100 km starting from Dondo. A phasedprogram for demining and certification o f the remainder o f the Sena Line has beenprepared and agreed between the Concessionaire and the Conceding Authority. Satisfactory implementation o f the demining program would be a legal covenant under the project. 17  A summary ofthe criticalproject risks and their mitigationmeasures is givenbelow. Rat M M Teeder roads Dialogue has been initiated with GOM and Zonstruction o f feeder roads linking ANE to planand include a component for M )opulation centers and production areas to improvement o f priority feeder roads inthe he railway network i s essential for the Zambezi valley under the next phase o f the ailways to serve its customers. Currently, Bank funded road development program. 18  here are no specific plans for the Consultancy studies to develop a feeder :onstruction of strategic feeder roads, nor roads programwill be initiated prior to lave funds been allocated for this purpose. effectiveness. This issue would be constantly monitored by the highlevel empowered committee being set up for this project. ?oliticaland cross-border issues limit the The cross-border traffic has been moving M kee flow o f intemational transit traffic without serious problems for a long time. All the same, the Bank will work closely with the Borrower and the regional economic commissions under the auspices o fNEPADand SSATP to further improve the efficiency ofborder transactions and remove constraints to regional trade and transport. .nadequaciesinand subjective The concession designhas beenimproved nterpretation of the ConcessionAgreement through a series o freviews by technical, M rovisions lead to poor performance o f the legal, andprocurement staff, one-to-one :oncessionaire. discussions with the pre-qualified bidders, consultation with major stakeholders, and by incorporating lessons from similar concessions awarded inthe region. To Component Results rinancial closure. The concessionaire Firm commitments on availability o f equity N ails to come to financial closure and make funds and debt from reputable lendershave he concession agreement effective within been obtained from the concessionaire. he stipulated time. inkages between physical and financial Linkages betweenphysical output and M lutputsmaybe difficult, inparticular with financial outcomes would be strengthened egard to control over measurement o f after the project physical monitoring system hysical progress (percentage o f is established andbecomes operational. ompletion) and matching it with the ayments. 'echnical assistance and Consultants The consultants will be selected with care o not performsatisfactorily indtheir performance will bemonitored :losely duringproject supervision and ippropriate remedial steps will be taken in )vera11Risk Rating M RiskRating-H(HighRisk), S (Substantial 19  6. Loadcredit conditions and covenants Agreements and legal documents Theproject will be guidedby anumber of legal documents and agreements to be entered into by various parties as follows: 1. The "General Conditions Applicable to Development Credit Agreements'' o fthe Association, dated January 1, 1985 (as amendedthroughMay 2004) (the General Conditions); .. 11. The Development Credit Agreement (DCA) betweenthe Borrower (Republic o f Mozambique) and the Bank; ... 111. Two Project Agreements (PA) respectively betweenthe Bank and CCFB, and between the Bank and CFM, definingthe roles and obligations o f various parties incarrying out the project; iv. A Subsidiary LoanAgreement to be entered into between the Borrower and CFM; defining the terms and conditions under which part oftheproceeds ofthe credit providedfor underthe Development Credit Agreement will be made available to CFM; V. A Tripartite Agreementto be entered among the Borrower, CFM andCCFB, definingthe terms and conditions under which part o f the proceeds o f the credit provided for under the Development Credit Agreement will be made available to CCFB and the role and obligations o f CFM inmanaging the transfer o f the said proceeds from the Borrower to CCFB; vi. Articles o fAssociation(AA) governing the formation and functioning o fthe Concession Company (CCFB); and vii. The ConcessionAgreement betweenthe Concessionaire (CCFB) and the GOM (Conceding Authority); and viii. The Investment andFiscalAgreement betweenthe Borrower andthe Concessionaire (CCFB) ensuring that the mechanisms to deal with VAT during project implementation, and customs duties on project investments, would not constitute a financial burdenfor CCFB. Effectiveness conditions (a) The CFM Subsidiary LoanAgreement, the Tripartite Agreement, the Concession Agreement and the InvestmentandFiscalAgreement have become effective; (b) A financial management system, satisfactory to IDA, has been adopted for the Project, including the following: (i) the FinancialProcedures Manual hasbeen adopted; (ii) o fchart accounts which i s able to identifyProject activities and disbursement categories, has been 20  established; and (iii) request for proposals for selecting a qualified and experienced the external auditor for the Project has been issued; (c) A de-miningcertificate has beenissued, inform and substance satisfactory to IDA, for 10 meters on either side o f the first 180k m s o f the Sena Line starting from Dondo; (d) The takeover ofthe BeiraRailway Systembythe Concessionairehasbeen completed; (e) The process for hiring an independent supervision engineer with qualifications and under terms o freference satisfactory to IDA has beeninitiated; and (0 The standardrequiredlegalopinionshavebeenprovidedto the Association. Legal Covenants (i) TheBorrowerwillsatisfactorilyimplementtheagreedEnvironmentalAuditand Management Plan (EAMP) and the Resettlement Action Plan (RAP) and carry out potential future resettlement or land acquisition inthe Beira Railway SystemRight o f Way, according to the same principles as agreed inthe approved RAP; and (ii) The Borrower, as the ConcedingAuthority, shall carry out the De-miningProgram referred to in Section C 5, inform and substance satisfactory to the Association. D. APPRAISAL SUMMARY 1. Economicandfinancial analyses Economic Analysis. The project impact differs for the two branches o f the Beira Railway System. Withtheproposed improvement inthe performance o fthe Machipanda Line, local traffic will gradually shift to the Railways resultinginlower costs o f transport for domestic shippers and receivers. Progressively more international transit traffic will shift to the railways from road or from ports outside Mozambique such as Durban inSouth Africa. The impact of the Sena Line onthe other hand, would be somewhat different as the project will openup regions, which untilnow have beenpoorly connected with the centres o fMozambique. The traffic is projectedto increase from 315,000 tons inthe first year of operation (2007) to about 2.3 million tons in2023. The projections are considered conservative given the phenomenal economic growth o f the country inthe past few years and the fact that the Sena Line carried over two milliontons prior to its closure in 1983. A detailedeconomic analysis ofthe proposed investments was conducted, takinginto account the following: Direct effects: these effects comprise the direct benefits and costs resulting from the construction and rehabilitationo fthe railway, including increased railway revenues from 21  project generated traffic, diverted intemational traffic and re-routedinternational cargo (excluding railway revenues for nationaltraffic), and increased economic activities inthe region, etc.; Indirect effects: shifts and creation o f employment, shifts inactivities and the birtho fnew activities because certainregions will become more attractive for companies to settle inand will providenew markets of "cash crops" for fanners, for example; and External effects: they refer to welfare changes insociety attributable to the project, for which the project does not pay or receive financial compensation. These effects comprise environmental effects (noise, emissions) and social aspects (safety). The economic rate o freturn(ERR) for the Beira Railway Projecti s estimatedto be 18percent (Annex9). Sensitivity Analysis. There i s an amount o funcertaintywith respect to the values o fthe future developments o f cargo flows, the assumptions with respect to net value added and multiplier effects, the tariff setting o frailway services, the investmentand operational costs and the cost savings with respect to roadtransport. To analyse the impact o f this uncertainty, a sensitivity analysis has beencarried out with respect to these variables. The results o f the sensitivity analysis show that the value o fthe ERR i s between 10% and 23% within the 90% confidence interval and a meano f 18%. The input variable with the largest relative impact on the outcome i s the growth in traffic volumes. This seems to be a logical outcome, since almost each category o fbenefits has beencalculated on the basis o f the traffic forecast. Financial Selectionprocessand equitystructure of the concession. GOMhas completedpre-contract discussions with the Concessionaire who has formed the public limitedcompany (CCFB) under the Mozambicanlaw.` The Concessionaire (RITES/IRCON consortium o f India) will own 51% o f the equity inthe company, while CFM would own at least 33% o fthe equity. The balance - 16% - o f the equity will be temporarily heldby CFM and eventually issued to private and institutionalMozambicaninvestors through a transparent public offering. The financial model shows that CCFB is expected to make an overall operatingprofit through out the life o f the concession except for years five to nine o f the concession period. This i s because o f heavier depreciation charges and the need to start interest payments on incurred debt duringthis period. CCFB i s expected to generate a Present Value returnto GOM o f about US$44.6 million over the 25 year periodof the concession, brokendown as follows: (a) US$2 million entry fee; (b) US$10.3 million fixed annual fee; (c) US$24.4millionvariable fee (based on traffic); (d) US$1.3 million intaxes; and (e) US$6.6 millionindividends. Furthermore, the Concessionaire i s requiredto service the US$104.5 millionloan from the Borrower. FinancialAssessmentof CFM. CFM continues to be a loss making company-both at the operational and net levels. This i s because its financial restructuringprogramhas only been partly implementedby GOM. The latest provisional FY03 audited accounts show an operating 22  loss o f about Meticais 492,500 million (about US$21.2 million) against 109,206 Meticais (about US$4.7 million) for FY02. Net losses for FY03 were Meticais 692,171 million (about US$29.7 million) against Meticais 2,116,182 million (about US$91.1 million). Despite CFM's continued operating and net losses, its cash flow positionremains strong with FY02baacash reserves o f about Meticais 742,126 million (about US$32 million). To ensure and support the longterm financial restructuringo f CFM, GOM entered into a comprehensive Performance Contract with it, the implementation o fwhich started in2000 and should have been completed in2002. However, several keyprovisions o fthe 2000-2002 Performance Contract, such as the re- structuringo f CFM's large external debt, have yet to be fully implementedby GOM. GOM i s now inthe process o f developing a comprehensive financial restructuringo f CFM, which would include, among others, write off o f substantial outstanding debt and accumulated losses and hivingoff o fnon-productiveassets. FinancialAssessment of companies formedwith minorityparticipationsfrom CFM. Consistent with GOM's policy o f supporting public-private investments inthe economy, CFM has gone ahead and concessioned out large parts o fMozambique's port and railway businesses and infrastructure. CFM has also taken `strategic' equity stakes, ranging from 5% to 50%, in several new companies that have beenformed by the concessionaires o f the various ports and railways andport and railway facilities. It has also taken some `strategic' equity stakes in companies that do not operate inthe port and railway sector to diversifyits activities (see Annex 9 for details). CFM's strategy o f concessioning out its assets andtaking `strategic' equity stake inthe specific companies that are created to operate them remains financially prudent. Furthermore, CFM will get the bulk o fthe concession fees from the companies that have been formed and its share o f whatever dividendpayment i s made by the companies inwhich it has shareholdings. This shouldprovide a steady source o f income for it. On-lendingofthe proceedsofthe Credit.The Creditwill be on lent to the Concessionaire by GOM as a long-termloan on the same terms as the IDA credit, viz.: (a) interest rate: three- fourths o f one percent per annum on the principal amount o f the Credit withdrawn and outstanding from time to time; (b) commitment charge: this i s decided by the Board on an annual basis, subject to a maximum o f 0.5% on the undisbursedamount and has beenfixed at 0.35% for the year endingJune 30,2005; and (c) loanrepayment: repayment o f the principal amount o fthe loan insemi-annual instalments, payable inequal six-monthly instalments starting with the lothanniversary the date o f o f Credit approved by IDAuntilthe end o f the concession period. 2. TechnicalAspects The Concessionaire shall carry out the rehabilitationworks as per the agreed standardsto carry all traffic on offer. The reconstructionand rehabilitation o f the line would be undertakenwith new materials. Inorder to have a longer asset life, better asset utilization, andreduced maintenance cost, the constructionand track renewal tolerances would be inline with UIC specifications UIC/CEN/TC 256/SC/WG for Type Class YO. A few important indicative acceptanceparameters are indicatedbelow: 23  Top (mm) Chord 10m 4 5 Alignment (mm) Chord 4 5 1Om Twist 1.5 1.5 (O/OO) Track would be maintainedas per FRA (Federal RailroadAdministration) Standards - Track Safety Standards, Federal RailroadAdministration, Title 49, Part 213, February 1996 for Passenger Trains - Speeds 60 kmph. These values, based on stipulations on AAR Maintenance effort, will have to beplannedmuch inadvance so that track would not deteriorate beyondthis limit.The designated inspectionunit will inspect and ensure that this set oftolerances is not exceeded. Coal Traffic. Whenthe coal mines are concessioned and the coal concessionaire desires to transport the coalby rail, the Conceding Authority and the rail and coal concessionaires will agree on the terms and conditions for the upgrading o fthe Sena Lineto handle the additional coal traffic and the technical standards. Such upgrades could comprise, among others, one or more o fthe following keymeasures: (a) extending the loop lengthat the stations to accommodate longer trains; (b) advanced signaling systems; and (c) establishing flag stations to increase line capacity. To facilitate the biddingprocess for concessioning the coalmines, it has beenagreed that the rail Concessionaire would prepare a draft note and agree with CFM, on the probable upgradingo f the Sena Linerequiredunder different assumptions o f coal traffic (e.g. 3, 6, 10 million tons per annum), its implications on costs (including operations) andthe parameters that would underpinthe discussions with the potential coal developers. 3. Fiduciary The financial management arrangements will bedocumented ina FinancialProcedures Manual, covering financial policies andprocedures (including procurement), accounting and intemal control system, financial reporting, flow o f funds and auditing arrangements. Itwill be based on and adapted from the one currently inuse for the RPRP. The procedures usedby the project to maintain its records will be appliedby the PAS-CFM with cognisance o fparticular IDA requirements. The staff inthe PAS-CFM is sufficiently qualifiedto properly take care of the financial management arrangements o f the project. However, the staff i s only experienced ina limited scope o f World Bank procedures andrequirements. There i s a needfor the staff from PAS- CFM, Internal Audit & InspectionDirectorate and the PIUto be trained on the latest World Bank procedures and requirements for: (i) Disbursement; (ii)FinancialManagement; and (iii) Procurement. This training will beprovidedbefore the project becomes effective and will be 24  conducted by staff from the World Bank's Maputo Country Office. The PAS-CFM will also, throughout the duration o f the project, be supported by a Financial Specialist. The financial management systemwill support management intheir deployment o f limited resources with the purpose o f ensuringeconomic, efficient, and effective application o fthese resources inthe delivery o f outputs and the achievement o f desiredoutcomes. Specifically, the financial management system shouldbe capable o fproducinguseful information ina timely manner for decision-makingpurposes (to enableprojectmanagement to monitor the efficient implementationo f the project). This would be achieved through the preparationo f (as a minimum)QuarterlyFinancialManagement Reports, which integrateproject accounting, procurement, contract management, disbursement and audit with physicalprogress. .. The overall conclusions o fthe financial management assessment are: The project's financial management arrangements satisfy IDA'Sminimumrequirements under OP/BP10.02 except for the issues mentionedinthe Action PlanshowninAnnex 8; The project financial management risk is assessed as beingnegligible. However, a number o f minor issues remainto be addressedinorder to establish an acceptable control environment andto mitigate financial management risks. The various measureshmprovements should be implementedby the due dates as indicated inthe Action Planfurnished inAnnex 8. . Standard financial covenants include the submission to IDA of: Auditedfinancial statements for boththe entityCFM and the Projectwithin six months after each fiscal year-end; 1 FinancialMonitoring Reports (FMRs) within 45 days after each calendar quarter, and shall cover such calendar quarter. Disbursementsfrom the IDA Credit will bemade onthe basis o fincurredeligible expenditures (transaction based disbursements). Strengthening its accounting and financial management capacity will enable CFM, at its option, to eventually use the FMR-based disbursement method. 4. Social Social issues and Resettlement Action Plan in compliance with WorldBank OP 4.12 (See Annex 10for details). Staff Retrenchment. When the Government o fMozambique decided around 1996 to concession the ports and railways inthe country inorder to improve their operating efficiency, CFM had close to 22,000 staff. A comparison o f staffproductivity inthe ports and railways around the world made it clear that only about 4,000 staff wouldbe neededto operate all the ports andrailways inMozambique. Consequently, staffretrenchment became a key component o f the Railways and Ports RestructuringProject (RPRP, Credit 32880). Consultations were held with the labor unions and a comprehensive survey ofthe CFM staffwas also undertakento ascertain their views. The retrenchment package that was adopted after considerable consultations with all concerned parties hadthe following key features: (a) staffbeingretrenched 25  were to be deemedto have retiredon the day o f leaving CFM and were to be eligible for pension (there was no provision for early retirement at the time ); (b) staff were to be giventhe option to continue with monthly pensions or receive the net present value o f the pensionstream (about 6 percent o f the staff opted for monthlypensions); (c) to compensate early retirement, the pension o f staff was to be enhanced by a factor o f 1.27, the enhancement portion beingpayable up to the retirement age ofthe staffandalso payable as the net present value; (d) the non-pensionable staff, who joined CFM after it became an autonomous enterprise in 1989, were to receive three months o f pay for every year o f service inaddition to their legal entitlement. More details o fthe compensation package are contained inthe Project Appraisal Document o f RPRP and the Financial Manual preparedby CFM. Interms oftheprocess, consultants were engagedto develop software for computing the compensation and the passwords for approaching the package were adequately safeguarded. A special Technical Unit, staffed with competent professionals, was created to compute the compensation. All computations were to be certified by an external auditor, specially engaged for this purpose. Theprocess o fretrenchment under the RPRPhas proceeded smoothly. ByAugust 2004, close to 11,000 staff hadbeenretrenched and the cases o f another 2,000 were under processing. There were very few appeals or challenges and most o fthese pertained to the computation o f the total lengthof service includingmilitaryservice, the problembeinginadequate availability ofrecords. The Technical Unit,however, dealt with these appeals. It i s expected that by the end o f 2005 all port and railway concessions would have become operational, and the staff positioni s likely to be as follows: (a) staff engagedbythe concessionaires about 4,000; (b) staff engagedbyCFM - -500; (c) staffretrenched-13,000; and(d)staffretiredorresigned-4,500. A firm o f consultants (GAPISARL), was engagedto provide counseling andtrainingto the retrenched staff. The firm has inthe last three years: (a) provided social, psychological, and financial counseling to almost all the retrenched staff, both ingroups and on a one-to-one basis: (b) invitedcommercialbanks to advise staffon the various products for saving and investing their funds; (c) ascertainedthe stafftrainingneeds on a one-to-one basis; (d) arranged for agricultural, vocational and business awareness, and small business start-up training programs for almost 60 percent o f the staff; and (e) assisted groups o f staff inpreparingsmall projects and obtaining loans. GAPI SARLhas reportedthat close to 6,000 staff (almost 50% o f the retrenched staff) has beenredeployed, mostly as self-employed, as a result o f the assistance providedto the staff. An independentevaluation o f the social mitigation measureswill soon be undertaken. ResettlementIssues. A satisfactory Resettlement Action Plan(RAP) hasbeenprepared. Itwas distributed and disclosed inthe country andthe infoshop, after review and clearance by the Bank on June 18,2004. The plan estimates relocation o f 37 households, 5 business facilities and 5 facilities for religious groups and to relocate crop lands outside the 10-meter fight o f Way. The planhas detailed the set o f actions necessary to compensate the project affected people. The principle o f land for landwill be applied, after ensuringfbll demining o f the substitutearea and after obtaining due certification on demining. The RAP will be implementedby CFM in collaborationwith community leaders and local authorities under the supervision o f CFM. 26  Coordination o f resettlement activities will be achieved through the Compensation and Relocation Committee (CRC). The CRC will comprise a FieldOfficer appointed by CFM, the District Administrator and the District Director o f Agriculture andRuralDevelopment. N o reconstruction work or activities that will cause displacement on any specific site will take place untilall entitlements (includingphysicalrelocation) are delivered. Thetotal cost for the resettlement has beenestimated at US$ 100,000 including contingency. HIV/AIDS. Steps will betaken by CCFB duringconstruction andoperation o fthe Beira Railway System to promote HIV/AIDS awareness, and reasonable measures will betaken to preventthe spread ofHIV/AIDS among construction workers and staff o f CCFB. As the cost for provision o ftreatment to affected staff i s unpredictable and couldbe exorbitant, C F M and CCFB would do all intheir power to put the affected staff intouch with on-going Government and external aidprograms (such as MAP)and facilitate their obtaining available assistanceunder such programs. 5. Environment The SenaLinerehabilitationwork involves only two main environmentalissues andbothhave been resolved. The first pertained to the use o fwooden sleepers, which would have affected the hardwood forests inMozambique. A decisionhas beentaken to use only concrete sleepers except at a very few locations where non-standard sleepers needto beused. The second issue pertains to the de-mining o f the right-of-way along the railway line, which i s beingaddressedin collaborationwith the National De-MiningInstitute. An environmental study was conducted to formulate anEnvironmentalManagement Plan (EMP). The EnvironmentalManagement Plan(EMP) and a separateResettlement Action Plan (RAP) havebeendisclosed inBank's Infoshop(June 18,2004) andhavebeenwidely distributed inthe project areaonJune 11,2004. As part ofthe Safety, HealthandEnvironmental(SHE) and social supervisionarrangements for the implementation o f the EMEMP and the RAP, it has beenagreed with CFM that an operational, viable and lean Inspectorate would be consolidated and strengthened as soon as possible. This Inspectorate will bebased within CFM, but may be transferred to the Ministryo f Transport at a later stage, since the Government o f Mozambique i s legally responsible for SHE oversight. The Inspectorate's SHE staffwill be supported through an on-the-job training executed by experienced Mozambican consultants over a two year period. Together they will visit the project sites. Duringthe second year, the support o fthe consultants for SHEmonitoring o f the Sena Linewill be reduced to one week per month. After the construction i s finished, a yearly independentSHE audit will be executed, commissioned by CFM. The Concessionaire will establish its own SHE unit, which will supervise the contractor on a daily basis duringconstruction and which would be responsible for SHE issues during operations. The unit will be assisted by a consultant engaged by CFM to support the CFM/SHE activities and for institutional strengthening. The contractor will prepare its own detailed EnvironmentalManagement Plan (C-EMP), which i s based on the approved and disclosed EMP, and which needs to be approved by CFM. The contractor will beresponsible for the 27  implementation o f its own C-EMP. The contractor reports to the Concessionaire on SHE issues on a daily basis. The Concessionaire will consolidate the contractor reports and submit them to CFM on a monthly basis. CFM will discuss the details o f the EA/EMP and RAP with the Concessionaire and discuss the Concessionaire's responsibilities with regard to the implementation o f the EA/EMP and RAP. 6. Safeguard policies Theproject triggeredthe following World Bank SafeguardPolicies: EnvironmentalAssessment OP 4.01, NaturalHabitat OP 4.04, and InvoluntaryResettlement OP 4.12 which have been compliedwith inthe Environmental Audit and Management Plan and the Resettlement Action Planprepared for this project. These Action Plans will be implemented by the Borrower. In accordance with World Bankratings, the Environmental Screening Category i s "B". Safeguard Policies Triggered by the Project Yes N o EnvironmentalAssessment (OP/BP/GP 4.01) [XI [I NaturalHabitats (OP/BP 4.04) [X 1 [I Pest Management (OP 4.09) [I XI CulturalProperty (OPN 11-03,being revised as OP 4.11) [I [XI InvoluntaryResettlement (OP/BP 4.12) [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I I:[I XI Forests (OP/BP 4.36) [I [ XI Safety o fDams (OP/BP 4.37) [I [ XI Projects inDisputedAreas (OP/BP/GP 7.60)* [I [ XI Projects on Intemational Waterways (OP/BP/GP 7.50) [I [ XI Safeguard Screening Category s2 Environmental Screening Category B Safeguard Studies to the InfoShop June 2004 7. Policy Exceptions and Readiness The project does not require any exceptions from Bankpolicies. Regionalcriteria for readiness for implementation: Financialmanagement staffhave beenidentified. 0 Project staff and the concessionaire have beenmobilized. ~~ ~ 'By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination of theparties` claims on the disputed areas 28  Government has committed itselfnot to burden the project with VAT and customs duties and where unavoidable, to provide them ina timely fashion. Tender documents for first year's procurement - the concessionaire has been selected competitively and all methods o fprocurement have been agreed to, and rehabilitation works on the Sena Line is inprogress. Disclosure requirements - EAs and the Resettlement Action Plans were sent to InfoShop on June 18,2004 andmade public inMozambique on June 11,2004. 29  Annex 1:Country and Sector Background MOZAMBIQUE: Beira Railway Project The BeiraRailway System. The BeiraRailway System comprises two rail lines: (a) a 317-kmMachipanda Line linkingthe port o fBeirato the railway network inZimbabwe; and (b) a 600-km Sena Line linking the port o f Beirato the town o f Tete inthe northwestempart o f the country and to the Moatize coal fields with a small spur linkingthe systemto the railnetwork inMalawiand another from Inhamitanga to Marromeu. The two lines take off from Beira and bifurcate at Dondo, a station about 28 k m s from Beira. The MachipandaLine goes in a westerly direction up to the border station o f Machipanda, where it links to the Zimbabwe rail network zt Mutare station. The Machipanda Lineis heavily gradedwhich limits train loads. The SenaLinetakes offfrom the Machipanda Line at Dondo and goes inaNorth, North-Westerly direction, crossing the Zambezi river between Sena and Dona Ana (298 Km from Dondo). The line againbifurcates at Dona Ana, where a254 kmline runs on the Northernbankofthe Zambezi river to the Moatize terminal station and a short 44 kmline runs Northto Vila Nova da Fronteirawhere it links up with the Malawi railway system. The second spur line i s an 88-km branchline runningdue East from Inhamitingato Marromeuon the South bank o fthe Zambezi. The line i s graded inparts, particularly, for the first 36 kilometers from Moatize. The MachipandaLineis operational andhas inthe past carried close to one milliontons of freight traffic as well as some passengertraffic. The traffic inrecent years has declineddue to the poor economic performance o f Zimbabwe. The Sena Linewas damaged duringthe violent war o fthe 1980s andhas beenout o f commission since 1983. At the peak o f its performance in 1981,the line carried close to two million tons o f assorted local and intemational traffic, transit traffic from Malawi, and considerable passengertraffic. The line passes through two provinces, viz., Tete and Sofala inthe centralMozambique along the Zambezi valley with apopulation o f about 4 million or about 24% o f the nationalpopulationand has an economic influence over Zambezia province. It was the life line o f the region and its closure has had a very crippling effect on the economy o f the region. The GOM i s desirous o f developing the region and the Zambezi RiverValley which has beenidentifiedfor special development initiatives inview o f its richpotential inthe areas o f mining, forestry, agriculture, animalhusbandryandpower generation. To attract public and private investment inthe socioeconomic development o f the region, the GOM in 1998 decreed a special fiscal regime o f incentives for this purpose. A special development agency, Zambezi Valley Development Authority (GPZ) has also been created to plan the Zambezi Valley Development Programs andmonitor progress. Rehabilitation o f the Sena Line and makingit operational once again i s the highest priority o f GOM. Past Efforts at Railway and Port Reform Efforts inthe past to reform the rail and port systemhave been reflectedinthe following Bank financed projects : (i) Beira Transport RehabilitationProject (closed 1994). This was a multidonor- financed traditional investment project with the aim o f improving the efficiency o f the 30  Beira port-railway system(except the Sena Line which was closed at that time) within apublic ownership framework. The focus ofthe project was on rehabilitating andmodernizingthe port andrailway infrastructureandoperating equipment to increase system capacity, installing cost, financial and management accounting systems for better decisionmaking, intemal organizational changes, staff training, and supporting management at all levels. (ii) MaputoCorridorRevitalizationProject(closedDecember31,1998). Thiswasa technical assistance project aimed at involving the private sector through concessioning inthe operation andmanagement o f the Maputo port-railway system. As the ideaof concessioning was new and GoM's commitment to privatizationwas low, the project became a learning ground for all. From a position o f skepticism and hostility towards the private sector, the project finally endedup with making considerable progress towards concessioning. The project was successful in developing a commitment to concessioning, providing experience inthe process for concessioning including an appreciation o f the finer points o f involving the private sector inrailway operations and management. (iii) RailwaysandPortsRestructuringProject(RPFW)(on-going). Thisprojectisaimed at completing the concessioning process started under the Maputo Corridor RevitalizationProject as well as completing the concessioning o f the Beira and Nacalaport-railway systems and paving the way for their efficient operation. Additionally, the project focus i s on retrenchment o f surplus staff and financing o f severancepayments, developing an appropriate regulatory and legal framework, corporate restructuring o f CFM, and strengtheningthe Ministryo f Transport and Communications. The past efforts have identified a number o f issues inthe roadtransport sector and railways operation and management, with a particular focus on: High Cost of Transport. The roadtariffs averageU S cents 12.0per net ton kilometer (ntkm), partlybecauseo fthe poor condition ofroads, leadingto the highcost o fvehicle spareparts and fuel consumption. Although the average rail tariff has beenmaintained by CFM at relatively low levels (about U S cents 3.2/ntkm), the freight traffic carriedby it i s averaging 70% o fwhat it carriedin 1975, consideringthe change intraffic mix. With improvements inoperational management, both inroad and railway sectors, the transport costs could be reduced. The Ministry o f Transport i s about to engage consultants to study all modes o f transport and identify reasons for the highcost o f transport. High Level of Government Financial Support to the Sector. The GOM i s currently forced to provide substantial financial support to all the transport sub-sectors. Inthe road sub-sector, in spite o f GOM's efforts to introduce measuresto improve cost recovery (including the road fund), revenues continue to lag behindthe roadnetwork's capital and maintenance requirements. Inthe railway sector, although CFM has not received a direct operating subsidy from GOM since 1987, it has not been able to service its loans andGOM hashadto write off some ofits outstanding loans. With the current tariff rates, GOM i s unable to generate enough surplus to keep the rail 31  transport asset base ina good condition. Its assets have deteriorated to such an extent that a substantial injectiono fprivate or public capital would be necessaryto prevent the railways from collapsing altogether. Inadequacy of Infrastructure. A considerable effort i s beingmade to improve the road and rail infrastructure inMozambique. However, the condition o fboth the rail androad infrastructure continues to be a matter o f concern and i s proving to be a definite constraint to the growth o f transit traffic from the surrounding landlockedcountries. The road infrastructure has suffered in the past and continues to suffer due to inadequate allocation o f funds for maintenance, inadequate enforcement o f axle load regulations, and inefficient maintenance. Problems of managingpublicly-owned railway enterprises. The Bank's experience inthe railway sector ingeneral points to the difficulty o f improvingthe railway performance within a public sector (parastatal) framework because: (a) cumbersome rules andprocedures make the decision- makingprocess very slow; (b) subtle and sometimes direct political interference inthe working o fthe railways erodes the authority and effectiveness o f the railway management; and (c) pressure on the railways to provide loss-making services without adequate financial support forces the railways to cut back on maintenance. High Rate of Accidents and Poor Record of Safety. The rate o f accidents, particularly on roads, continues to remain very high. Inadequate safety consciousness, poor investmentinsafety equipment and staff training, and inadequate enforcement o f safety regulations have beenthe main reasons for the highrate o f accidents. Slow Rate of Regional Integration. Inspite o f intentions to this effect, no concrete steps have beentaken bythe railways inthe regionto integrate many oftheir functions and activities and take advantage o f the economies o f scale and specialization with a view to improving efficiency and productivity. There i s markedreluctance on the part o f individual railways, to give up any o f its facilities or functions. The concessioning o f the railways could trigger regional integration, with the private sector seekingto gain from advantages o f scale by entering into appropriate contractual agreements with the neighboring railways and other service providers. Inadequate environmentalmanagement. An environmental audit o fthe railwayshas shown the absence o f an environment policy and an environmentalmanagement plan as well as noncompliance with the established environmental and safety standards, even though CFM has recently taken steps to develop an environment policy and environment standards. The situation with regard to roads is almost similar. Government Strategy. The Government has initiated a number o freforms inthe past few years to improve the operation andmaintenance o f the railways sub-sector, with a particular focus on: (i) Facilitating large scale involvement o f the private sector inthe operation and management o f all ports and railways; (ii) Supporting rationalization o fthe CFM staff including retrenchment o f surplus staff. In 1996, CFMhad close to 19,200 staff. The retrenchment o f surplus staff 32  o f CFM i s proceeding smoothly and a total o f 11,300 staff has beenretrenched so far; retrenchment o f another 2,300 staff hasbeen initiated andwouldbe completed by December 2004. After all the concessions have beenoperational and the necessary staff transferred, CFM will be left with about 500 core staff. The social mitigationmeasures for the retrenched staff are beingimplemented satisfactorily; (iii)Comprehensive restructuringo f CFM involving: (i) separation o f strategic, corporate and regulatory functions from day-to-day commercial and operating functions; (ii)making the headquarters and the zonal units lean and thin; (iii) replacingtraditional railway skills inthe headquarters with specialized legal, financial, institutional and corporate management skills; (iv) increasing accountabilitythrough well structured performance contracts between GoM and CFM; and (iv) Making compliance with the environmental and safety standards a part o f the concession agreement as well as strengtheningsafety and environment related regulation. 33  Annex 2: Major RelatedProjectsFinancedby the Bank and other Agencies MOZAMBIQUE: BeiraRailway Project Sector Issue Project Latest Supervision(PSR) Ratings (Bank-financed rojectsonly) Bank-financed Implementation Development Progress(IP) Objective (DO) Ports and Railways Inefficiency o f the Beira port- Beira Transport Rehabilitation Project (closed S railway system 1994) Inefficiency o f the Maputo port- Maputo Corridor RevitalizationProject (closed S railway system December 31, 1998) Loss-making operations inall Railways and Ports Restructuring Project (on- S port-railway systems inthe going) country; overstaffing inCFM; inadequacy o f regulatory and legal framework Roads and Highways Poor road maintenance, Roads and Coastal Shpping Program(Closed insufficient roadmanagement 1999) capacity Second Roads and Coastal Shipping Program (closed 2003) Roads and Bridges Management and Maintenance Program (on-going) Other development agencies 0 Austria 0 Supply o ftrack maintenance equipment 0 Canada 0 Supply o f locomotives and training 0 CFD (France) 0 Rehabilitationo f the Nacala railway system 0 Supply o f locomotives 0 DANIDA(Denmark) 0 Supply o ftug boats and TA for their operation including training 0 EU 0 Reconstruction o f the port o f Beira 0 Rehabilitation o f stations and water tanks for the railway system 0 FINIDA (Finland) 0 Construction o f freight container stations at Beira port 0 Paving o f container terminal at Nacala Port TA and supply o fport equipment 34  0 Italy 0 Rehabilitationo f the Boane-Goba line 0 Establishing the sleeper factory plant at Dondo 0 Establishing quarry plant at Matsinho 0 JaDan 0 Supply o f locomotives 0 KfW(Germany) 0 Rehabilitation o f the energy systemin the port o f Maputo 0 Supply and commissioning o f equipmentfor bulkhandling and rehabilitationo f the Port of Quelimane 0 Grainterminals at Matola 0 Netherlands 0 Deepening and widening o f the entrance channel at the port of Beira 0 TA for Beiraport and training 0 Supply ofport equipment to Beira port 0 NORAD(Norway) 0 Rehabilitation o fthe port of Beira and technical assistance to C F M 0 Construction o f the new oil terminal at the port o fBeira 0 Rehabilitation of the Pemba port 0 ODA 0 Rehabilitation of Matola Oil Terminal 0 Rehabilitation o fthe Limpopo line 0 Portugal 0 Part rehabilitationof Nacala railways 0 SIDA (Sweden) 0 Acquisition o f container handling equipment for Beira port 0 Rehabilitation of electrical network o f Beira ~ o r t 0 SIDA/FINIDA/NORA 0 TA to Beira Corridor Authority D/DANIDA/N'lands 0 USAID(USA) 0 Rehabilitation o f the Limpopo line damagedby floods IP/DO Ratings: HS (Highly Satisfactory),S (Satisfactory),U (Unsatisfactory),HU (Highly Unsatisfactory) 35  Annex 3A: ResultsFrameworkandMonitoring MOZAMBIQUE: BeiraRailway Project ResultsFramework Use of OutcomeInformation Sena Line progressively opened to Monitor progress and, if necessary, made available for the freight and freight and passenger traffic with improve marketing strategy and passenger traffic inthe Zambezi freight traffic reaching at least 1.O enable complementary investments Valley to accelerate economic milliontons per annumby end o f inthe regionto spur growth. growth inthe sub-region project International traffic through the Internationaltraffic from Zimbabwe Investigate and remove cross-border Beira Railway System increased on Machipanda line increasedby and other constraints to facilitate 30% over the project period. international trade and transport. Rail access to the port o f Beira for the Malawi freight traffic restored Access to Beira port opened to Zambia through roadrail multi- modal connection at Moatize. The operational, managerial and Beira Railway System operating as Monitor progress and, ifnecessary, financial sustainability o f the Beira a reliable, efficient and review and remedy operational Railway System improved. commercially viable system with: strategies. (a) track under temporary speed restrictions reduced from 10%to less than 2%; (b) average kilometers between locomotive failures increased from 10,000 to more than 100,000; (c) time lagbetween wagon demand and supply reduced from 4 days to 2 days; (d) net ton- kilometers plus passenger kilometers per staff per year increased from 0.35 millionto 1.3 million; and (e) working ratio (operating cost excluding depreciation and interesthevenue) decreased from more than 100%to less than 70% by end o fproject. 36  ComponentsOne and Two: ComponentsOne and Two: Beira-Railway System developed to The 317km-long Machipanda Line Closely monitor the actual carry all the freight traffic on offer and 600 km-long Sena Line rehabilitation vis-a-vis the and provide assurance to all rehabilitated to specified standards established schedule and quality investors and developers regarding and withrnthe timeframe and freight standards and take remedial actions the availability o fefficient and cost- and passenger operations as necessary. effective transport. commenced on the rehabilitated network as soon as possible and progressively extended as the rehabilitationprogresses. ComponentThree: ComponentThree: ComponentThree: CFM's institutional capacity to Supervision Engineer and Adviser to Reconsider technical assistance monitor performance o f the the C F M Board appointed and strategy and adjust as needed. concessions ingeneral and the Beira hnctioning effectively; and the Introduce more appropriate Railway System inparticular rehabilitationwork progressing computerized software. enhanced. according to schedule. Periodic financial and management reports are prepared by C F M intime and o f highquality. 37  -I--- - I -E e ? 2 2 E l e n3 x  5 4 O 0 r = W m 3 ' 5 0 0 0 Q 0 m 5 !2 0 38 hl 5 0 m 0  Annex 4: DetailedProjectDescription MOZAMBIQUE: BeiraRailway Project Concessionfeatures The main features o fthe BeiraRailway Concession are as follows: a) one concession awarded for the whole BeiraRailway Systemcomprising the Sena andMachipandaLines; b) the periodofthe concession is 25 years; c) the rehabilitationstandardshave beendefined inthe Concession Agreement; d) the Concessionaire is requiredto complete the SenaLinerehabilitation within 4 years o fthe takeover; e) The concessionaire shall pay to the ConcedingAuthority the concession fees, as follows: (i) entry fee o fUS$2.00 millionprior to takeover date; (ii) annual fixed an fee o f US$l.OO million from year 11to 25 (included); and (iii) annual variable fee an (varying between3% and 7.5% o fthe the Company's tumover); and f) the Concessionaire shall ensure that the railway infrastructure i s developed insuch a mannerthat it hasthe capacity to handlethe coal traffic offered subsequentto the award o f coal concession. With this objective inmind, as andwhen the coal concession i s finalized by the GOM, CCFB will negotiate ingood faith and agree with the ConcedingAuthority the terms and conditions for upgradingthe Sena Line andnegotiate ingood faith and agree with the coal concessionaire the tariffs, commercial, operating and transportation agreements. Inthe event the parties are unable to reach an agreement, the ConcedingAuthority reserves the right to mediate, failing which to terminate the Concession Agreement, as specified inthe Agreement itself, and/or take appropriate alternative action. ProjectComponents Component 1. Rehabilitationand operationofthe Sena Railway (US$127.5 million) Component description, This component comprises rehabilitation, maintenance and operation o f the SenaRailway Line under a concession agreement with the private sector. The Credit will finance rehabilitationo f the railway line to support 18-tonaxle loads and 60 kmphtrain speeds. The rehabilitationo fthe SenaLine will bepartly supportedbypublic funds usingthe proceeds of the IDA credit. The cost o frehabilitationandprovisions of enough locomotives androlling stock for the projected traffic i s estimated to be about US$127.5 million, o fwhich IDA support will beUS$104.5 million. The concessionairewouldberequiredto procure/lease locomotives and rolling stock for transport of coal and other traffic, gradually inline with the buildup o f 40  traffic. The locomotives and wagon requirement could bepartiallymet from the wagons available with CFM through lease/sale agreements. The rehabilitationworks shall be adequate to carry all the traffic on offer, including the expected coal traffic currently on offer, i.e., before the coal mines are concessioned and new technology i s introduced. The rehabilitation work will be inaccordance with the designcriteria indicated in the ConcessionAgreement. The Concessionaire would beresponsible for establishing adequate capacity for such traffic by all appropriate methods. The Concessionaire will complete all o fthe rehabilitation works within four years o f the Concession Agreement becoming effective. Component2. Improvementand operationof the MachipandaRailway(US$25.O million) Component description. The improvements o fthe MachipandaRailway Line will be the sole responsibility o f the concessionaire, who will bear the full cost o frehabilitationandprovisiono f locomotives and rolling stock. ProjectCostBreakdownof Components1and2 The cost ofrehabilitating the infrastructure o f the Senaand MachipandaLines hasbeen estimated as US$119.30 million andUS$7.95 millionrespectively. The rolling stock and workshop costs for the two lines are estimated as US$8.13 million and US$17.09 million respectively, as indicated inthe table below (net o f VAT andDuties): Sena Line Machipanda Total line Infrastructure 119.30 7.95 127.25 Rolling Stock 8.13 17.09 25.22 Total 127.43 25.04 152.47 ProjectFinancing. Theproposed financing arrangement for components 1and2 is as perthe table below: 41  Source Amount Remarks (USD million) 1 ShareholderFunds (Equity+ 19.74 To be provided by ShareholderLoans) Shareholders RITES :USD5.13 IRCON: USD4.94 CFM: USD9.67* 2 GOMSupport 104.50 To be provided through IDA support 3 Commercial Debt/ Suppliers' Credit 25.45 To be arrangedby RITES/IRCON Consortium 4 CashFlow from Machipanda 2.78 As per projections Operations Total 152.47 Incasecommercial fundingis not tiedup, theRITES/IRCONConsortiumhas guaranteed, by means o f a Board resolution, that shareholder loan fimding to the extent o fUS$20 million, shall be available for the project together with a certificatefrom banks, duly notarized, specifying availability o f funds with the bank. The Consortium would arrange to provide a similar arrangement for approval o f commercial debt for the balance o fUS$5.44 million before takeover. Component3. InstitutionalStrengthening(US$5.5 million) Component description. (a) training in, inter alia, regulation, safety inspections, contract monitoring, andproject, financial and environmental management (US$0.3 million); (b) support for an Independent SupervisionEngineerto certify andreport on, inter alia, the quantity and quality ofthe rehabilitationworks for the Sena Line, adherence to the agreed procurement procedures and eligibility for disbursement o f funds, and all other matters relatingto the implementationo fthe project ($2.6 million); (c) technical and financial audits ($0.3 million); (d) Technical Adviser to the CFM Board for 3-5 years for the purposes o f advisingthe Board andits Chairman on all financial andproject management related matters connected with the day to day operations o f CFM ($0.5 million); (e) incremental operating costs o f CFM units managingthe project (US$0.4 millions); (f) sector studies including inter alia, planning for new railway and port facilities, review o f existing transport systems, and enhancement o f competitiveness among differentmodes o ftransport ($1.O million); and (g) environmentalmanagement andresettlement ($0.4 million). 2CFM, inaddition to its declared equity o f 33%, is holding 16%equity to be offered to Mozambican interests at a later stage. 42  Annex 5: Project Costs MOZAMBIQUE: Beira Railway Project Table A: Project Costs ProjectCost By Component and/or Activity Local Foreign Total U S %million US $million U S $million A. Rehabilitationand operationofthe SenaLine 18.0 105.1 123.1 B. Improvementand operationofthe Machipanda 5.0 20.0 25.0 Line C. InstitutionalStrengthening C1. training inregulation, safety inspections, 0.1 0.2 0.3 contract monitoring C2. support for IndependentSupervision Engineer 0.3 2.3 2.6 C3. technical and financial audits 0.1 0.2 0.3 C4. technical Adviser 0.0 0.5 0.5 C5. Incremental operating costs o f CFM units 0.2 0.2 0.4 managingthe project C6. Sector studies 0.4 0.6 1.o C7 Environmental management andresettlement 0.3 0.1 0.4 Subtotal(C) 1.4 4.1 5.5 Total Baseline Cost Physical Contingencies 2.0 2.4 4.4 Price Contingencies 0 0 0 TotalProjectCosts' 26.4 131.6 158.0 Interest duringconstruction Front-end Fee TotalFinancingRequired - 26.4 131.6 158.0 Note: (1) Total costs exclude taxes and duties 43  I N - t - - N 0 QI 0 0 0 0 ' I X 0 - 0 E 3 - 0 s / % 3 1 0 0 E/X 0 0 -p V b Y + E " Z hl + 0 0 l I 0 I p.- c 8P  vr W W 0 c l 5 2 m d b? IA x 0 2I N tq7 W si x 3 O I 0 I c1 N 0 sz 0 c W t C C W 0 0 6 0 O 1 O = I I O * f? 3 2 2 1 2 W 8 O l E I 0 o I C W I 8 I + 82 1 F300 01:m 0 G I 0 5 W m x W C I W ? T N 0 -L W I o m 8 0 v, O d r- C v! N 0 Eil W Ifi 00 - 1 - 0 8 I 8 d O 8 1 4 t O I I k f i W 2 1 2 N 2 z v Y 0 N I W -8qI + m 3 z 0 8 3 l o I C N 8 3 5 t 0 0 C N 9 O I E I C =2 I N 0 8 LI 0 1 si IA * C / Z IA 8 0 8 0 4:' ee  Annex 6: ImplementationArrangements MOZAMBIQUE: BeiraRailwayProject Implementationperiod. The project implementation period i s five years (January 1,2005 to December 31,2009). The concession duration i s 25 years. Institutionalarrangement. The management ofrehabilitationofthe SenaLinewill be separated from its subsequent operation and maintenance andthat o f the operation and maintenance o f the MachipandaLine. As far as operations and maintenance o f the two lines i s concemed, it will be the sole responsibility o f the Concessionaire. MachipandaLine i s currently operational and the Concessionaire will commence operations on the line from day one after takeover, andrehabilitate the line and liquidate the backlogo f maintenance while continuing operations. The main institutions and entities proposed to have a role inthe project are discussed below. The ConcessionCompany. The concession company (CCFB), established bythe winningbiddertogether with CFM (withthe shares beingheldinthe ratio o f 51:49), would be fully responsible for the rehabilitationo f the Sena Lineand its subsequent operation, and the operation o f the Machipanda Linewhile concurrentlyrehabilitating it. CCFB i s likely to engage about 400 staff, mostly from CFM and only a few key staff fiom the parent companies o f the concessionaire. More staff will be engaged when operations are resumedon the Sena Line. The Joint Venture Company (RICON). CCFB will enter into aProjectManagement Services contract with RICON, a Joint Venture company to be established by the foreign partners inCCFB. The projehmanagement services would cover: (a) survey, design, and detailed engineering; (b) preparation o fbiddocuments for various rehabilitation and works packages, call for bids, evaluationand ordering; (c) supervision o fworks; and (d) project management functions. The rates, terms and conditions will be negotiated and agreed uponbetweenRICON and the CCFB. ProjectImplementationUnit. CCFB will establish aProjectImplementationUnit (PIU) for constructionsupervision. The PIUwill be manned bytechnical experts from the parent companies o fthe winningbidder and CFM. The Unitwill be locatedinitially at Dondo. CFM. CFM's role inthe management ofthe Projectwould betwo-fold: (a) as 49% equity shareholder inthe concession company; and(b) as representative o fthe Conceding Authority to monitor the Concessionaire's compliance with the terms o f the Concession Agreement andmaintainingan account o f all fixed infrastructure andmobile assets conceded or leased to the Concessionaire. The units within CFM that would be actively involved inproject implementation are the Finance Directorate, The Intemal Audit Directorate, The InspectionUnit, and the StaffRetrenchment Unit. 46  (v) IndependentSupervisionEngineer. CFMwouldengage an IndependentSupervision Engineer(a firm) for the durationo fthe rehabilitationperiodto certify, inter alia, quality and quantity o f completed works on the Sena Line. (vi) RegulatoryBody. Very little economic regulationis requiredfor the railandport sectors. Evenso, GOM i s considering settingup a regulatory body for the whole transport sector to ensure that issues o f unfair practices andmonopoly abuse, ifraised by the users or providers o f transport services, are appropriately addressed. The body could also have responsibility for technical, safety and environmentalregulation. Technical assistance for establishing the regulatory body i s being financed through RPRP. Method Statement for the Track Rehabilitationprogramme for Sena Line. The Concessionaire and the ConcedingAuthority have agreed on the basic parameters o fthe track rehabilitation program, the details o fwhich are givenbelow. The Method statement covers: survey; collection and review o f all the existing data from CFM; generation o f a design based on the operating parameters for the system; carrying out o f the field survey and refinement o f the base model work plan; specialised work packages, bridgerehabilitation, track laying and finishing, general works and goods packages and consultant and training services. Survey - A complete survey, design andplanning ofthe Sena Linewill betaken up first and i s anticipated to take about 4 months. This i s dependent on the availability o f the areas and access to the sites for collection, assimilationand analysis o fthe field data. The National Institute o f Deminingi s responsible for demining. CFM already has the following deminingcertificates: (a) for 100kilometers with 10meters on both sides o f the line; and (b) for 300 kilometers with 5 meters on both sides o f the line. A certificate for an additional 80 kilometers (out o f the 300 kms) with 10meters on both sides o f the line or a certificate for a total o f 180kilometerswith 10 meters onboth sides o f the line will be made available by credit effectiveness. A definite program has been drawn by CFM and acceptedby CCFB to provide deminingcertificates for the entire line with 10meters onboth sides inaphasedmanner to ensure that the work o f CCFB will not be adversely affected. Collectionof allthe existing data from CFM - The data available with CFMwill be reviewed and examined for suitability o f its conversionto precise co-ordinate reference data. Generation of a designbasedon the operatingparametersfor the system - Based on the operating envelope for the various parameters laid down inthe Concession Agreement, a design, at amacro level, will be generated for the deviations that would need to be adopted and accepted for the rehabilitated line. Fieldsurvey and refinementof the base model- For the work to becompleted within the time frame, an appropriate projectplanwill bedeveloped. Since the through link o f track i s not available, the logistics will be managed with the support o f the available roadnetwork, where possible. 47  (v) Work plan generation- The above methodologyhasbeen adopted to refinethe quantities and packaging o fthe works for maximisation o f localparticipationrequired for precision oriented railway track work. The critical supply elements are steel (rails and other components) andpre-stressed concrete sleepers. For the main track it i s proposed to lay uniformly 45 kgrail on concrete sleepers with station to station Long WeldedRails with buffer rails at the ends. (vi) Specializedwork packages-Works pertainingto earthwork, formation improvement and bridge repair would be segmented into smaller stand-alone packages. For works requiringhighcapital intensive resource mobilization such as track laying, welding, de-stressingand finishingwith tamping, introduction o f multipleagencieswould neither bepossible nor cost effective and such works would bepackaged as a single contract. (vii) Bridge rehabilitation - The steel bridgesthat are o f smaller spans and are inpoor condition, would be replaced with concrete slab bridges. Other bridges can be handled along with sectional works like earthworks and drainage improvement works. For the fixing o f track onbridges, steel sleepers can be used instead o f wooden sleepers. (viii) Track laying and finishing-the majority o fthe sections ofthe SenaLine will be amenable for mechanized methods o f laying, handling and finishing. (ix) General Works and Goods packages- The whole constructionwork has been dividedinto 18 works and goods packages, which will generally be awarded on ICB, NCB, ICB limited, and N C B limitedbasis (See Annex 7 for details); (x) Consultant and training services for component 3 will beprocured following Bank guidelines. 48  Annex 7: Procurement MOZAMBIQUE: BeiraRailway Project ProcurementPlanfor rehabilitationof Sena Line-IDA-financedcomponent. The procurement responsibility will be that o f CCFB. The cost, including contingencies, but excluding VAT and duties, to be financed by IDA, i s estimated at $104.5 million. As the Concessionaire has been selected following the internationalcompetitive biddingprocedure satisfactory to the Bank, the Concessionaire i s free to choose hisownmethod o fprocurement o f goods, services and works, subject to the Borrower (Conceding Authority) approvingthe proposed procurement procedures inconsultation with the Bank. After the Bank clears the Concessionaire's procurement plan, the Bank's no objections duringthe procurement process will no moreberequired. Hence there will beno prior review for goods, works and services procuredunder this component. A list o f goods, works and services to be procured for the Project under IDA-financingis attached inTable 7A. The Plandetails thepackages for theprocurement o fworks, goods, project management and other services, the procurement method for each package, and the estimated costs. The key features o fthe Plan are as follows: (0 Procurement o f concrete sleepers, stone ballast would be on single-source basis in Mozambiqueprovided the supplier can meet the technical specifications and volume requirements, andthe rates are competitive. Sourcing from within Mozambique is justified as facilities for the manufacture o fbothconcrete sleepers andballast are already available with CFM, the production expertise i s well established, and transport from outside the country will prove uneconomical and outrageously expensive. By sourcingin Mozambique, the Concessionaire could reduce cost, avoid complications o fpreparing specifications for competitivebiddinginvolving terms and conditions o f leasing the facilities by CFM, and avoid making an assessment o f capabilities o f the potential suppliers from outside the countrywhen a qualified supplier, identifiedbythe Concessionaire, i s available inMozambique; (ii) Theprojectmanagementservicesforworks,includingsurvey,engineeringdesign, preparation o fbid documents, evaluation o fbids and ordering, and supervisiono fworks would beprovidedby RICON, the Joint Venture Company proposed to be established by the foreignpartners o fthe concessionaire, the fees being decided on anegotiated basis with the concession company and subject to the approvalo f CFM directors inthe Board o f CCFB; (iii) Exceptforlowvalueitems(belowUSD100,000), procurementofgoods,andservices (except iand iiabove) by CCFB, shall be through competitivebidding- Openor limited Internationalbiddingfor items costing more than US$3 million, International or National limitedbiddingfor items costingbetween US$0.5 millionandUS$3 million; and national open or limited biddingfor itemsbelow US$0.5 million. LimitedInternational or National competitivebiddingwill involve at least three or more qualified bidders, whenever applicable (particularly for National competitive bidding); 49  Incaseo fworks contracts, maximization oflocalparticipation is the desired goal. Local contractors with required competence and expertise would be selected to execute the majority o f the works. Only inexceptional cases where capacity, competence and expertise is not available inthe country at competitive prices, CCFB will look to international contractors; The services such as maintenance, consulting, legal, audit, taxation etc (not financed by IDA) - are expected to be mostly o f low value andCCFB shall decide on the appropriate method o f procurement; Since no prior review by Bank will be required for items to be procured by the Concessionaire, expenditures incurred therein, will be reimbursed under the SOE method. ProcurementPlanfor rehabilitationof Sena Line-Concessionaire-financedcomponent. The packages to be financed by the Concessionaire are detailed inTable 7B. The total cost is estimated at US$14.84 million. ProcurementPlanfor the MachipandaLine. This component will be fully financed bythe Concessionaire and rehabilitation will be undertakenwhile operating the line. The Concessionairewill planthe rehabilitation works after takeover, taking account o f the need to maintain operation o f the line. ProcurementPlanfor the InstitutionalStrengtheningcomponent. This component will support: (a) an independent supervision engineer; (b) training insafety, environment and regulation; (c) technical advisor to C F M Board; (d) technical and financial audits; (e) incremental operating costs o f C F M units involved inthe management o f the project; (f) sector studies; (g) implementation o f EMP and RAP. The most urgent under this category is the engagement o f the independent supervision engineer. The consultants under this component will be selected using the World Bank Guidelines for the Selection o f Consultants. SpecialProcurementPrinciples. The procurement principles givenbelow will be applicable in all cases ofprocurement includingprocurement usingproceeds o f the IDA Credit for Components 1and 2: Inspection and certification o f materials and work outputs would be undertakenby an independent supervision engineer to be engaged by CFMunder component 3 o f the Project; The terms and conditions o f the tender will be framed keeping inview the agreed technical standards; The tender documents above U S D 3 millioninvalue will be based on the FIDIC documents for works contracts and on World Bank documents for supply o f goods contracts; The method o f open or limited competitive biddingshall be followed depending on the value o f procurement, nature and urgency o f work etc.; 50  Incaseoflimitedcompetitivebidding,CCFBwillmaketheshortlistofapproved suppliers/contractors; Membersofthe concessionaire consortiumor their associatedventures will be eligible to bid and will be awarded the contract provided their bidi s within 15% o fthe lowest acceptable offer; Incase ofsupplycontracts coveringitemsproducedwithin Mozambique, localbidders will be entitledto a domestic preference of 15%. Inthe case ofitems (vi) and (vii) above, thebiddingdocuments will clearly statethe preference clause and the criteria for its application. Procurement plans, procedures, and guidelineswill be includedinthe proposed Financial Procedures Manual. * Table 7-A: Sena LineProject Components to be Financed by IDA Item Unit Estimated Estimated Estimated Procurement Quantity Rate cost of the Method (US$) package CUSS m) (A) Supply Contracts Supply and Rails MT 3 1,680 604 19.1 ICB transportation to site -S1 ~~ ~ Supply and Concrete Sleepers numbers 721,082 29.5 21.3 N SS transportation to site -S2 Supply and Steel Sleepers (Seconc numbers 188,571 11 2.1 ICB transportation to site -S3 hand) Supply and Wooden Sleepers Cubic 6,420 transportation to site -S4 meters Production and Stone Ballast Cubic transportation & Stacking meters at site and cess- S5 Manufacture, 1:12 45 KgTurnouts Sets 69 2.1 ICB transportation and stacking inyards - S6 I 30,838 I 51  PackageConfiguration Supply and yards - S7 transportation to he I LNCB Ballast screening KM 704 1,780 Study, design and L S ICB repairs to Zambesia Works package-BW1 river bridge Renewal of Rails & 704 I9,767 I 6.9 SleeDers 5,800 0.4 10.000 5.3 LICB withUSF6testing). Makingcheck rails & L S 0.22 0.2 stone slabs for Level crossings Works packagesfor Repairs o f bridges L S 1.15 1.2 LICB ninor bridges BW2- Minor) Works package L S 2.50 2.5 LNCB jtructures other than bridges including supply ifmaterials-Sw-1 Works packageincluding Communication upply of materials - stations 24 0.17 0.2 NCB 3w1 Arrangement (VHF) Sub-Total (B) 25.1 52  I Item I Unit EstimatedIEstimatedl Estimated Procurement I I Package Configuration IQuantity I Rate cost of the Method (US$) package US$^) I C) Rebuilding of Track from Dondo Y Track Section from -r irect Contrac Dondo Km0 to with CFM Works & Material Savane Km26, total track length 30 Kms 4'0 Ongoing Works on 0.13 Track Section fi-om Savane Km26 to Works & Material uanza, at take-over expected completed track length 12Kms Sub-Total ((21 I Total (A+B+C) Contingency @ 5% of rota1(A+B) I Project Management 6.1 ISS - RICON services GRANDTOTAL 104.5 53  Package Configuration Item Amount (US$ m) Procurement Method 5.3 ICB Supply andworks for Grooved rubber pads for sleepers 2.3 ICB Rehabilitationof SenaLine Elastic rail clips for sleepers Contingency@?5% 0.4 Other Costs: Selection of Consultants(Component3): (cost US$5.0 million) All consulting services financed by IDA credit costingmore than US$200,000 equivalent for firms will be awarded according to the QCBS procedure. Consulting services contracts estimated to cost less than US$200,000 equivalent to be awarded to consulting firms may be awarded accordingto Consultants' Qualifications selection method. Consultants for financial audits and other repetitive services estimated to cost less thanUS$50,000 equivalent per contract will be selected through Least Cost Selection (LCS) method. Individual consultants will be selected in accordance with provisions o fparagraphs 5.1 to 5.3 o fthe Guidelines. Inexceptional cases (contract monitoring, railway development studies, Adviser to the CFM Board) Single-Source selection for appointing a consultant may be usedinaccordance with provisions o fparagraphs 3.8 to 3.11o f the Guidelines. Shortlists for contracts costing less than US$200,000 equivalent may consist o f national firms only inaccordance with provision o f paragraph 2.7 o f the Guidelinesprovidedthat at least three qualified firms are available at competitive costs. However, ifforeign firms have expressed an interest, they will not be excluded from consideration. Table 7-C shows the procurement planfor consultant services under component 3 o f the project. 54  Table 7-C: ConsultantSelectionArrangements (US$ equivalent) Consultant Services Selection Method Total Cost Expenditure QCBS I sss (US$) Category CFMTechnical 500,000 500,000 Adviser SupervisionEngineer 2,600,000 2,600,000 Technicaland 300,000 300,000 financial audits management and resettlement Total 4,500,000 500,000 5,000,000 B. Assessment of the agency's capacityto implementprocurement Limitedprocurement activities for selection ofconsultants will be carriedout by CFM . CFM has beenselecting consultants usingWorld Bankprocedures underthe on-going RPRP andhas competent staff for procurement. An assessment o f the capacity o f the ImplementingAgency to implement procurement actions for the project has been carried out. The assessment reviewed the organizational structure for implementingthe project and the interactionbetween the project's staff responsible for procurement and the Ministry's relevant centralunit for administration and finance and found it satisfactory. The overallproject risk for procurement i s negligible. C. Frequency of Procurement Supervision Inaddition to the prior review supervision to becarried out from Bankoffices, the capacity assessment o f the Implementing Agency has recommended that supervisionmissions be carried out by the Country office staff annually. 55  Table 7-D: Allocationof Credit Proceeds kmount nUS$ Expenditure Category nillion Financing percentage 100%o f foreign expenditures and 86% of 1) Civil Works 30.7 local expenditures 2) Goods, Equipment and Velucles (a) Ballast and concrete sleepers 34.8 100% 100%o f foreign, 100% of local (ex-factory cost) and 86% of local expenditures for (b) Other than ballast and concrete sleepers 28.5 other items procured locally 3) Consultant Services (including 100%o f foreign expenditures and 86% of ,udits) local expenditures (a) For Component 1 6.1 (b) For Component 3 4.8 4) Training 0.3 I 100% 5) Incremental Operating Cost 86% Oe4 I 5) Unallocated(contingencies for components 1 and 2) 4.4 'otalCredit Proceeds 110.0 I 56  Annex 8: FinancialManagement andDisbursementArrangements MOZAMBIQUE: BeiraRailwayProject A. FINANCIAL MANAGEMENT ARRANGEMENTS 1.1 COUNTRY RISKS The overall conclusion o f the Country FinancialAccountability Assessment (CFAA) dated December, 2001 i s that "public sectorfinancial management systems in Mozambique are very weak, as evidenced by the Report of the Tribunal Administrativo on the Government General Accounts Reportfor 199t13and 1999, and will require substantial strengthening over several years. In the interim, risk of waste, diversion and misuse of funds are assessed as high. The public sectorfinancial environment in Mozambique denotes a situation of highfiduciary risk: material receipts andpayments are excludedfrom the budget andfvom Government accounting and reporting system; accounting systems and standards are outmoded; internal and external auditing require substantial support; andparliamentary oversight requires strengthening. Efforts have been made in recent years to reduce thefiduciary risk through (among other measures) the strengthening of the internal audit capacity of the IAD, and the creation of external audit capacity within theAT. Both of these efforts (as well as others) need to be intensified, because there is still a lot of work to be done in this area." 1.2 PROJECTRISKS Again from the CFAA: "Because of the highfiduciary risk, IDA has taken special measures to ensure adequatefinancial management of its portfolio. Project management units are often established to manage IDA-financed projects and Bankfunding is "ring-fenced" to mitigate fiduciary risk. Accounting staff are hired as consultants, typically on salaries higher than civil service salaries, to work onprojects, even when a Ministry implements thoseprojects. IDA projects are invariably audited by one of the "Big Four" international auditfirms. " The above risks are beingmitigatedbythe fact that project implementationi s managedby CFM which i s a well established company with a good accounting system and internal controls. Insummary, the keyfinancial management relatedrisks that project managementmayface, and the manner inwhich it shouldbe addressedare furnishedbelow: 3The Government GeneralAccounts Report (ContaGeraldo Estado,CGE) was auditedby the TA for the fEst time during2000 57  1. Corruption M Strong supervision by Independent engineer. 2. Poor governance N 3. Weak Management capacity N 4. Illiquidity delaying project M No counterpart funds requiredfrom GOM. Safe- implementation through lack of guards as per the Concession Agreement inplace to counterpart funds ensure theconcessionaire makes it's contribution. I5. andfinancialrecords. Poor linkages betweenphysical M Project Monitoring System to be established. I I I Overall Inherent Risk M L H = High S = Substantial M = Moderate N = Lowlnegligible * These items are considered moderate, not substantial or highrisk as long as mitigating factors, as described inthe FMAction Plan, are put inplace. 1.3 MAINSTRENGTHSAND WEAKNESSES The project financial management i s strengthened by the following salient features: CFM i s a well established company and complies with the statutory financial accountability requirements; The accounting personnel i s adequately qualified andwell experienced inaccounting. The CFM accounting system i s based on a well functioning computerized, double entry, accrual-based system; The intemalcontrol system provides sufficiently for the separation o fresponsibilities, powers and duties; The entity has a set o fFinancialRegulations and a detailed Accounting InstructionsManual, which describes the intemal control system and set procedures; The Maputo Corridor RevitalizationProject andthe Rail andPort RestructuringProject (RPRP) hadbeenmanaged by CFM. Hencethe key accounting, internal audit andproject staff have experience o f World Bankrequirements. Also the project accounts are prepared and audited ina timely manner; and 58  0 Except for inthe beginningo f the project, it will deal with a relative low volume o f transactions. The project financial management is challengedby the following salient features: The nature o fthe transactions maybe complicateddue to their technical content andthe fact that payments will bebased on sophisticated quantity reviews by engineers, althoughthe presence o f an IndependentEngineerwill substantially attenuate this challenge; Linkages betweenphysical and financial outputs may be difficult, inparticular with regards to control over the measurement o fphysicalprogress (percentage o f completion) and matching it with the payments made; and Dueto the fact that all RPRPpayments aremade directly bythe WorldBank, the staffis only experienced ina limitedscope o f World Bank procedures andrequirements. There i s a need for the staff from the PAS, Internal Audit & InspectionDirectorate and the PIU to be trained on the (i) Disbursement, (ii) FinancialManagement and (iii) Procurement procedures and requirementsof IDA. This trainingwill beprovidedbythe Bankbefore the Credit becomes effective. The measuresto minimize the impact ofthese weaknesses are described below. 1.4 FINANCIALMANAGEMENT ANDREPORTING SYSTEM OrganizationalStructure Similar to the management arrangements o fthe RPRPproject, the Beira Railway Project will be monitored by a SupervisionCommittee and a Finance Committee. The Director o f Finance o f CFM will be the "Accounting Officer" for the project, assuming the overall responsibility for accounting for the project funds andreportingto the Finance Committee. Aspects such as certification and technical implementationwill behandledby an Independent Supervision Engineerandthe PIUinCCFB, with oversight from the CFMheadquarters. The day-to-day financial management (FM) work will be conducted by the Project Accounts Section (PAS) which hadbeen set up under the WW. The Director o f InternalAudit & Inspectionwill be in charge o fproject auditing, and will report directly to the Chief Executive o f CFM. CFM will have an obligation to demonstrate to the Government and IDA that their funds are beingeffectively managed, fully accounted for andthat value for money hadbeen achieved. FinanciaYAccountingPolicies& Procedures The FMarrangements will be documented ina FinancialProcedures Manual, covering financial policies andprocedures (including procurement), accounting and internalcontrol system, financial reporting, flow o f funds and auditing arrangements. This manual i s inthe process o f beingprepared andwill bebased on and adapted from the one currently inuse for the RPRP. Theprocedures used bythe project to maintain its records will be appliedby the PAS-CFM with cognisance o fparticular IDArequirements-these will include the requirement for cross 59  references to supporting documentation inthe SOE supporting schedules inorder to facilitate the inspectionof these schedules and improve the maintenance o f the project's records. Accounting System, AccountingPolicies and Procedures The FMsystemmust support management intheir deployment of limitedresources with the purpose o f ensuringeconomic, efficient and effective applicationo fthese resources inthe delivery o f outputs and the achievement o f desired outcomes. Also, it should ensure that funds are properly managed and flow smoothly, adequately, regularly andpredictablyto the implementing agency. Specifically, the FMsystemshould be capable o fproducinguseful informationina timely manner for decision-makingpurposes (to enable project management to monitor the efficient implementation o f the project). This information shouldhave the characteristics o fbeingunderstandable, relevant, reliable and comparable andwould enable management to plan, implement, monitor and appraise the entity's overall progress towards achieving its objectives. Dueto the nature ofthe transactions andthe profile ofthe project, this shouldbeachieved through the preparation o f (as a minimum) Quarterly Management Reports which integrate project accounting, procurement, contract management, disbursementand audit with physical progress. The CFM accounting system is based on a sophisticated and computerized, double entry, accrual-based system. The objectives o f the C F M accounting system are, inter alia, to: Recordassets, liabilities, revenue and expenditure o f the CFM so as to meet statutory and other requirements; Provide informationto management to assist them inrunningthe CFM's activities on a day to day basis; Provide informationon reporting and accountability to stakeholders, and inparticular for donor hnding; Provide a suitable financial framework for planningthe CFM's future activities by means o f annual budgets and long term strategies; Facilitate concise and accurate Management InformationReports from reliablerecords to enable corrective measures on time; Enable performance evaluationo f CFM; and Enable the flow o fmanagement information from the basic recording system described above. The financialmanagement arrangementsare captured inthe FMQuestionnaire on file. Informationsystems The current computerized financial management systemis known as PROLOGICA. However, the financialreports for the current RPRP andthe proposed BeiraRailway Projectwill be preparedbased on spreadsheets. PROLOGICA has a report-writer ability to preparefinancial reports and this could be considered as an option. 60  ManagementReporting(FinancialManagementReports) Formats o f the various quarterly management reports to be generated from the financial management systemwill be developed. There will be clear linkages betweenthe informationin these reports andthe Chart o f Accounts. These financial reports will be designed to provide quality and timely informationto project management andvarious stakeholders onproject performance. Quarterly management reports will beproduced and will serve as FinancialMonitoring Reports (FMRs)requiredby IDA. The contents ofthesereports should as aminimumconsist ofthe following: . Financial Reports: .. 0 Sources and Uses o f Fundsby FundingSource; o Uses o f Funds by Project Activity/Component; PhysicalProgress (Output Monitoring) Report; Procurement Report. The draft formats have been definedand agreed duringnegotiations and the PAS-CFM is expected to become capable o fproducingthese reports by credit effectiveness. AnnualFinancialStatements CFM i s requiredby legislationto prepare its financial statements within six months after the financial year-end and inaccordance with Generally Accepted Accounting Practice (which inter alia includes the application o fthe accrual basis o frecognitiono ftransactions). Interms o f the Project Ameement CFM will berequiredto prepare entity financial statements for each financial year endingon 31December. The IDADevelopment Credit Agreement will also requirethe submission o fproject audited . financial statements to the Bank within six months after each fiscal year-end. These Project Financial Statements4will comprise of: A simplifiedBalance Sheet reflectingthe assets, liabilities and fundingoftheproject based on the cash bases. It should as a minimumreflect the: (a) Cash Balances; (b) Fixed Assets'; . (c) Work-in-Progress; (d) Funds contributedby IDA and the Concessionaire; and (e) Accumulated Expenses; A Statement of Sources andUses ofFunds/ CashReceipts and Payments which recognizes . all cash receipts, cash payments and cash balances controlledby the entity for this project; and separately identifies payments by thirdparties on behalfo f the entity; The Accounting Policies Adopted and ExplanatoryNotes. The explanatory notes should be presented ina systematic mannerwith items on the Balance Sheet and Statement o f Cash Receipts and Payments being cross referenced to any relatedinformation inthe notes. Exampleso fthis informationinclude: 4 It should be notedthat the project fmancial statements should be all inclusive and cover all sources and uses of funds andnot only those provided through IDA funding. Itthus reflects allproject activities, financing and expenditures, including funds from other donors/parties and contributions inkindsuch as labor and accommodation, irrespective o f whether the project implementationagency controls the funds for a particular aspect of the project. However, the IDA components would have to be identified separately. 'It should be noted that under the Cash Bases o f Accounting the Fixed Assets will not be subject to depreciation. 61  . o a summary offixed assets bycategory o f assets (to bemaintainedbythe PIU); o a summary of SOEWithdrawal Schedule, listingindividualwithdrawal applications; and A Management Statement that Bankfunds havebeenexpendedinaccordancewith the intended purposes as specified inthe relevant World Bank legal agreement. 1.5 FLOWOFFUNDS AND BANKINGARRANGEMENTS The envisaged funds flow arrangements for the project, throughonebank account (managed at CFM Head Quarters inMaputo) are as follows: IDAwill make aninitial advance disbursementfrom the proceeds ofthe Credit bydepositing into a CFM-operated Special Account (SA) heldat BIM(commercial bank) and denominated inUS Dollars; Actual expenditure will be reimbursedthrough submission o f Withdrawal Applications from the Concessionaire supported by full documentation or StatementsofExpenditure (SOE), which will be approved inaccordance with internalcontrol measures appliedinCFM. Also, the direct method o fpayment (WB pays supplier directly) i s another option available to the client; No payments from the IDA funds will be made from the PTU-office inDondo; Counterpart funds are not applicable. However, for the payments to be made by the Concessionaire a Special PurposeAccount will be opened; and The Special Account shouldbe opened by credit effectiveness. The account signatories will be inaccordance with the current arrangements within CFM. 1.6 STAFFING AND TRAINING Staff Qualifications & Skills The staff inthe PAS-CFM is sufficiently qualifiedto properly take care of the financial management arrangements o f the project. Dependent on the final project requirements the staff6 may needto be strengthened. (for the present, the existing unit staff PAS-CFM will be handling the FMarrangements for the project). The PAS-CFM will, also, throughout the duration o fthe project be supported by a Financial Specialist. Training Dueto the fact that all RPRPpayments aremade directly bythe WorldBank, the staffis only experienced ina limited scope o f World Bank procedures and requirements. There i s a needfor the staff from PAS-CFM, InternalAudit & InspectionDirectorate andthe PTUto be trained on the latest World Bank procedures and requirements for: (a) Disbursement; (b) Financial Management; and (c) Procurement. This training will be providedbefore the project credit becomes effective and will be conductedby staff from the World BankMaputo Country Office. 6The current staff consists o f the Director o f finance supported bytwo Assistant Accountants. 62  1.7 AUDIT InternalAudit An IntemalAudit & InspectionDirectorate (IAD)hasbeen established at CFMwith independent dual reporting to the CEO and respective auditors. The IADi s well capacitated and staffed. Responses to audit queries are requiredto be submitteddirectly to the Chief Executive o f CFM to improve quality and timeliness o f follow-up. The IAD concentrate on corporate governance and testingcompliance with financial regulations. TheDirector o fIntemal Audit & Inspectionwill ensure that the project expenditures are subject to internal audit testing on a random basis. ExternalAudit The entity financial statements will be audited bythe external auditors (currently Ernst & Young for CFM) interms o f legislation6and the audit report will be submittedto IDA within 6 months after the financial year-end. The external audit on the proiect financial statementswill be carriedout by a private sector auditing firm. The costs incurred for the audit will be bornebythe project funded by IDA. The external audit will cover all World Bank funds and Concessionaire funds at all levels o fproject execution. The auditors will berequiredto express an opinion on the project financial statements, in compliance with Intemational Standards on Auditing (IFAC pronouncements) the audit report will be submitted to IDAwithin 6 months after the financial year-end. Inaddition, a detailed management letter containing the auditor's assessment o f the internal controls, accounting systemand compliance with financial covenants inthe IDA Credit Agreement, and suggestions for improvement will be preparedand submitted to management for follow-up. The arrangements for the appointment o fthe extemal auditors o fthe project financial statements shall be communicated to IDA through agreed terms o f reference. The following observations relate to audit compliance ofthe RPRP (Credit 3288-MOZ) and the . current situation inCFM: The most recent audited financial statements for the RPRPaccounts were issued with unqualified audit opinion by DeLoitte Touch Tohmatsu for the component managed by . CFM. Also, the management letters for the project didnot reveal serious deficiencies or areas o f weakness insystems and controls; and The most recent set o f audited financial statements o f CFM for the year ended 31December 2003 have been issued on time. These financial statements contain an "except for" audit qualification which does not relate to materialweaknesses ininternal control. 6Decree No. 32/90 institutes compulsory audits incountry. 63  1.8 SUPERVISION .. Project monitoring will take the following forms: Certification o f quality and quantities by an IndependentSupervision Engineer; .. Management oversight o f the project by a Supervision Committee and a Finance Committee inCFMheadquarters; Internal audit; and Interimand annual external audit oftheproject finances. Financialmanagement supervision will be carried out by the FinancialManagement Specialist .. (FMS) duringregular World Bank supervision missions. The FMSwill also: . Conduct an FMsupervision before credit effectiveness; Review the financial component o f the quarterly FMRs; and Reviewthe Audit Reports andManagement Letters from the external auditors and follow-up on material accountability issues with the Client, and/or Auditors. 1.9 CONCLUSION The evaluation above indicates that the project's financial management arrangement satisfies IDA'Sminimumrequirements under OPh3P10.02 except for the issues mentionedinthe Action Planbelow. The project financial management risk i s assessed as beingnegligible. However, a number ofminor issues remainto beaddressedinorder to establish an acceptable control environment and to mitigate financial management risks. The following financial management action plan shall be satisfactorily addressedinaccordance with the time frames shown below to ensure full compliance with the minimumrequirements. 64  1.10 FINANCIALMANAGEMENT ACTION PLAN No. Action Duedate Conditionality Training for staff from PAS-CFM, Internal Audit Trainingto be None & InspectionDirectorateandthePIUonlatest provided at WB World Bankprocedures andrequirements for: Country office e Disbursement, e Financial Management e Preparationo f FMRs e Procurement procedures. 2 Financial Management System(FMS) designed and Effectiveness Condition o f operational at PAS-CFM. This includes: effectiveness (i)ReviseandupdatetheFinancialProcedures Manual. (ii) ofaccountstobeabletoidentify.project . _ Chart - . activities, and disbursement categories. 3 Open Special Account inU S Dollars. Effectiveness Condition o f effectiveness 4 Process of hiringa relevantly qualifiedand Effectiveness Condition o f experiencedexternal auditor for the project has effectiveness I 1.11 FINANCIAL COVENANTSAND EFFECTIVENESS CONDITIONS Financial covenants are the standard ones as stated inArticle IV of the Development Credit Agreement and Project Agreement. Effectiveness conditions are shown inthe FinancialManagement Action Plan above. B. D I S B U R S E M E N T A R R A N G E M E N T S Disbursements from IDA would, for the duration of the project, b e made on the basis o f incurred eligible expenditures (transaction based disbursements). IDA would then make advance disbursement from the proceeds of the Credit by depositing into a CFM-operated Special Account (SA) to expedite Programimplementation. The advance to a SA would b e used by CFMto finance IDA's share o fproject expenditures under the proposed Credit. Another acceptable method o f withdrawing funds from the Credit is the direct payment method. Payments m a y also b e made to a commercial bank for expenditures against IDA special commitments covering a commercialbank's Letter of Credit. IDA's Disbursement Letter stipulates a minimum application value for direct payment and special commitment procedures. Uponcredit effectiveness, CFMwouldbe requiredto submit a withdrawalapplication for an initial deposit to the SA, drawn from the IDA Credit, inan amount to be agreed to inthe Development Credit Agreement. Replenishment of funds from IDA to the SA will be made 65  upon evidence o f satisfactory utilization o f the advance, reflectedin SOEs andor on full documentation for payments above SOE thresholds. Replenishmentapplications would be requiredto be submitted regularly. Ifineligible expenditures are found to have beenmade from the SA, the Borrower will beobligatedto refundthe same. Ifthe SA remains inactivefor more than six months, the Borrower may be requested to refundto IDA amounts advanced to the SA. IDAwill have the right, as reflectedinthe Development Credit Agreement, to suspend disbursement o f the hnds ifreportingrequirements are not complied with. Certificationby the independent supervision engineer will be an important internal control measure inthe disbursementprocess. Other disbursement arrangements are described inthe paragraphs that follow. Out o f the total allocation o f US$127.46 million for Sena Line, the cost o f rehabilitationo f Sena Lineinfrastructure, includingproject management cost (IDA financed component) is estimated as US$ 119.34 million, the remaining $8.12 millionbeingfor workshops and rolling stock. The cost o f rehabilitation o f infrastructurei s apportioned as under: Source Amount ($m) Proportion IDA Financing USD 104.50 88% Concessionaire Financing USD 14.84 12% USD119.34 The disbursement procedure o f IDA Funds shall be based on the following principles: (0 The source o f financing for all items to be financed from IDA funds amounting to USD 104.50 million, shall be 100% IDA. The source o f financing for all other items, amountingto USD 14.84 million, shall be 100% Concessionaire funding; (ii) Inallthedisbursements,itwouldbeensuredthat:(a)thetotaldisbursementwillnot exceed the amount agreed inthe Concession Agreement, i.e., US$104.5 million; (b) ifthe final total project cost turns out to be lower than that estimated by the Concessionaire, thenIDA'Ssharewill also beproportionallyreducedwith the balance, ifany, inthe Special Account beingreturnedto the Bank; and (c) ifthe project cost turns out to be more, thenthe IDA share will not be increased and the concessionaire will meet the additional cost; (d) the estimated completioncost under major categories o fpackages viz a viz Supply Contracts, Works Contracts andProject Management Services shall be reviewedon a yearly basis; (iii) Incaseof(d)above,iftheactualcostofapackageexceedstheestimatedcost,theIDA fundingwill berestrictedto the estimated cost and the excess will bepayablebythe concessionaire. This i s to avoid accumulation o f shortfall o f funds due to cost overruns towards the endpart o fthe Project. However, ifthe cost o f some packages tums out to be lower than the estimate, this gain can be adjusted towards the cost overrun o f the other packages. This aspect will be monitored and controlledduringproject supervision; 66  (iv) To enable speedydisbursement, the list o fpackages with estimated costs as well as copies o fthe contracts would be sent to the Bank as soon as they are concluded; (v) Eligibleexpenditures would bereimbursed according to theratio oftotal IDA financing to that o fthe Concessionaire's contribution (see detailed mechanism below), up to the maximum o f the agreed IDA amount, subject to certificationby an IndependentEngineer to be hiredby CFM. This methodwill be usedfor expenditures for materials, goods, services and advancepayments thereof; (vi) The independent supervision engineer will inthe case o fworks, certify that quantities, unitprices andquality are inaccordancewith the contractual requirements, andinthe case o f supplies certify the correctness o f the contract prices, quantities and quality. Thereafter the payment documentation will be submitted to the Finance Directorate at CFM headquarters for processing; (vii) The independent engineer will certify the bills within 5 days o f submission. Certification incaseofimports shallbebasedondocuments specified inthe contract withthe suppliersinorder to facilitate payments through Letters o f Credit. For the supply contracts, ifdeemednecessary, inspections can be carried out at the supplier manufacturingplant, where chemical andphysical tests shall be conducted as required; (viii) The CCFB shall submit Statements o fExpenditureinrespect o fIDA eligible items ("Funding Claim") accompaniedbyinvoices and all other requireddocumentation to CFM Finance Directorate, for disbursement to the beneficiary; (ix) FundingClaims inrespect ofindividualpayments less than USD0.50million shallbe submittedon fortnightly basis. FundingClaims for individualpayments o fUSD 0.50 million & above and those requiringto be released earlier as per contract provisions may be submittedas andwhen required. CFM shallmake arrangements for payment to the beneficiaries either through the Special Account or direct payment by IDA. CFM shall settle the FundingClaim within the following timeframe: a. 5 (five) working days o f its submission by the Company when the beneficiary's account i s inMozambique; b. 10 (ten) working days of its submission by the Company when the beneficiary's account i s outside Mozambique and the disbursement i s through the Special Account; and c. 20 (twenty) working days o f its submission by the Company when the beneficiary's account i s outside Mozambique and the disbursement i s through Direct Payment by IDA. (x) The CCFB shall, on amonthlybasis, submit to CFM detailed reports andassociated documentation on the capital expenditures under the Non-IDA FundedItems; (xi) The CCFB shall annually (by December 31) ensure that, its investmentinthe Non-IDA works i s not less thanthe agreed proportionon a cumulativebasis ("Investment 67  Percentage"). Ifat that time the InvestmentPercentagefalls below 12%, the Company shall deposit the deficit amount into a separate dedicated bank account ("Non-IDA financed Account") to be operated exclusively for the purpose o fpayments for non-IDA works. As andwhennon-IDA works are executed, payments will be made for these works from Non-IDA Works Account subject to the sharing percentage not falling below 12%. The mechanism for ensuringthat the proportion o f IDA financing to Concessionaire financing i s always kept at the agreedproportionwill be as follows: a. The expenditure under IDA andNon-IDA funding shall be reviewedon halfyearly basis to assess that Company's investment inthe Non-IDA items on a cumulative basis i s not less than agreedproportion o f 12% ("Investment Percentage"). Ifthere i s a shortfall, Company shall be advised to ensure maintenance o f the said proportion duringthe next 6 months. Ifthe Investment Percentage, after the expiry o f the next 6 months, falls below 12%, the Company shall deposit the deficit amount into a separate dedicated bank account ("Non-IDA ItemsAccount") to be operated exclusively for the purpose o fpayments for Non-IDA Items. As and when non-IDA Items are executed, payments canbe made for these items from Non-IDA ItemsAccount. b. The agreed financing proportionswill be duly audited annuallybythe CFM appointed Auditor, to ensure that the agreedproportions have been maintained at year end and that the balance o fthe separate dedicated bank account (Non-IDA ItemsAccount) correctly reflects the company's deficit amount, ifapplicable. Retroactive Financing. The eligible expenditures incurred after January 1,2004, andprior to the signingofthe Credit agreement would be reimbursed retroactively up to a limit o f $3 million. Inaddition, alldisbursementspriortothedatetheIndependentEngineerstartsfunctioningshall beprocessedbasedon certificationbythe Project ImplementationUnit o f CCFB. 68  Annex 9: Economicand FinancialAnalysis MOZAMBIQUE: BeiraRailway Project ECONOMICANALYSIS Summaryof Benefitsand Costs. Theproject's mainbenefits comprise development ofthe region, creationo fnew activities, avoided costs o f alternative transport and infrastructure and creationo f employment. An economic analysis was conducted for rehabilitation o fthe Sena and Machipandarailway lines. TheNet Present Value for rehabilitationofthe SenaLineis US$214million andthe economic Rate o fReturn(ERR) i s 18 percent. The results o fthe sensitivity analysis show that the value o f the ERRis between 10% and 23% within a confidence interval of 90% and ameanof 18%. ProjectImpactandArea of Influence. The project comprises the rehabilitationo fthe MachipandaLine(MP-Line) andthe reconstruction o fthe Sena Line and considers bothprojects separately and combined. The investmentsinthe MP-Line require upgradingo ftrack inorder to improve track reliability as reflectedinreductionintemporary speedrestrictions. Theproject impact differs for the two branches of the BeiraRailway System. Improvement of the MachipandaLinewill enable local traffic to gradually shift to the rail resultinginlower costs o f transport for domestic shippers andreceivers and international transit traffic will also shift from road(divertedtraffic) andports outside Mozambique such as Durban(re-routed traffic). The impact ofthe Sena Lineproject is somewhat different as the project will open up regions untilnow insufficientlyconnectedwith the centres o fMozambique andwhich leadto new economic activities generating new transport (generated traffic). It i s therefore useful to make a distinction between the existingtransport inthe Sena Line's area o f influence, which goes by road or river (existing traffic) and the generated traffic. The existing traffic concerns for instance traffic routes connecting Beirawith areas located along the Zambezi River (Marromeu Sugar Plant) and along the new Inchope- Caia road. The two roads arepart o f the nationaltrunk road system andhave a highpriority; all other roads inthe areaofinfluenceare earthroads andarenotbeingupgraded inthe foreseeable future. The feeder roads inthe Sena Line areao f economic influence will be improved as part o f the Bank funded road development program. The Sena Lineruns from the port o fBeirato the city of Tete inthe centralparto fthe Tete province. Inbetween are various districts / provinceswhich will benefit from the Sena Lineby improved accessibility. The three provinces Sofala, Tete and Zambeziahave a total population o f 4.75 millioninhabitants. The Sena Line will have a great impact on the districts beingdirectly linkedto this line. Excluding the populationo fBeira some 1.26 millionpeopleliving alongthis line will see their situationgreatly improved. 69  costs The costs o fthe project include: (i) the cost of(re-) construction, building, andrehabilitationofthe railinfrastructure (the investmentcosts); (ii) the cost o fmaintainingandoperating the railway systems ; (iii) the residual value o fthe newrail infrastructure at the endo fthe evaluating period (adopted as negative cost); (iv) investmentsinfeeder roads connecting the railway stations with their feeder regions Conversions factors have been usedto translate financial costs into economic costs. Benefits Economic benefits are assessedby systematically contrasting the situationwith and without the project on the basis o f the impacts. It i s assumed that inthe situationthat no investments are made inthe Machipanda Line and the Sena Line (the `without' situation), the current goods that are transported by the MachipandaLinewill remain on this line inthe future but decrease steadily. Goods that are now transported by truck will remain on the road. Trucks will also transport possible increasing volumes o f goods inthe future. Inthe cost benefit analysis (CBA) the following effects ofaretaken into account: (0 Direct effects: These effects comprise both the financial costs and benefits from the reconstructionandrehabilitation o fthe railway; (ii) Indirecteffects:Theseeffectscompriseshiftsincreationofemployment,shiftsin activities, andbirth o fnew activities consequent to the railway project, for example, certain regions will become more attractive for companies to settle down and will provide newmarkets of"cash crops" for farmers; (iii) Externaleffects:Theserefertowelfarechangesinsocietyattributabletotheproject,for which the project does not pay or receive financial compensation. These effects comprise environmental effects (reduction innoise and emissions) and social aspects (increased safety and reductioninthe number o f accidents). The economic benefitsvary per type o f trade. National traffic has beendividedinexisting and project generated traffic. Existing traffic (category A) refers to national traffic (within Mozambique) that i s inthe situationwithout the project carriedby the road, rail or water. Project generated traffic (category B) i s traffic that will occur only when the Beiraproject i s implemented. This concerns the new economic activities and the related cargo flows that will be generated by the Sena Line project. Internationaltraffic needs to be dividedintraffic that without the project i s already routedvia Mozambiqueby roador rail (category C) and traffic that without the project i s not carriedvia Mozambique, and that will be re-routed via Mozambique usingthe BeiraRailway after the project i s implemented (Category D). 70  The costs andbenefits of the project are discounted to the year 2004. The discount rate usedin discounting i s 12% and the prices usedare prices inthe year 2003. Only the costs and benefits for the economy o fMozambique are taken into account. Costs andbenefits o f the project that will accrue to parties outside Mozambiquedo not apply. TrafficForecasts Sena Line trafic. The Moatize coal i s expected to increase from a base level o f about 600,000 tons (the level which was existing in 1983 when the line closed down) to 874,000 tons at the end o f the forecast period. Non-coal traffic: It i s not considered realistic to have an immediate switch from road to rail (in case o f existing traffic) and an immediateproduction increase (incase o f generated traffic) for the first year the new line will be operational, i.e. 2007. Therefore it i s assumedthat a three-year period i s neededto achieve the anticipated forecast traffic level: a. in2007: 25% oftrend level; b. in2008: 50% oftrend level; c. in2009:75% oftrendlevel. Traffic flows other thancoal will increase to a level o f about 1.4 million tons at the end o fthe period. Machipanda Line trafic. The traffic development on the Machipanda Linewill show a more gradual development where traffic diverted from road andreroutedfrom non-Mozambicanports will gradually increase. Total traffic will increase from 1milliontons in2004 to 2.2 milliontons in2023. PassengerTraffic Forecasts. Passengerservices on the Beira Railway System are not important interms ofcosts andrevenues. Forthe economic evaluation oftheprojectthese services, however, are o f great importance, as they increase the mobility o f the populationof isolated areas providing them access to markets, educational, health and other social services. The passenger traffic therefore impacts the isolatedareas o f the Sena Line and i s forecast to increase from current zero level to about 1millionpassengersby end o fthe project. ECONOMIC EVALUATION InvestmentCosts The investmentcost for the BeiraRailwayProject is givenbelow: Table9-1: Investmentsinthe BeiraRailwaySystem(* 1,000 USD) 71  Discountinginvestmentcosts to the baseyear gives a total Net PresentValue (NPV) o f 81.6 millionUSD for the Sena Line and 16.0 millionUSD for the MachipandaLine. For the economic analysis, a conversion factor from financial to economic costs o f 80% i s applied, resultinginaNPV o f 65.3 millionUSD for the SenaLineand 12.8 millionUSDfor the Machipanda Line. The flows of costs andbenefits result inan economic internalrate ofreturno f 18%. The largest sources o f economic benefits concern avoided transport costs from road andbarge transport (USD 75.1 million) followed closelybynet value addedofthe first order (USD70.6 million) and additionalrailway revenues (USD 72 million). The net value added o f the first order i s relatedto generated economic activities and concern productionof cotton, timber, other agricultural goods and coal inisolated parts near the Sena Line(excluding existing traffic). The second order net value added result through multiplier effect, The impact o f the project on the available income o f the inhabitants (through for instance a shift from food crops to cash crops) will also have a further impactthrough increasedconsumption andinvestments. Environmentalcosts and benefits are on balance, as may be expected, positive but o f little weight. Table 9-2: Net PresentValue of the costs andbenefits ofthe Beira RailwayProject(in millions of USD,discountedto 2004) Investment -65.3 I -12.8 I -78.1 Investment in Feeder roads -12.9 0 -12.9 Maintenance and operation -72.7 -66.6 -139.3 4.7 0.9 5.6 71.2 -0.6 70.6 Net Value Added Second 53.0 Order 53.4 -0.4 Rail Revenues 16.9 55.2 72.1 Avoided Transport Costs 35.2 39.9 75.1 Avoided Infrastructure Costs 2.8 1.6 4.4 External Costs Rail -0.5 -0.3 -0.8 Avoided External Costs Road 1.2 0.7 1.9 Passenger Mobility 33.3 0 33.3 -19.1 -2.3 -21.4 Sensitivity Analysis. The sensitivityanalysis i s applied ina stochastic manner, where the uncertaintyconceming the major inputs i s expressed as a distribution function. The expected value according the distribution i s equal to the most probable values as discussed inthe previous 72  Chapters. Inall cases a normal distribution function i s chosen. The uncertainty o f a variable i s expressed inthe value o f the standard deviation. See table below. Table 9-3: Inputvariablesfor sensitivity analysisandtheir distributions Standard deviation Growth rates 20% Net value added percentage 5% Railway tariff 10% Operational costs 5% Investment costs 10% Multiplier 5% Road vehicle operational costs 10% Furthermore, for each individual input the impact o f a change inthat input, the project IRRi s estimated. This provides informationon the relative importance o f the various input variables on the final outcome as expressedinthe IRR. The sensitivity analysis presentedhere is basedon a Monte Carlo simulationo f 1,000 simulations, usingthe Excel add-in @Riskv4.0. Eachiteration i s recorded and analysed to provide the necessary informationfor the regression analysis supporting the sensitivityanalysis. There i s an amount o funcertaintywith respect to the values o fthe future developments o f cargo flows, the assumptions with respect to net value added and multiplier effects, the tariff setting o f railway services, the investment and operational costs and the costs savings with respect road transport. To deal with this uncertainty sensitivity analysis i s applied for these variables. The results o f the sensitivityanalysis show that the value o f ERR i s between 10% and 23% within a confidence interval o f 90% and a meano f 18%. The input variable with the largest relative impact on the outcome i s the input for growth factors o f the traffic forecast. This seems to be a logical outcome, since almost eachbenefithas beencalculated on the basis o fthe traffic forecast. Furthermore, the net value added percentage andthe multipliers are relatively important compared to, for example, the road vehicle operating costs or the revenues. FINANCIAL ANALYSIS Viability of companyformed to operateBeira Railway Concession. Although the financial model shows that the BeiraRailway Concession company i s expected to make an overall operating profit andnet profit over the life o f the concession, it i s projected to make a net loss from year five to nineo f the concession period. This i s when interest repayments will start. The assumptions that have beenusedto test the model interms o f traffic growth, fixed costs, freight rates, revenues are conservative. Furthermore, a lot o f effort has beenmade by the concessionaire to minimize the capital cost o f rehabilitatingthe SenaRailway Line. For example, as per the model, duringthe concession periodtraffic i s projected to grow by only about 4% a year, which will mean that bythe end o fthe concession period the combined Sena andMachipanda Lines will becarrying only about 3.5 milliontones of freight. Consideringthat the Sena Linewas carrying about 2 millions tones o f freight when it was shut down inthe early 80's ,the projected traffic levels should be achievable. 73  The sensitivity analysis that was done onthe financial model shows that the BeiraRailway Concession i s sensitive to changes inthe rates for freight andthe capital costs o frehabilitating the SenaLine. What follows i s a synopsis o f the proforma income statement for the company that will be formed to operate the Beira Railway Concession: Table 9-4: Projected Income Statement for Beira Railway Concession Company (Year's 1-11and amounts inUS$ million) Expenses: 7.78 8.06 8.48 8.85 24.54 26.32 27.08 27.59 28.45 30.84 38.62 "PBT: 2.67 2.28 1.83 1.55 (4.77) (5.08) (4.26) (3.06) (2.11) 1.62 3.37 Net Profit: 1.81 1.55 1.45 1.29 (4.77) (5.08) (4.26) (3.06) (2.11) 1.62 3.37 Financialperformance of CFM. As per the 2000-20002 `Performance Contract' between GOM and CFM, CFM's roles was supposed to focus on: (a) facilitating anddeveloping modernrail- port infrastructure and services; (b) facilitating the development o ftransport and logistical activities through the increasedparticipation o fthe private sector intheir operation and maintenance; (c) participating with the private sector inthe operation o fthe rail-port systems ina way which i s sustainable, secure, efficient andbeneficial for passenger and cargo transport; and (d) maximizing the productive use o f its physical assets. The financial performance o f CFM continues to be affected by the following major factors: (a) ongoing fundingo f a large capital expenditure programto restore the remaining parts o f Mozambique's port and railway infrastructurewhich was destroyeddamagedneglected during the war; (b) ongoing heavypensionand retrenchment costs associatedwith the rightsizingof staff levels within CFM; (c) part o f CFM's asset base (eg.; Sena Railway Line)not currently generating any revenues; and (d) increased depreciation charges for a large re-evaluated productive and unproductive asset base. However, GOMi s now inthe process o f developing a comprehensive financial restructuringo f CFM, which includes, among others, write off o f substantial outstanding debt and accumulated losses and hivingoff o f non-productive assets. However, due to the fact the financial restructuringprogram has only beenpartially implemented by GOM, CFM is still losingmoney-bothat the operational andnet level. The latest FY03 provisional audited accounts show an operating loss o f about Meticais 492,500 million (about US$21.2 million) out o ftotal revenues o fMeticais 1,653,619 million (about US$71.1million) against 109,206 million Meticais (about US$4.7 million) out o f total revenues of 1,849,344 millionMeticais (about US$79.8 million) for FY02. The deterioration inthe operating results 74  and tumover for FY03 were causedby: (a) disruption causedby heavy rains to the operations on the Nacalarailway line; (b) decreaseintraffic volumes from Zimbabwe; and (c) revenues generatedby the port o f Maputo beingshiftedto the winning concession. The provisional net loss for FY03 was Meticais 692,171 million (about US$29.7 million) compared to Meticais 2,116,182 million (about US$91.3 million) for FY02. The sharp improvement inCFM's net losses for FY03 when compared to FY02 are primarily the result o f a major decrease in extraordinary items or `one offs' duringthe FY. Table 9-4 gives the details for the income statement o f CFM duringthe last five FY's. Table 9-5: IncomeStatement(ProfWLoss) for CFM (FY endingDecember31 andAmountsinMillions ofMeticals) INCOME 1.1 Sales of Services: 1,184,706 1,352,841 1,072,313 787,101 704,646 Other Income: 468.913 496,503 404,552 265,591 193,744 Total: 1,653.619 1,849,344 1,476,865 1,052,692 898,390 I Adiustments related to mevious I I I I I I Fys: 89,956 16,037 (41,996) (51,4 14) 1,277,322 Profitl(1oss): (470,118) (2,116,182) (509,884) (276,051) 943,819 * Incomestatement figures are provisional. Financialperformance of companies were CFMhas equity stakes. Consistent with GOM's policy of supportingpublic-private investments inthe economy, CFM has gone ahead and concessioned out largeparts o f Mozambique's port and railway infrastructure. C F Mhas also taken `strategic' equity stakes, ranging from 5% to 50%' in several companies that have been formed from the concessioning out o f its extensive port and railway asset holdings. It has also taken some `strategic' equity stakes incompanies that do not operate inthe port andrailway sector to diversify its activities. The main reasons for CFM's strategy o ftaking `strategic' equity stakes inseveral companies are to: (a) reduce andrisk for the private sector investors to invest in the developmenthe-developmentof key transport infrastructure; (b) leverage the utilization o f under-used public infrastructure assets withprivate sector capital and expertise; (c) fund the rehabilitationo f large parts o f Mozambique's rail and port infrastructure; and (d) introduce full commercial management inthe runningo fthese new commercial entities. 75  CFM strategy o f concessioning out its assets and taking `strategic' equity stake inthe specific companies that are created to operate them remains financially prudent. CFM gets the bulk of the concession fees from the companies that have been formed and its share o fwhatever dividend payment i s made by the companies inwhich it has shareholdings in. This should provide a steady source o f income for it. The combinedFY03 results for the 11major companies where CFMhas equityparticipations reveal that turnover has grown by 42% to Meticais 2,35 1.7 billionover the previous year. The operating profit was Meticais 425.4 billionwhich was a 63.6% increase over the previous year. This shows that the financial performance ofthe companies inwhich CFM has equity participations i s reasonably good. What follows i s a consolidated table which gives the financial performance o f the 11major companies where CFM has equity contributions. 76  Table 9-6: Incomeand OperatingProfit/Loss For 11companieswhere CFMhas shareholdings (FY endingDecember31 & Amounts inBillionsof Meticais) I 1Moc. I I 2. Comelder de 531.7 I 151.5 I320.5 I 72.2 I Moc. 3. MPDC 230.9 16.9 4. MIPS 137.9 20.1 5. CEAR 77.9 (16) 127.5 110.7 (11.9) 6. BIMLeasing 115.4 35.2 66.3 21.7 59.7 7. CrediCar 81.1 (2.9) 54.4 (2.2) 8. Air Plus 11.7 (6.0) 31.5 1.3 19.8 .6 9. TCM 16.5 (1.2) 12.1 (1-6) 11.2 (*3) 10. STM 16.5 1.o 13.5 (13.2) 9.4 (14.7) 11. INTUR 7.9 (7.5) Total: 2.352.1 425.4 1,751.3 I 260 I 1,235.4 I 116.9 77  Annex 10: SafeguardPolicyIssues MOZAMBIQUE: BeiraRailway Project Safeguard policies. The project triggeredthe following World Bank Safeguard Policies: Environmental Assessment OP 4.01, Natural Habitat OP 4.04, and Involuntary Resettlement OP 4.12 which have beencompliedwith inthe Environmental Audit and Management Plan andthe Resettlement Action Planprepared for this project. These Action Planswill be implementedby the Borrower. Inaccordancewith WorldBank ratings, the Environmental Screening Category is "B". EnvironmentAssessment Background. The Sena Line rehabilitationwork involves only two main environmentalissues andbothhave been resolved. The first pertained to the use o fwooden sleepers, which would have affected the hardwood forests inMozambique. A decision has beentaken to use only concrete sleepers except at a very few locations where nonstandardsleepers needto be used. The secondpertained to de-miningalongthe railway line, which is beingaddressedin collaborationwith the NationalDe-MiningInstitute. An environmentalstudy was conducted to formulate an EnvironmentalAudit andManagement Plan(EA), which focused on: (a) establishing environmentalbase line conditions and examining the present institutional andlegal framework; (b) assessingthe physical, biological and socio- cultural environment; (c) formulating an EnvironmentalAudit andManagement Planwhich encompasses environmentalmitigationmeasures, includingmeasures to restrict illegal transport o f forest products (timber logs are one o f the mainproducts to be transported by rail ) and wildlife products (bushmeat consumption is not a major issue inthe project area); (d) environmental monitoring plan, including contingency plan, an emergency response plan and health and safety plan; and (e) evaluatingthe institutional issues relevant to establishing a well functioning rail operation from an environmentalpoint o f view and recommending improvements and institutional changes as needed. The study also reviewedthe Mozambique Railways Act and addressesthe environmental management obligations o f the concessionaire and the borrower. The EnvironmentalAudit and Management Plan (EA), including an EnvironmentalManagement Plan (EMP) and a separate Resettlement Action Plan (RAP) have been disclosed inBank's Infoshop (June 18,2004) and have beenwidely distributedinthe project area on June 11,2004. As part o fthe Safety, HealthandEnvironmental(SHE) andsocial supervision arrangements for the implementation o f the EA/EMP and the RAP, an operational, viable and lean Inspectorate would be consolidated and strengthened as soon as possible. This Inspectorate will bebased within CFM, butmay be transferred to the Ministryo fTransport at a later stage, since the GOM i s legally responsible for SHE oversight. The Inspectorate's SHE staff will be supported through an on-the-job training executed by experienced consultants over a two year period. Together they will visit the project sites. The second two years the support o f the consultants for SHE 78  monitoring o f the Sena Line will be reduced to one week per month. After the constructioni s finished, a yearly independentSHE audit will be executed, commissioned by CFM. The consultants will also beresponsible for SHE training ofmiddlelevel managers (1/2 day per group), for the basic environmental management training o f the operators (1 day) and for the preparation o f the manuals for EnvironmentalManagement, EnvironmentalAuditingand EnvironmentalMonitoring. The consultants will also be responsible for discussing non- compliance issues with the concessionaire to solve issues on the spot and for monthly reporting to CFM, followed by a close-out meeting. For recurrent non-compliance issues, CFM top management will be requiredto take correcting actions. CFM will prepare, with the assistance o f the consultants, twice a year a report for submission to MICOA (Ministryo f Environmental Coordination) and to the World Bank. The concessionaire (Beira Railway Company) will establish its own SHEunit, which will supervise the contractors on a daily basis during construction and which would be responsible for SHEissues duringoperations. The contractor will prepare its own detailed Environmental Management Plan (C-EMP), which i s basedon the approved and disclosed EMP, andwhich needs to be approved by CFM. The contractor will beresponsible for the implementationo f its own C-EMP. The contractor reports to the concessionaire on SHE issues on a daily basis. The concessionaire will consolidate the contractor reports and submit them CFM on a monthly basis. CFM will discuss the details o f the E N E M P andRAP with the concessionaire and discuss the concessionaire's responsibilities with regard to the implementationo f the ENEMP and RAP. Social Assessment Social issues and Resettlement Action Plan in compliance with WorldBank OP 4.12. The social issues o f staffretrenchment consequent to concessioning are beingaddressedunder RPRP. A total o f 10,441 staff has beenretrenched so far. Retrenchment o f an additional 3,100 staff has been initiated and would be completedby December 2004. Retrenched staff have been successfully retrained and around 6,000 staff have found new employment. After all the concessions are operational and the necessary staff transferred, CFM will be left with about 500 core staff. A satisfactory Resettlement Action Plan(RAP) has beenprepared anddisclosed to the public to relocate 37 households, 5 business facilities and 5 facilities for religious groups and to relocate crop lands outside the 10 meter Right o f Way. The principle o f land for landwill be applied. The RAPwill be implementedby CFM incollaborationwith community leaders and local authorities under the supervision o f CFM. Coordinationo fresettlement activities will be achieved through the Compensation and RelocationCommittee (CRC). The CRC will comprise a Field Officer appointed by CFM, the District Administrator andthe District Director o f Agriculture and Rural Development. No reconstructionwork or activities that will cause displacement on any specific site will take place until all entitlements (including physical relocation) are delivered. The total cost for the resettlement has been estimated at US$lOO,OOO, including contingencies. 79  HIV/AIDS. All steps will betaken duringconstruction and operation o fthe BeiraRailway Systemto promote HIV/AIDS awareness andreasonablemeasureswill be taken to preventthe spread o f HIV/AIDS among construction workers and staff o f the Company. As the cost for provision o ftreatment to affected staff i s unpredictable and couldbe exorbitant, CFM and the Concession Company would do all intheir power to put the affected staff intouch with on-going Government and extemal aid programs (such as MAP)and facilitate their obtaining available assistance under such programs. 80  Annex 11:ProjectPreparationand Supervision MOZAMBIQUE: BeiraRailway Project Planned Actual PCNreview 05/27/2003 04/24/2003 Initial PID to PIC 11/11/2003 Initial ISDS to PIC 10/29/2003 Appraisa1 06/21/2004 06/21/2004 Negotiations 08/30/2004 08/30/2004 Board/RVP approval 10/28/2004 Planned date o f effectiveness 01/28/2005 Planned date o f mid-term review 05/O5/2007 Planned closing date 06/30/2010 Key institutions responsible for preparation o fthe project: MTC, MPF, CFM, RITES and IRCON Bankstaffandconsultants who workedonthe projectincluded: Name Title Unit Ani1Bhandari Task Team Leader AFTTR Ajay Kumar Sr. Transport Economist AFTTR Yash Pal Kedia Consultant, Railway Specialist AFTTR Marius Koen Sr. FinancialManagement Specialist AFTFM Fabio Galli Sr. FinancialAnalyst SASE1 Joao Tinga FinancialManagement Specialist AFTFM Manuel J.P.Sumbana Procurement Analyst AFTPC Kristine Ivarsdotter Sr. Social Development Specialist AFTS1 Robert Robelus Sr. EnvironmentalAssessment Specialist AFTS1 Davis Makasa Transport Specialist AFTTR Ntombie Siwale Program Assistant (HQ) AFTTR Adelia Chebeia Program Assistant (CO) A F c 0 2 George Tharakan Peer Reviewer ECSIE LouThompson Peer Reviewer (Consultant) TUDTR Albert0 Ninio Sr. Counsel LEGAF Monica Sawyer Counsel LEGAF BridieChampion Consultant, DisbursementSpecialist LOAG2 Marie Khoury Consultant LOAG2 Bank funds expended to date on project preparation: 1. Bankresources: US$234,000 2. Trust funds: - 3. Total: US$234,000 Estimated Approval and Supervision costs: 1. Remainingcosts to approval: $10,000 2. Estimatedannual supervision cost: $100,000 81  Annex 12: Documentsinthe ProjectFile MOZAMBIQUE: BeiraRailway Project 1. Bank StaffAssessments 0 Draft Project Concept Document (PCD) and Departmental Review Meeting Minutes, April 2003; 0 DecisionMeetingMinutes,June 2004 0 IdentificationmissionBTO including aide-memoire 0 Preparation missions BTO including aide-memoires 0 Pre-appraisal BTO includingaide-memoire 0 Appraisal missionBTO including aide-memoire 0 Project Information Document 0 EnvironmentalImpact Assessment 0 FinancialManagement-Assessment Report July 2004 2. Other Concession Agreement, August, 2004 0 Technical Proposals ofthe RITES Consortium and the Tenwin Holdings and China Tiesiju Civil Engineering Consortium for BeiraRailway Concession 0 Country Assistance Strategy, October 2003 0 EnvironmentalManagement Study, 2004 BeiraRail Concession Project: Economic Analysis (ECORYS, July 2004) BeiraRail Concession Project: Analysis o f Barge Transport, (ECORYS, June, 2004) 82  Annex 13: Statement of Loansand Credits MOZAMBIQUE: BeiraRailway Project Difference between expected and actual Original Amount in US$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO75805 2005 First Poverty ReductionSupport Credit 0.00 60.00 0.00 0.00 0.00 60.00 0.00 0.00 PO82308 2004 SouthAfrica Gas Guarantee 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 PO69183 2004 EnergyReform and Access Project 0.00 40.26 0.00 0.00 0.00 39.01 39.01 0.00 PO71942 2004 EnergyReform and Access Project-GEF 0.00 0.00 0.00 3.09 0.00 3.09 3.09 0.00 PO01807 2004 DecentralizedPlanningand Fin. Proj 0.00 42.00 0.00 0.00 0.00 39.30 39.30 0.00 PO72080 2003 Public Sector Reform 0.00 25.60 0.00 0.00 0.00 24.30 10.10 0.00 PO78053 2003 HIViAIDS Response Project 0.00 55.00 0.00 0.00 0.00 52.90 52.90 0.00 P073479 2002 CommunicationSector Reform 0.00 14.90 0.00 0.00 0.00 10.20 1.29 0.00 PO01806 2002 Municipal Development Project 0.00 33.60 0.00 0.00 0.00 22.70 8.23 0.00 PO01785 2002 Roadsand Bridges 0.00 162.00 0.00 0.00 0.00 137.4 73.50 0.00 PO69824 2002 Higher Education 0.00 60.00 0.00 0.00 0.00 51.40 -3.70 0.00 PO01808 2001 MineralResourcesProject 0.00 18.00 0.00 0.00 0.00 8.40 1.90 0.00 PO70305 2000 Coastal & MarineBiodiversityMgmt 0.00 5.60 0.00 0.00 0.00 5.00 4.44 0.00 PO35919 2000 Coastal & Marine-GEF 0.00 5.60 0.00 4.11 0.00 3.39 4.10 3.06 PO42039 2000 Rail and Port Restructuring 0.00 100.00 0.00 0.00 0.00 68.98 55.55 13.59 PO49874 2000 EnterpriseDevelopment(PoDE) 0.00 26.00 0.00 0.00 0.00 12.40 14.39 0.00 PO83263 2004 National Water DevelopmentI1Suppl. 0.00 15.00 0.00 0.00 0.00 PO52240 1999 NationalWater DevelopmentI1 0.00 75.00 0.00 0.00 0.00 73.4 41.98 0.00 PO01799 1999 Agricultural Sector (PROAGRI) 0.00 30.00 0.00 0.00 0.00 12.7 16.81 0.00 PO01786 1999 Educ. Sect. Strat. Program(ESSP) 0.00 71.00 0.00 0.00 0.00 37.00 45.09 0.00 PO39015 1998 NationalWater DevelopmentI 0.00 36.00 0.00 0.00 0.00 16.5 19.32 0.00 Total: 30.00 1020.0 0.00 7.20 0.00 677.67 427.30 16.65 83  MOZAMBIQUE STATEMENT OF IFC's Held and Disbursed Portfolio InMillions ofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1998 BIM-INV 0.00 0.30 0.00 0.00 0.00 0.30 0.00 0.00 2000/03 BMF 0.00 0.20 0.00 0.00 0.00 0.20 0.00 0.00 1997101 MOZAL 69.55 0.00 58.5 0.00 57.87 0.00 58.5 0.00 1999 MaragraSugar 10.30 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1992 PolanaHotel 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00 2000 SEFAusmoz 0.72 0.00 0.00 0.00 0.45 0.00 0.00 0.00 1997 SEF CPZ 1.oo 0.00 0.00 0.00 1.oo 0.00 0.00 0.00 1997 SEF CTOX 0.73 0.00 0.00 0.00 0.73 0.00 0.00 0.00 2000 SEF Cab0Caju 0.58 0.00 0.00 0.00 0.51 0.00 0.00 0.00 2001 SEF GrandPrix 0.46 0.00 0.00 0.00 0.27 0.00 0.00 0.00 1999 SEFROBEIRA 0.16 0.00 0.00 0.00 0.16 0.00 0.00 0.00 Total portfolio: 83.68 0.50 58.50 0.00 61.17 0.50 58.50 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 1999 Mozal Swap 0.01 0.00 0.00 0.00 2004 SEF Merec I1 0.00 0.00 0.00 0.00 Total pendingcommitment: 0.01 0.00 0.00 0.00 84  Annex 14: Country at a Glance MOZAMBIQUE: BeiraRailway Project Sub- POVERTY and SOCIAL Saharan Low- Mozambique Africa Income jDevelopment diamond' 2002 Population, mid-year(millions) 18.4 688 2,495 Life expectancy GNI per capita (Atlas method, US$) 200 450 430 GNI (Atlas method, US$ billions) 3.7 306 1,072 Average annual growth, 1996-02 Population (%) 2.1 2 4 19 Labor force (%) 2.1 2 5 2.3 GNI per M o s t recent estimate (latest year available, 1996-02) capita Poverty(%ofpopulation beiownationalpoveflyline) 69 Urbanpopulation (%of totalpopulation) 34 33 30 Life expectancyat birth (years) 41 46 59 Infant mortality (per 1,000liveblflhs) ?26 Q5 81 Child malnutrition(%ofchildrenunder5) 26 1 Access to improved water source Access to an improvedwatersource(%ofpopulation) 57 58 76 Illiteracy(%ofpopuiation age E+) 54 37 37 Gross primaryenrollment (%of school-age population) 92 86 95 - a m . -Mozambique Male a 4 92 a 3 Female Low-income group 79 80 87 KEY ECONOMIC RATIOS and LONG-TERM TRENDS I 1982 I992 2001 2002 GDP (US$ bflhons) Econom IC ratlos' 3 6 19 3 4 3.6 Gross domestic investmentlGDP 6 0 256 26 5 23.7 Exportsof goods and services/GDP 8 3 139 218 23.5 Trade Gross domestic savings/GDP -119 - v 2 2 8 8.9 Gross nationalsavingslGDP 5 4 3.6 Current account balance/GDP - 0 7 - 9 0 -46 7 interest paymentslGDP Domestic 00 2 3 0 2 0.8 Investment Total debtlGDP savings 3 5 2768 P 95 P8.1 Total debt service/exports 0 2 8 7 7 6 8.4 Present value of debt/GDP 26 7 Presentvalue of debt/exports 78 9 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (averageannuaigrordh) GDP 2 4 8 1 130 8.3 -Mozambique GDP percapita 11 5 7 Q 6 6.1 Low-incomegroup STRUCTURE o f the ECONOMY 1982 1992 2001 2002 (%of GDP) Growth of investment and GDP (%) I Agriculture 33.8 32.0 26.7 26.8 T Industry 'O0 32.6 6 . 3 27.6 27.7 Manufacturing 7.6 15.3 25.4 50 Services 33.6 517 45.7 45.5 0 Private consumption 97.7 Q4.6 76.4 80.1 Generalgovernment consumption 14.1 P.6 Q.8 11.0 Imports of goods and services 26.2 46.7 35.4 38.2 -*---GDI d G D P 1982-92 1992-02 2001 2002 (averageannuaigrordh) Growth o f exports and imports (%) Agriculture 3.1 6.7 P.6 7.2 6o T Industry -3.7 77.3 20.1 25.1 Manufacturing .. 40 18.8 27.2 6.2 Services 8.6 3.1 8.1 0.3 20 Private consumption 0.2 4.3 -2.1 Q.9 0 Generalgovernment consumption 0.0 5.4 li.9 14.7 -20 97 98 99 Gross domestic investment 5.6 P.0 -Q.O 3.9 Imports of goods and services -1.9 4.3 -14.9 6.6 85  Mozambiaue PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 1 Domestic prices Inflation (%) I (77 change) 50 Consumer prices 17.7 45.1 9.0 lj,8 40 Implicit GDP deflator 17.5 44.6 a.6 a.6 30 20 Government finance io (%of GDP,includes current grants) 0 Current revenue 8.2 20.3 18.2 18.0 97 98 99 00 01 02 Current budget balance 3.2 4.4 3.7 2.2 Overallsurplusldeficit -5.0 -13.0 4 . 5 -15.8 TRADE 1982 1992 2001 2002 (US$ mi//ions) Export and import levels (US$ mill.) Total exports (fob) 229 139 703 682 1,500 7 Cashews 44 m 31 51 Prawn 39 65 81 0 8 Manufactures 14 13 13 1,000 Total imports (cif) 745 1,063 1,263 Food 72 99 500 Fueland energy 41 43 Capital goods 396 525 0 Export price index(1995=?JO) 90 90 87 85 96 97 98 99 00 01 02 Import price index(1995=MO) 10 93 82 81 Exports olnports Terms of trade (895=WO) 81 97 106 0 6 BALANCE o f PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balance to GDP (%) Exports of goods and services 337 304 1,008 1,187 0 imports of goods and services 893 860 1,578 1,837 Resource balance -556 -556 -570 -650 -io Net income -20 -183 -254 -80 -20 Net current transfers 0 0 Current account balance -30 -497 -352 -1,604 Financingitems (net) 356 392 1,607 -40 Changesin net reserves 141 -40 -3 -82 1-50 Memo: Reserves including gold (US$ millions) Conversion rate (DEC,/oca//US$) 37.8 2,566.5 20,703.6 23.678.0 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Composition o f 2002 debt (US$ mill.) Total debt outstanding and disbursed P5 5,130 4,450 4,6a IBRD 0 0 0 0 IDA 0 417 777 985 G:371 Total debt service 1 83 89 a3 IBRD 0 0 0 0 IDA 0 3 7 7 c 200 Compositionof net resource flows F 1,516 Official grants a 1 726 656 Official creditors 60 V I 93 229 Privatecreditors 0 -3 -30 -37 509 Foreign direct investment 0 25 460 Portfolio equity 0 0 0 E 1,029 World Bank program Commitments 0 289 229 mo A IBRD E- Bilateral Disbursements 0 a6 52 149 B - IDA ~ D. Other rmltilateral F. Rivate Principal repayments 0 0 3 2 C - I M F G - Short-ter 86