Argentina - Railway Project

RESTRICTED FILE COPY Report No. P-90Z This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE RAILWAYS WITH THE GUARANTEE OF THE ARGENTINE REPUBLIC March 4, 1971  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECM4ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE RAILWAYS 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$84 million to the Argentine Railways (Ferrocarriles Argentinos). PART I - HISTORICAL 2. The background to the Bank's association with the transport sector in Argentina has been reviewed in the Report on the proposed loan for a third road project, which is being present simultaneously (P_901). 3. The Argentine railways developed as separate systems serving various areas and clienteles. In 1946 the Government purchased the privately-owned systems and consolidated the entire network of 43,000 km into the Ferrocarriles Argentinos. The Government at that time, however, failed to create a fully unified organization and to discontinue services which could no longer be rendered economically in view of the changed demographic pattern, the new distribution of economic activity and the development of other transport modes. In subsequent years as a result of increasing competition from roads, inadequate management and lack of investment, the traffic and revenues declined, staff morale became low, the equipment deteriorated and general inefficiency prevailed. 4. The UN Special Fund study of transportation in Argentina (the 1962 Larkin Report) inter alia recommended far reaching reforms for improving the railways. Implementation of the reforms proposed proved to be difficult and the working of Ferrocarriles Argentinos continued to deteriorate. It ran increasingly large deficits amounting to US$158 million equivalent in 1966. These deficits have been a major drain on the national budget and contributed greatly to the nation's fiscal problems and inflation. 5. The management of Ferrocarriles Argentinos was entrusted in July 1967 to an energetic group of army officers committed to the rehabilitation of the system. The new management has made considerable organizational changes and secured the adoption of a new enterprise law giving a large measure of autonomy to Ferrocarriles Argentinos. It has also performed creditably in achieving an improvement in staff discipline. This is evident in the punctuality of trains and the better maintenance of equipment. Traffic has increased and the operating loss has been reduced from US$158 million equivalent in 1966 to US$58 million equivalent in 1969, representing (in real terms) a reduction of about two thirds. Since 1968 several Bank missions have consulted with Ferrocarriles Argentinos in identifying further the necessary reforms, and the enterprise has now prepared a comprehensive five year plan (1971-75) for  -2- modernizing and rehabilitating the system. This plan ("Plan do Mediano Plazo"l) has been approved by the Government, which has committed itself to ensure its implementation. The plan consists of a group of action programs regarding staff redeployment, rationalization of services and closure of uneconomic lines, modernizing and concentration of workshop facilities, rehabilitation and renovation of diesel locomotives and passenger cars, building up of - the fleet of locomotives, railcars and rolling stock, improvement of the track, standardization of equipment, improvement of financial and accounting practices, organizational changes and a more market- oriented and aggressive commercial policy. 6. At the negotiations held in Washington in December 1970 and January 1971, the Argentine Government and Ferrocarriles Argentinos were represented by a delegation led by Dr. Juan Llamazares, Undersecretary in the Ministry of Public Works and Services. 7. The past lending of the Bank and IFC to Argentina and the progress of Bank-financed projects that are under execution has been reviewed in the Report on the proposed loan for a third road project. PART II - DESCRIPTIONW OF THE PROPOSED PROJECT 8. Borrower: Ferrocarriles Argentinos Guarantor: The Argentine Republic Amount: In various currencies equivalent to US$84 million Purpose: To help finance an investment program of US$368 million, which is the first two years' portion of the five year rehabilitation plan Amortization: In 25 years, including a 4-year period of grace through semi-annual instalments beginning May 15, 1975 and ending November 15, 1995. Interest Rate: 7-A4 percent per annum Commitment Charge: 3/4 of one percent per annum PART III - THE PROJECT 9. A report entitled "Appaisal of a first railway project: Argentine Railways" (PTR-62a) is attached.  -3- 10. The Government and Ferrocarriles Argentinos have asked the Bank for assistance in financing the investment of US$839 million equivalent proposed to be made over five years. This investment forms a vital part of the comprehensive plan (1971-75) 6f-modernizing and rehabilitating the railways. This i3 a large program for an enterprise which is at present far from viable financially but it seems justified in view of the target adopted by Ferrocarriles Argentinos of bringing the working expenses (i.e. all operating expenses, before charging depreciation) below the operating revenues by 1975. The losses over this period will be covered by the Government as in the past. The targeted improvement in the financial position of Ferrocarriles Argentinos would have a salutary effect on the national finances. Moreover, the general increase in the railway's efficiency will help achieve the country's long-term growth objectives, particularly by carrying long haul freight and providing suburban passenger services. 11. The project consists of the first two years (1971-72) of the five year rehabilitation plan. An investment of the equivalent of US$368 million is proposed during the project period, of which the proposed loan of US$84 million would finance 23 percent. The proceeds of the loan would finance the procurement of freight cars, workshop equipment and components for rehabilitating and renovating locomotives and cars, track material and track workshop equipment and signalling and telecommunication equipment. A small portion of the proposed loan would also finance civil works related to track renewal and improvement. The most probable overall economic rate of return of the proposed investment is estimated to be about 20 percent, the range being from 14 percent to 26 percent. 12. The foreign exchange component of the project is computed to be about US$172 million equivalent. Suppliers credits of about US$34 million equivalent are expected to finance the procurement of locomotives and electric rail-cars. Along with the proposed Bank loan of US$84 million equivalent, external sources would thus be financing about US$118 million of the total foreign exchange requirement of the project. The proposed Bank loan, however, depending on the proportion of bids won by local suppliers, might finance up to US$6 million equivalent of local expenditure. As explained in the memorandum on the economic situation in Argentina attached to P-901, some measure of local expenditure financing by international institutions is desirable to help Argentina sustain a public investment program of appropriate size. 13. Most of the contracts for items to be financed by the proposed loan will be on the basis of international competitive bidding in which Argentine suppliers may participate subject to a margin of preference of 15 percent. The only exception will be the procurement of components and new parts for rehabilitating diesel locomotives and cars which are of vital importance for the rehabilitation program and which must necessarily be procured from the original suppliers on a negotiated basis. The proposed loan includes US$11 million for this purpose. As explained in the appraisal report (para.4.12), the proposed loan will finance about  half of the railway requirements for freight car bodies during the project period, The Government has decided that as a measure of encouragement to Argentine industry, the other half of the freight car bodies will be reserved for competitive bidding confined to Argentine suppliers, on condition that their prices are no more than 125 percent of the lowest international prices for comparable goods. Procurement under these arrangements would not be financed by the proposed loan. 1I. A recently passed law introduces more restrictive requirements for procurement by public agencies. The Government intends to pass a further law approving the proposed loan documents in order to ensure that the Bank's standard procurement requirements can be applied. Passage of this law will be a condition of effectiveness. PART IV - LEG(L INSTRUMEI"ETS AND AUTHORITY 15. The draft Loan Agreement between Ferrocarriles Argentinos and the Bank, the draft Guarantee Agreement between the Argentine Republic and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. The Agreements follow the form currently used for loans for railway projects. PART V - THE ECONCMY 16. A report (No.WH-191a) on the economy of Argentina was circulated to the Executive Directors on June 3, 1969, and a memorandum summarizing the principal recent economic developments is attached to the report (P901) recommending the third highway loan. They indicate that Argentina is creditworthy for the proposed borrowing from the Bank. PART VI - CCMPLIANCE WITH ARTICLES OF AGREEMENT 17. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 18. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington D.C. March 4, 1971.