Thailand - Fourth Railway Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 64a-TH APPRAISAL OF A FOURTH RAILWAY PROJECT THAILAND April 5, 1973 Asia Ptojects Department Thi mreport was prepared for official use only by*the Bank Group. I*y not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responssibiity for the accuacy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit - Baht (1 Baht - 100 Satangs) US$0.048 Baht 1.00 US$1.00 - Baht 20.80 US$48,077 - Baht 1 million SYSTEM OF WEIGHTS AND MEASURES: METRIC Metric Briti8h/US 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) - 0.62 miles (mi) 1 kilogram (kg) - 2.2 pounds (lb) 1 metric ton (m ton)- 0.98 long tons (lg ton) - 1.10 US short tons (sh ton) - 2,205 pounds (lb) ABBREVIATIONS AND ACRONYMS BE - Buddhist Era CL - Carload ETO - Express Transport Organization LCL - Less than Carload MDC - Ministry of Communications NEDB - National Economic Development Board SRTI/ - State Railway of Thailand vPpd - vehicles per day FISCAL YEAR October 1 to September 30 I / This abbreviation has been used in this report though RSR (Royal State Railways) is regarded as the official abbreviation.  THAILAND APPRAISAL OF FOURTH RAILWAY PROJECT TABLE OF CONTENTS Page No. SUMMARY ......................... .......................... 1. INTRODUCTION ..........................................1 2. BACKGROUND ................................-.1 A. Economic Setting ........................... 1 B. The Transport Sector ........................ 2 C. Transport Investment and Coordination 2 3. THE STATE RAILWAY .................................... 5 A. Organization, Management and Staff ......... 5 B. Financial Management ....................... 6 C. Property and Equipment ..................... 6 D. Operational Perforrance .................... 7 4. THE PLAN AND THE PROJECT ............................. 8 A. The Plan ................................... 8 B. The Project ................................ 11 C. Execution of the Project, Procurement and Disbursement ...................... 13 5. FINANCES AND EARNINGS ................................ 14 A. Past Performance ........................... 14 B. Financing Plan ......... ..................... 15 C. Forecast Performance and Future Financial Policy ............. ................... 17 6. ECONOMIC EVALUATION .................................. 18 A. The Project and The Third Development Plan 1972-76 ......... ................ 18 B. Traffic .................................... . 19 C. Evaluation of the Project .... .............. 21 D. Economic Feasibility of the Project ........ 24 7. AGREEMENTS REACHED AND RECOMMENDATION .... ............ 25 ANNEXFS 1 through 13; TABLES 1 through 19; NWA. This Appraisal Report has been prenared by Messrs. Bickers and Rahkonen (economists), Spencer (financial analyst) and Tachibana (engineer).  ANNEXES 1. Previous Transportation Projects 2. Economic Setting and Transport Sector 3. STATE RAILWAY OF THAILAND ORGANIZATION 4. Detailed Description of Railway Property and Equipment 5. Investment Program 1973-1976, Main Items 6. Items Financed under the Loan 7. Estimated Schedule of Disbursements 8. Changes in Train Operations and Increase in Train Capacities as a Result of Procurement of 54 1800 hp Diesels 9. Rescheduling of Train Operations 10. Utilization of Passenger and Freight Cars, 1972-1974 11. Reduction in Operating Costs Resulting from Use of 150 New Passenger and 470 Freight Cars 12. Cost Reductions Resulting from Improvement of Infrastructure, Workshops and Operational Facilities 13. Marginal Costs of Increased Passenger and Freight Traffic (Excluding Cost of Locomotive Operation) TABLES 1. Motor Vehicle Registrations, 1961-70 2. Inventory of Motive Power and Rolling Stock (excluding Maeklong Line) 3. Summary of Operational Statistics (excluding "Sekloag Line (3 pages) 4. Selected International Comparisons for Availability and Daily Run of Mainline Diesel Locomotives and Diesel Railcars 5. Investment Program, 1973-1976 6. Revenue and Expenditure Accounts for the Years 1967-71 7. Balance Sheet, September 30, 1972. Note on v-,7 ialance Sheet 8. Forecast Source and Application of Funds 193-,''77 9. Forecast Revenue and Expenditure Accounts i97"->'-1`7 Notes of Forecast Revenue and Exirenditure Accoa'nts 1973-1977 '0. Forecast Balance Sheet 1973-1977 11. Pdeig.,t Traffic (CL) by Main `96'or:itie in i467 anr 1971, and v'orecast for Years 2- 977 Dassenger iraffia 1967-1971, _-a- orrcast for 1972-1977, Total and by Classes 13. Surnnary of the Effect of Procurernengi cf 34 h.?(i h? iiesel Locomotives and Rescheduling of Trains on Railway Operations ti. Estimated Variable Costs of Locomotive Operations <. Savings in Locomotive Operating Costs, 1975, and Estimated FuL'ure Increase, Baht lk. Composition of Total Project Cost by Main Cost Iters: Local and Foreign Component, Taxes, Duties and Other Costs  - iii - 17. Rate of Custom Duties for Railway Material and Equipment 18. Increase in Net Revenues Due to Increased Train Capacities Resulting fron Procurement of 54 1800 hp Diesel Locomotives 19. Total Project Benefits, 1975-1999 MAP Thailand, State Railway of Thailand (IBRD 10135), November 1972   THAILAND APPRAISAL OF A FOURTH RAILWAY PROJECT SUMMARY i. The State Railway of Thailand (SRT) operates over a 3,830 route-km meter gauge system which radiates from Bangkok. The principal lines are to Chiengmai in the North (750 km) and to the Malaysian border (1100 kms) in the South. Less important lines extend to the Northeast and East to the borders of Laos and Khmer Republic. ii. The SRT has exploited with success its inherent advantages for long distance bulk traffic but is still saddled uwith the burden of providing passenger and freight services in areas offering very light volumes of traffic. In making plans to complete its dieselization program, it is essential for SRT to review and reschedule certain services now provided by steam traction in order to avoid the introduction of expensive locomotives on operations which would not permit an economic utilization of the new equipment. iii. During the 1960's the number of road motor vehicles in Thailand has increased threefold while the highway network has grown at the rate of about 700 km a year. This has resulted 'n the railways shedding some local traffic better suited to road transport. in the same period rail passenger and freight traffic has grown respectively by 6% and 7% annually. Government transport investments in the last decade have resDonded to the needs of the growing economy and have helped to stimulate economic development. The Government's Third Five Year Development Plan (1972-1976) proposes transport investments amounting to about 20% of total development expenditures. High- way investments comprise about 80% of total transport investments. in the Third Plan the emphasis is on the improvement of provincial roads rather than national highways. iv. While the primary transport system was being developed, planning was simple. Now that most of the obvious needs have been met, more careful planning will be required for evaluating projects and setting priorities. A Bank mission comprehensively reviewed the transport sector in October 1971 and identified the need for improved transport planning and coordination. To this end, the Government has decided to establish a new transport planning unit, and technical assistance for setting it up has been included in the Fifth Highway Project. v. The SRT was established as a separate legal entity in 1951. A Board of Commissioners, appointed by the Council of Ministers, is entrusted with the formulation of railway policy. The General Manager, a member of the Board, is in charge of operations. General supervision of SRT is vested in the Minister of Communications.  vi. The investment program of SRT for the remaining four vears of the Third Plan involves total expenditure of Baht 2,251 million (US$108 million equivalent). The proposed project, covering a first nhase of the program, is estimated to cost Baht 1,446 million (US$69 million equivalent) including foreign exchange of USS47 million. The first stage of the program makes provision for the acquisition of 54 diesel locomotives, 150 passenger coaches,. 470 freight cars and the completion of works associated with the dieselization program. The proposed loan, US$15.0 million, would contribute part of the foreign exchange costs of the project. vii. Before making final decisions on the implementation of the second and final stage of the investment program, which will involve the complete abandonment of steam traction, it is essential for SRT to prepare a compre- hensive plan covering all aspects of the dieselization program. Provision is made in the present project for technical assistance in the preparation of a Plan and for the Covernment to review the Plan with the object of authorizing necessarv changes in SRT's operations and services in order to maintain a financially viable situation. viii. In the past, SRT has aluways earned a net surplus on revenue account. It has been able to generate substantial cash balances because its debt service pavments have been relatively low and no interest has been payable on Government capital although a payment is made in lieu of income tax. Earnings have been sufficient for its financial needs. The proposed invest- ments during the four year program will be financed bv loans (about 57% of total investment) and from SRT's own substantial cash resources. Financial forecasts indicate a decline in future profitability aend this, coupled with a substantial increase in long-term debt, would result in a tendency for SRT to become too dependent on the Government for cash resources to meet its normal capital replacements. Agreement has, therefore, been reached on an earnings covenant providing for a return on net fixed assets of 2' and on a limitation of future long-term debt, wqhich will mean debt service payments are to be covered 1.5 times. Implementation of the covenant requirements will mean the eatly adjustment of certain low tariffs and other selective tariff increases. These measures, coupled with other proposals bv SRT relating to improved operational efficiency, would enable it to maintain a satisfac- tory financial Dosition and permit the generation of adequate funds towards STZT's capital investment program. iN. The emphasis of the Project is on reduction of operating costs '-oug continued dieselization, replacement of old equipment and modernization of workshons; the project investments will also produce increased traffic carrying capacity. Taken as a whole, the project yields an economic return of about 13%. .N. The proposed Project provides a suitable basis for a Bank loan of USSS15.0 million to the State Railway of Thailand (SRT), with a guarantee from the Kingdom of Thailand, for a 20 year term including 4 vears of grace.  THAILAND APPRAISAL OF A FOURTH RAILWAY PROJECT 1. INTRODUCTION 1.01 The Government of Thailand has asked the Bank to assist in financing part of the In'estment Program (FY 1972-1976) of the State Railway of Thailand (SRT). Totaa investment of SRT during the remaining four years of the program is presently estimated at Baht 2,251 million (US$108 million equivalent) including foreign exchange of US$73 million equivalent. The amount of the proposed lan is US$15.0 million equivalent. The Borrower would be the State Railway of Thailand. 1.02 The Railway's Program, which was revised following discussions with the appraisal mission, includes procurement of 109 diesel locomotives, coaches, freight cars and other equipment as well as replacement of rails and bridge strengthening and replacement works. The proposed loan would contribute to the first phase of the Program and SRT will be asked to review its further plans and existing services in order to ensure that in achieving full dieselization, they also achieve optimum utilization of the new equipment. 1.03 The Bank has made three previius loans to SRT totalling US$37 million mainly for the post-war rehabilitation of the Makkasan workshop (First), telecommunications equipment and 30 diesel locomotives (Second), and 60 diesel locomotives and 1,650 freight cars (Third). These operations have been satisfactorily completed (Annex 1). The most recent loan was made in 1961 for US$22 million equivalent; the loan was fully disbursed in October 1967, nearly two years after the original closing date. The delay was due mainly to cumbersome tender approval procedures. 1.04 Other Bank lending for transportation in Thailand comprises five Highway loans totalling US$151.6 million equivalent (subsequently reduced to US$135.3 million) and three Port loans totalling US$20.3 million equivalent. Details on these loans are given in Annex 1. 1.05 This appraisal is based on the findings of Bank missions in June and October 1972 comnprising Messrs. Bickers and Rahkonen (economists), Spencer (financial analyst) and Tachibana (engineer). The report has been prepared by them. 2. BACKGROUND A. Economic Setting 2.01 The economy, which grew rapidly in the 1960's (8% annually), required a significant growth of transport, but a slowdown set in towards the end of the decade mainly because world market prices fell for rice and rubber (the main export commodities) and US military expenditures decreased.  -2- In 1971 and 1972, unexpectedly large increases in exports, continued growth in Government expenditures, and a revival in US military expenditures led to a recovery of investment and output growth, which began slowly around mid-1972 and will probably gain further momentum in 1973. The Governient's main objective for the Third Plan (1972-1976) is to sustain a 7% annual growth rate. Achievement of this objective seems within reach but Thailand will have to continue to increase its exports rapidly and receive a larger inflow of external capital. Demand for transnortation will therefore continue to grow, but probably at a lower rate than during the 1960's, in line with develonment of the economy. Further details of the economic and phvsical setting are provided in Annex 2. B. The Transport Sector 2.02 Transport requirements in Thailand are much influenced by the size and importance of Bangkok which, together with its position as the only com- mercial deeD water port, makes it the natural focal point for all transport modes. Much of the transport activity outside Bangkok is concentrated within about 100 km of the capital, but the pographv of the country, with distances of more than 750 km from Bangkok to the northern border and of over 1,000 km to the southern border with Malaysia, also requires movements over long distances (see Map) 2.03 Ranid economic growth has been accompanied by a sharply increasing demand for land transport. During the 1960's, the number of road motor ve- hicles (excluding motor cycles) increased more than threefold (Table 1). At the same time rail passenger-km grew by about 6% per annum, and rail freight ton-km by about 7% p.a. Within the overall expansion, there has been a shift in the relative roles of road and rail transnort. With the national and provincial road network increasing by about 600-700 km in recent years, and reaching 16,000 km by 1970 (plus some 35,000 km of minor roads), it is becoming progressively easier for the railway to shed the local traffic which road transport is more suited to carry, but which, bv virtue of its former monopoly position, it was obliged to serve. 2.04 Further details on these two modes of transport as well as on ports, inland waterways and aviation is provided in Annex 2. C. Transport Investment and Coordination _0.th5 Actual investments in transport during the Second Investment Plan (FY 1967-71) compares with the National Economic Development Board's (NEDB) 7r;ird Five Year Plan (FY 1972-76) and the Bank 1971 Transport Sector Mission recommendations, as follows (in current prices)-  -3- Transport /1 Sector Mission 2 Actual- NEDB Plan Recommendations- (Baht Million) % of % of % of FY67-71 Total FY72-76 Total FY72-76 Total Ministry of Communications - - - - 4 - Roads (including buses and trucks) 11,800 80 16,637 80 11,700 75 Railways 1,640 11 2,469 12 1,698 11 Ports, Shipping & Waterways 680 5 919 4 1,581 10 Aviation and Airports 560 4 890 4 612 4 14,680 100 20,915 100 15,595 100 /1 Budget allocation for 1971. /2 Transport Sector Mission Report, Yeilow Cover, Septemcer 1972. 2.06 Investment in transport represented 24% of total Public Development expenditure during the Second Plan period, and amounts to 20% of the proposed total in the Third Plan period. The actual expenditure during the Second Plan period 1967-71 came close to the planned figure, but there were numerous alterations caused by faulty cost estimates and cost overruns. The dangers inherent in inadequate planning are likely to be much greater in the Third Plan period, partly because the sums involved are higher but also because with the rapid development of a modern and sophisticated transport system, most projects demand a closer and more detailed evaluation and there are fewer projects of obviously high priority. For these reasons, the 1971 Transport Sector Mission recommended the strengthening of the planning organization and some reductions in the Third Plan Investment Program, which now amounts to about 15% of the planned Public Development expenditure 1972-76. 2.07 The Transport Sector Mission comprehensively reviewed the transport sector in October 1971 and identified the need for improved transport planning and coordination. The mission's recommendations have been discussed with the Government which intends to set up: (a) a transport policy and planning committee to review and recommend transport policies and investment programs for Government approval; and (b) a transport planning unit in the Ministry of Communications to act as a secretariat to the transport policy and planning  -4- committee, to undertake the drafting of transnort policy papers and formulation of transoort sector investment programs; the unit will also develop and operate a transport information system, to aid decision-making on transport matters. During negotiations for the fifth highway loan the Government confirmed its agreement to make the above institutional changes by December 31, 1973, and agreed with the Bank on the scope and timing of related technical assistance. 2.08 For the railways, coordination with road transport is clearly of first importance, especially at a time when the roads are rapidly improving their capability for taking over functions to which rail transport is inherently unsuited. 2.09 The biggest barrier to achieving proper coordination appears to have been resistance on the part of the Government towards changes necessary to allow road and rail to play their proper roles. For the railways this is seen in the difficulties of obtaining permission to change train schedules and close stations when warranted by changing conditions; or to raise rates and fares when justified by cost levels and market considerations. For high- ways, while generally competitive and efficient, there has recently appeared within the Government some tendency for excessive regulatory policies in favor of the Government-owned Express Transport Organization (E.T.O.), but following discussions during negotiations the Government has satisfactorily clarified its position in regard to these policies. The situation will be kept under continuing review between the Bank and the Government. 2.10 This attitude of reluctance to change is to some extent understand- able in view of the fact that the railways have not documented, in any comprehensive way, their case for a more flexible attitude toward their problems. The railways now, however, have prepared a report on the measures which need to be taken to improve their financial position and train services. The report was approved by the Railway Board in December 1972, and was submitted to the Ministry of Comnunications in February 1973. During neantiations the Bank was informed that SRT's Board of Commissioners has authorized imple- mentation of changes in train schedules and other measures within i--s authority. Other proposals in the report have been approved in principle by Government and they will be taken into account in preparing the compre- hensive olan covering all aspects of dieselization (para 4.07). 2.1- Road/rail coordination should imnrove following the abolition in October 1972 of the Ministry of National Development and the handing over of its responsibility for highways to the Melinistry of Communications which is now responsible for all transport planning and operations. 2.12 Another consideration in road/rail coordination is the level of road user charges, in terms of duties and taxes on road vehicles, spares and fuel, and registration fees on vehicles. Here again the shortage of data makes it difficult for the Government to pursue a policy of providing proper ground rules for road/rail competition. For this reason a study was proposed  -5- both by the 1971 Sector Mission and the Appraisal Mission for the Fifth Highway Project. During negotiations for the fifth highway loan, it was agreed that an appropriate time to initiate such a study would probably be in 1974, after completion of the Bangkok Urban Transport Study and the high- way maintenance study. 3. THE STATE RAILWAY A. Organization, Management and Staff 3.01 Management of SRT is in the hands of well qualified and competent officials. 3.02 The Railway was established as an autonomous body by the State Railway of Thailand Act dated June 5, 1951. There have been two amending Acts dated June 11, 1959, and July 19, 1966. General supervision of SRT is vested in the Minister of Communications, and responsibility for policy-making and general affairs rests with a Board of Commissioners. The members of the Board are appointed by the Council of Ministers: one of the appointees is presently Under Secretary of State for Communications, and three are retired senior officials of SRT. 3.03 Responsibility for management and administration of SRT is with the General Manager who is appointed by the Board subject to the approval of the Council of Mlinisters, and he is ex-officio a Board Member. Approval of the Council of Ministers is required before (a) constructing new or abandoning existing lines, (b) increasing or decreasing capital, (c) borrowing money, (d) making sales of property, and (e) making changes in standard rates and fares. 1/ General organization is on a functional department basis and includes a separate Railway Bureau which operates the Maeklong line (65 km) which serves the Bangkok area but is not connected to the main network. An organization chart is shown at Annex 3. 3.04 Adequate arrangements are made for training of staff at a Railway Training Center and for several years SRT has followed a policy of sending senior officials for training in other countries. The general level of pay for employees of SRT is higher than for corresponding grades in Government service and while pay scales are somewhat lower than those in other industries, this is offset by more generous fringe benefits and greater security of job- tenure. 1/ SRT is authorized to make, at its own discretion, increases not greater than 25% and reductions of not more than 50% in standard rates.  -6- B. Financial Management 3.05 The financial management of SRT has generally been sound and the accounts have been prepared in a satisfactory manner by qualified staff. 3.06 Accounts of SRT are prepared in accordance with commercial accounting principles. Depreciation of fixed assets is based on original cost and estimated useful life; the cost of rail replacements is charged to a renewals fund which is maintained on a satisfactory basis. 3.07 Annual budgets for capital spending have to be approved by the Council of Ministers, but the operating budget of revenues and expenditure is presented to the Council for information only. Any surplus from operations is required to be handed over to the State after making provision for approved capital investment, but in practice the amount handed over is 30% of the profits as a payment in lieu of income taxes from which SRT is exempted; SRT is also exempted from business tax of 0.5% on gross revenue applicable to transport undertakings but no other exemption from taxation or import duties applies to SRT. Any deficiency from results of operations is required to be met by State appropriation, provided sufficient funds cannot be found from other sources. 3.08 Costs of the various operations and services provided by SPT are established annually on a network basis and costs of carrying particular commodities over separate sections are prepared as required for the purpose of negotiating rates. Proposed improvements in financial profitability and costing procedures are dealt with at paragraphs 4.07 and 5.11. 3.09 The Board is required to appoint auditors annually and in addition the Audit Council shall, at the request of the Minister, examine the accounts of SRT. The appointed auditor is in fact the Audit Council which reports to the Board.of Commissioners, the Ministry of Finance and the Budget Bureau (attached to the Prime Minister's Office). On serious matters the Audit Council has the right to report direct to the last two mentioned offices. Agreement has been reached that accounts will be audited in accordance with satisfactory principles and that certiflied copies of accounts and the auditors' reports will be sent to the Bank within five months of the end of each financial year. 3.10 Covenants included in previous loan agreements with SRT have been satisfactorily fulfilled. C. Property and Equipment 3.11 Railway property and equipment are generally well maintained. 3.12 As of September 30, 1971, SRT had 3,830 route-km, of which 90 km were double track. Total length of track, excluding about 567 km of sidings, is 3,920 km, of which 510 km (13%) are laid with 80 lb/yd rails and the rest with 70 lb/yd or less. Track has been generally well maintained. There are 59 km of bridges, of which 18 km (31%) are wooden. Several of the wooden bridges need strengthening.  -7- 3.13 SRT's motive power and rolling stock position is given in Table 2. Steam locomotives are expected to be phased out by September 1976, except those for emergency use. About 148 passenger cars (15%) are of wooden structure and over 40 vears old. All these cars should be scrapped. SRT has a central workshop at Makkasan, which deals with not only heavy repair of motive power and rolling stock but manufactures rolling stock as well, and three regional workshops, which deal with heavy repair of freight cars. In order to reorganize maintenance operations in the Makkasan Workshop, particularly in connection with the development of dieselization, the requirements were reviewed by consultants (SOFRERAIL of France) in 1965, whose recommendations are being followed up by SRT. 3.14 Further details of railway property and equipment are given in Annex 4. D. Operational Performance 3.15 Table 3, which gives a summary of operating statistics from FY 1967 to 1971, shows that operating efficiency is generally good. Only about 21% of train-km in FY 1971 were steam-operated, against 67% in 1960. Average net train load of steam trains is 120 tons compared with 220 tons for diesel trains (Malaysia: 205 tons for diesel), and average daily distance traveled is 109 km for steam and 353 km for diesel trains (Malaysia: 225 km for diesel). 3.16 The availability of steam locomotives at 77% in 1971 was low because of their age. The availability of diesel locomotives at 85% in 1971 can be further improved by adequate repair facilities and increased attention to the recommendations made by the consultants in 1965. SRT is aiming at an avail- ability of 90%. The daily output of 353 kn per engine available is acceptable. Availability of diesel railcars is 89%, which is satisfactory. Selected inter- national comparisons are given in Table 4. 3.17 The availability of passenger cars at 83% in 1971 should be improved. SRT is aiming at an availability of 90%, by replacing 148 over-aged wooden passenger cars with 79 newly manufactured steel cars. The average daily run per passenger car available is 426 kIn, which is good. 3.18 The average load of freight cars has increased from 9.0 tons in 1967 to 10.2 tons in 1971, which corresponds to an average load factor of 74%. Freight car productivity of 253,000 ton-km per freight car available in 1971 compared well with other railways (Malaysia 174,000; East Africa 230,000). The availability of freight cars, 86% and 90% for four-wheelers and bogies respectively in 1971, needs to be improved. The introduction of new bogie cars to replace over-aged cars in poor condition should enable availability to increase to about 93% by 1976. 3.19 To improve operating performance and ensure optimum utilization of the motive power and rolling stock, improvements in marshalling yards and signalling are needed. SRT's efforts to improve operations include the recent introduction of more block trains for oil, marl and cement movements.  During loan negotiations, SRT confirmed its intention to achieve by 1976 an increase in the availability of locomotives and passenger cars from 85% to 90% and that of freight cars from 86% in the case of four wheelers and 90% in the case of bogies, to 93% in both cases. 4. THE PLAN AND THE PROJECT A. The Plan 4.01 SRT's Investment Program for FY 1973-1976 -/, as revised following discussions with the mission, is set out in detail in Table 5. A detailed description of the items included appears as Annex 5 and a summary of the major items is shown below: (Million Baht) Financial Year 1973 1974 1975 1976 1977 Total 109 Diesel Locomotives and Spares 51 316 283 482 71 1,203 Bridge and Track Strengthening 32 146 104 14 - 296 Workshop Improvement 24 26 - - - 50 Passenger Cars 52 42 41 48 - 183 Freight Cars 44 35 43 24 - '46 Miscellaneous (including Price Escalation) 134 98 63 73 5 373 (US$108 Million Equivalent) 2,251 * Retention money for diesel locomotives. 4.02 The Investment Program has as its broad objectives the achievement of complete dieselization, track strengthening and expansion of the rolling stock fleet to meet expected traffic increases. It was not, however, founded on any comprehensive plan to re-shape the railway's future role to meet the changing conditions of traffic needs and the technical advances embodied in the Program itself. It assumed that existing train services would continue to operate to the same timetable and serve the same stations as they do now. It was not supported by evidence of profitability of the various services (or of their economic viability), and was not accompanied 1/ Including items brought forward from the 1967-1971 Program.  -9- by proposals for tariff re,riews which changing conditions, affecting both the costs of railway servii,es and the demand for them, are bound to require. For these reasons, the mis;ion reviewed in detail with SRT the changes in train service which could e introduced following procurement of the first lot of 54 diesel locomotivas out of the total of 109. Following this review the investment program was revised to its present form which is realistic for the first stage of the prcgram of which the proposed Bank project is a part. 4.03 Further revisioits to the second stage of the program can be expected after the comprehensive pi3n to be prepared by September 30, 1974 (para 4.07) is approved by the Governrient by March 31, 1975. In addition to improvements in train services this comprehensive plan will include all aspects of the final stages of SRT's program for phasing out the last of its steam locomotives and turning completely to diesel traction. This is a major decision, calling for new investment of about Baht 1.0 billion (including associated workshop improvement and track-strengthening for heavier diesel locomotives), or nearly 50% of the 1972-1976 program. 4.04 In FY 1971 the diesel locomotive fleet of 181 units represented about 47% of the total mo':ive power fleet (excluding diesel railcars and shunting locomotives), but performed about three-quarters of total locomotive-km. By 1977 it is planned to Introduce 74 more diesel locomotives to replace the remaining steam traction, plus a further 35 diesels to work additional trains. In terms of locomotive numbers and utilization, the comparison between the years 1971 and 1977 is expected to be as follows: Locomotive-Km Locomotive-Km No. Locomotives (excluding per Locomotive in Fleet shunting) in Fleet Steam Diesel /1 Steam Diesel Steam Diesel (000) (000) 1971 206 181 6,432 19,866 31 109 /2 1977 65- 290 Nil 29,665 Nil 102 /3 /A Difference -141 109- 9,799 Nil 9 between 1971 & 1977 /1 Excludes diesel railcars and shunting locomotives. /2 65 steam locomotives to be stored as emergency reserve. /3 74 to replace steam and 35 for new services. /4 This average includes the reduction in utilization of existing diesels (para 4.05); the average annual utilization of the 109 new diesels will be 120,000 km.  - 10 - 4.05 The average annual utilization of the 54 1800 hp diesels to be procured under the project will be a high 158,600 km. The annual utilization of the existing diesel locomotives, which will be replaced by the new diesels, will decrease from 156,400 km to 85,300 km, because they in turn will replace steam locomotives with a low 62,700 km in annual utilization. Some deterioration of this kind is to be expected as the transfer to diesel traction is completed. However, the 20 new diesels required in the final stage of the program (FY 1975 and 1976) to complete the replacement of steam traction will have a low annual utilization of 73,600 km, which is unsatisfactory and will actually result in higher costs for some trains than is presently experienced with steam traction. This situation arises because SRT's plans for complete dieselization do not at present take account of rescheduling of train operations which is essential for a sound investment plan. 4.06 A fresh look at these operations is, therefore, needed but it will raise issues that go well beyond the first objective of substituting diesel for steam traction, and cannot be divorced from an integrated planning of other major aspects of the railway's operations. In seeking more satisfactory use of its new locomotives, SRT should consider not only a rescheduling of trains but an elimination of some stops altogether by concentrating traffic at fewer terminals and closing the remainder. In some cases it may become evident that operations cannot be improved sufficiently to justify continuing services with diesel traction, in which case termination of services should be seriously considered. The cost of retaining uneconomic services should be identified. 4.07 Similar considerations are important in assessing the case for the passenger and freight cars and other items in the final stages of the program. Until the future scope and content of the railway's operations is established on a rational basis, it is not possible to formulate a comprehensive investment program. The SRT is fully aware of the need for a comprehensive assessment but needs technical assistance in its preparation. Provision has been made in the proposed loan for the cost of the required technical assistance, and it was agreed during loan negotiations that: (a) SRT will, by September 30, 1974, prepare, with the assistance of a transport specialist, a comprehensive plan covering all aspects of the final stages of dieseliza- tion including rescheduling of train services, the identification of uneconomic services, and the expansion of SRT's marketing and commercial activities coupled with continuing reviews of costs and tariffs; and (b) Government will decide by March 31, 1975, with the SRT and the Bank on the implementation of this comprehensive plan. The technical assistance will be provided to SRT under the project by the appointment of one experienced railway advisor for a period of about one year directly under the Deputy General Manager, Operations.  - 11- 4.08 The main objectives of the program deserve support, and there is no difficulty in justifying an interim project covering the first stage of the investment program, which will allow the railway and the Government the necessary time to establish a rational plan as the basis for subsequent investment decisions. B. The Project 4.09 The Project is part of SRT's investment program for the three fiscal years ending September 30, 1975. 1/ The principal items included are pro- curement of (a) 54 diesel locomotives, (b) 30 hopper cars, and (c) components for production by the SRT workshop of about 150 passenger coaches and 470 freight cars. The project also provides for track (about 300 km) and bridge strengthening (about 700 m) works and the expansion and modernization of workshops, the major part of which are associated with the program of eventual substitution of diesel for steam traction. Estimated cost of the project is Baht 1,446 million (US$69 million equivalent) with a foreign exchange content of US$47 million equivalent. A summary of project expenditure is shown below: 1/ Excluding "spill-over" works from earlier years.  - 12 - Summary of Project Costs Local Foreign Local Foreign Loan Currency Exchange Total Currency Exchange Total Items Baht (Millions) US$ Equivalent (Millions) US$ Million 54 Diesel Locomotives & Spare Parts 129.9 605.3 735.2 6.2 29.1 35.3 30 Bogie Hopper Wagons & 2 Brake Vans 2.7 13.7 16.4 0.1 0.7 0.8 0.7- Station Yard Remodeling (Thung Song) 7.7 8.5 16.2 0.4 0.4 0.8' 0.4 Components for manufacturing of about 150 Passenger Coaches 76.0 54.0 130.0 3.7 2.6 6r3- 2.6 Components for manufacturing of about 470 Freight Cars 37.7 73.6 111.3 1.8 3.5 5.3 35: 2 Breakdown Cranes & Spare Parts 2.5 12.5 15.0 0.1 0.6 0.7 0.6 Bridge Strengthening 18.4 55.6 24.0 0.8. 0.3 1.1. Procurement & Laying Concrete Sleepers 13.2 3.7 16.9 0.6 0.2 0.8 Signalling & Interlocking Equipment 9.4 4.1 13.5 0.4 0.2 0.6 Rail Replacement 51.6 130.0 181.6 2.5 6.2 8.7 6.2t Expansion and Modernization of Workshops 16.5 27.2 43.7 0.8 1.3 2.1 Staff Quarters 20.8 - 20.8 1.0 - 1.0 Office Buildings 20.6 - 20.6 1.0 - 1.0 Other Works (including 2 shunting locomotives)-43.5 19.3 62.8 2.1 0.9 3.0 0.4- 450.5 957.5 1,408.0 21.5 46.0 67.5 14.4 0.1* Provision for Price Escalation 13.5 24.1 37.6 0.6 1.2 1.8 0.5 464.0 981.6 1,445.6 22.1 47.2 69.3 15.0 * Specialist Services (para 4.07). L, To be used for the Bang Sue marshalling yard.  - 13 - The foreign exchange cost is the total estimated cost of direct foreign procurement. Local expenditures will include only an insignificant amount of foreign exchange. 4.10 Cost estimates for loccnotive and spares are based on the agreed contract price. For other items, cost estimates are based on March 1973 prices and provision for price escalation has been made on the basis of 5% annual increase in foreign costs and 3% annual increase in local costs. No separate provision for physical contingencies is necessary because the project does not include major civil works. The cost estimates are reasonable. Items to be financed by the proposed loan are detailed in Annex 6. C. Execution of the Project, Procurement and Disbursement 4.11 The proposed loan will be to SRT, with a guarantee from the Kingdom of Thailand. SRT will be responsible for completion of the project; it has the necessary facilities and is competent to carry out the various work programs. The 150 passenger cars and 470 freight cars will be manufactured by SRT at the Makkasan Workshon, within its present manufac- turing capacity. The technical level of labor and facilities is adequate. Manufacturing costs, including overhead, are on the average about 10% to 15% lower than CIF cost of imported cars excluding custom duties and taxes. Track strengthening of about 300 km will alsn be carried out by SRT on force account. 4.12 All equipment financed by the proposed loan will be procured through international competitive biddingin accordance with Bank procedures. There is a possibility that local bids may be received for a small part of track materials and related equipment. In the event of such bids being successful, it is unlikely that local currency financing would exceed US$0.5 million equivalent. Normal domestic preference margin of 15% would apply. Thailand has no preferential tariff agreements with any foreign country. The loan makes provision for the cost of the services of a transport specialist, who will assist SRT in long-term planning including the identifi- cation of uneconomic services and the maintenance of a continuing review of traffic flows and of rates and charges. 4.13 A contract has already been placed for the supply of 54 locomotives, which are to be financed by a French Government loan and a Supplier's Credit. Delivery of these locomotives will begin in mid-1974 and be completed in early 1975. The technical assistance will begin in mid-1973 and be completed in mid-1974. The project is expected to be completed by September 1976. The Bank loan will be disbursed against 100% foreign expenditures for procurement of imported materials, components and equipment and for technical assistance; in case of local procurement, disbursement will be against ex-factory cost; the estimated disbursement schedule is shown in Annex 7. 4.14 Any savings under the loan will be used to finance additional, but similar project items, subject to review and agreement with the Bank.  - 14 - 5. FINANCES AND EARNINGS A. Past Performance 5.01 Revenue and Expenditure accounts of SRT from FY 1967 to 1971 are shown in Table 6. During this period net income from operations has dropped from Baht 182 million to Baht 97 million; the operating ratio has increased from 79 to 90 and return on net fixed assets has declined from 3.6% to 1.7%. Average receipt per ton-km for freight traffic (CL) dropped by about 7% which was caused by the negotiation of special rates to attract additional bulk traffic and a proportionately greater increase in the volume of low rated traffic. During this five year period total personnel costs have increased by 34% resulting from an increase in the average wage of 28% and an increase in staff of 4%. Staff productivity has improved substantially considering that there has been an increase in traffic of nearly 20%. However, total operating costs have gone up by 28% and total revenue by only 14%. There has been no general increase in rates and fares during the past 16 years. 5.02 In spite of this less favorable development, SRT had a net income in 1971, after charging loan interest, of Baht 68 million (US$3.3 million) and in that year its net cash generation from operations was sufficient to cover total debt service payments three times over. Furthermore, during the period 1967-1971 SRT contributed from its own resources Baht 741 million to its program of capital investment amounting to Baht 1,541 million while avoiding any significant reduction in its substantial cash balances. 5.03 Following a review of all Government service pay scales, the average cost of personnel on SRT increased in 1968 by 14.5%; subsequent increases have been about 4% annually. These increases mean that while in 1967 personnel costs absorbed 39% of gross revenue, in 1971 the percentage was 46% which is still reasonable compared with other railways. In absolute terms, gross revenues in 1971 were Baht 120 million higher than in 1967 while operating costs (excluding depreciation) were Baht 180 million higher. In future years these trends will have to be arrested if a steadily worsening cash situation is to be avoided (para. 5.11). 5.04 The 1972 balance sheet of SRT is shown as Table 7. The ratio of current assets to liabilities is 3.0:1.0. This ratio does not, however, truly reflect the financial position because the assets include some old and disputed balances (paragraph 5.05). 5.05 In their report on the 1972 accounts the auditors drew attention to certain old balances in SRT accounts which have not been reconciled with the Controller General and to old debts due from Government departments and State enterprises. One other feature of SRT's accounts that requires improvement is that inventory verifications should be supervised by the internal audit section and they should be planned so as to make physical verifications of all stocks at least once a year, reports on these verifica- tions being submitted to the Financial Controller of SRT. The amount shown in the 1972 accounts for Long Term Debt has been increased by about Baht 70 million to take account of the revaluation of foreign currencies; this  - 15 - adjustment has been made by adding a corresponding amount to deferred charges which it is intended to write off to retained income over the years in which repayments are effected. In order to avoid showing a fictitious asset it has been confirmed during negotiations that satisfactory arrangements will be made to deal with such differences in accordance with generally accepted accounting principles. During loan negotiations it was agreed that: (a) Government will take measures to ensure that amounts due to SRT in the future from its Departments or Government agencies will be paid promptly to SRT and that existing old balances will be settled not later than October 1976. (b) SRT will arrange as part of its internal audit function to supervise the annual verification of all inventory items carried out on a continuing basis and for verification reports to be sent to SRT's Financial Controller. (c) SRT will, whenever it is necessary to value, in Baht, the debt payable in another currency, make such valuation at the then current rates of exchange. B. Financing Plan 5.06 Table 8 shows the forecast Source and Application of Funds for the years 1973 to 1977. During the three years (1973-1975) in which the project is to be financed, funds required by SRT and the source of such funds will be as follows:  - 16 - Baht US$ Equivalent (Millions) (Millions) Funds Required Capital Project Costs 1,445 69 Non-Project Costs 150 7 Additional Working Capital 24 1 1,619 77 Sources SRT Sources Internal Cash Generation 525 25 Less: Debt Service and Other Charges 387 19 138 6 x Reduction in SRT Cash Balances 416 20 Total 554 26 34 Other Sources From Government 147 7 9 From IBRD Loan/i 312 15 19 From French Government Loan 271 13 17 From French Suppliers' Credit 335 16 21 Total 1,065 51 66 Total Sources 1,619 77 100 Financing of Project Costs SRT Funds 380 19 27 Government Funds 147 6 9 IBERD Loan 312 15 22 French Government Loan 271 13 19 French Suppliers' Credit 335 16 23 1,445 69 100 /1 Disbursement schedule in Annex 7. 5.07 The figures in paragraph 5.06 show that the proposed loan will contribute 22% of total project costs, 27% will come from SRT's own resources, 9% from the Gcvernment and 42% from the French loan and credit. The total foreign exchange cost of the project is US$47.2 million, of which the proposed loan will contribute 32%, the French financing 61% and the remaining  - 17 - 7Z will be found from SRT and Government resources. Following implementation of the earnings covenant (para 5.11), the contribution from SRT resources would be higher than indicated in the forecast and would reduce the Government's contribution to no more than about Baht 20 million. The proposed loan would be for 20 years including four years of grace. Items to be financed under the proposed loan are detailed in Annex 6. 5.08 It has been agreed during negotiations that as a condition of effectiveness of the Banks' proposed loan, the conditions of effectiveness of the French Bank's Credit Agreement shall have been fulfilled, and the Borrower shall have certified in writing to the Bank that such conditions have been fulfilled. The French Banks' Credit Agreement covers a French Government loan of F 60 million (US$13.0 million) and a French Supplier's Credit of F 74 million (US$16.0 million) for procurement of 54, 1800-hp diesel locomotives. 5.09 The financing plan is satisfactory. It has been agreed during negotiations that Government will make available to SRT all funds it may require to complete the project. C. Forecast Performance and Future Financial Policy 5.10 Table 9 shows SRT's forecast of revenue and expenditure for years 1972 to 1977. The forecast makes no provision for any increases in rates or fares but assumes an annual increase in labor and material unit costs of 3% and 2% respectively. These percentages are consistent with experience in recent years. The forecasts also take account of operating economies resulting from further dieselization and additional traffic to be carried. The average annual increase in non-suburban passenger traffic is 5.6% and in car-load freight traffic 3.9%. These figures are reasonable. 5.11 The forecasts show a decline in profitability and in 1977 there is expected to be a deficit of Baht 61 million after charging loan interest of Baht 110 million. The operating ratio would be 95.6 and the return on net fixed assets would be less than 1.0%. Clearly such a situation is not acceptable but instead of insisting on specific measures to maintain SRT's financial viability it has been agreed during negotiations that SRT will maintain fran FY 1974 a rate of return on net fixed assets not lower than 2.0% and will not incur any additional debt unless its cash generation from onerations will be sufficient, after paying bonuses and Government's share of profit, to cover all debt service payments at least 1.5 times. It has also been agreed that SRT will by September 30, 1974, (i) complete a survey to identify uneconomic stations and services, (ii) inform Government of the amount of losses incurred on such services, and that Government on its part will by March 31, 1975 authorize the abandonment of such services or pay compensation to SRT for a financial loss identified by SRT if Government decides the services shall be continued. 5.12 The means available to SRT to maintain a sound financial position are quite varied. In the first place, average receipt per freight ton-km, Satangs 15 (USd0.75), is low and as a result of the continuing review of  - 18 - rates, should be capable of considerable improvement without loss of traffic. Average receipt per pass-km at Satangs 12 (USkO.6) is also low. Apart fron these generalizations, third class passenger fares in the greater Bangkok area are only Satangs 6 per km compared with Satangs 10 in the rest of the network. If the Bangkok area fares were to be increased to the general level, there would be an increase in passenger revenue of about Baht 50 million a year. In addition, the minimum charge for parcels traffic is absurdly low at Baht 1.0. An increase in this minimum charge to Baht 10.0 coupled with the raising of the lowest rates for LCL traffic would produce. a further Baht 20 million annually. SRT has adequate means available for maintaining its present sound financial position and its proposals for obtaining additional revenue are incoroorated in its report (para. 2.10) which is now under review by the Ministry of Communications. 5.13 Taking SRT's own forecast of revenue and exnenditure for the year 1977, and assuming the three increases referred to in paragraph 5.12 are implemented, it would be necessary for SRT to obtain additional net revenue of about Baht 29 million in order to meet the recuirements of the earnings covenant. This should not be difficult and it would permit the generation of adenuate funds towards SRT's capital investment program (about 55% of the total requirement). 5.14 Forecast balance sheets to the year 1977 are shown as Table 10. In preparing these figures it has been assumed that the whole of the investment program as presently prepared will be implemented. Some revision of this program may be required following preparation of the comprehensive plan (para 4.07). 6. ECONOMIC EVALUATION A. The Project and The Third Development Plan 1972-76 6.01 The major objective of the Third Plan, of which the project forms a part, is to achieve a real GDP growth rate of 7% a year. The Third Plan gives higher priority than the Second Plan did to agriculture and education, whose shares in public development expenditures are expected to increase considerably. On the other hand, the share of expenditures for infrastruc- ture works is reduced; In the case of transport sector investments, from 24% in the Second Plan to about 15% in the Third Plan. This decrease relates mainly to the reduced need for capacity increasing investments which were of hizh relative priority during the 1960's. As a result, many of the most serious bottlenecks in the transport sector were removed. On the other hand, continuous investments are required for replacement and modernization of the existing system, which is essential in order to respond to the general development objectives. These investments, such as the project, result essen- tially in cost reductions, but are frequently combined with some capacity increases. Typical of these capacity increases is, however, that they are obtained through improved operational efficiency rather than expansion of the system. The project is thus designed to meet the essential renewal  - 19 requirements of the railways and to maintain its competitive position against other modes by improved operational efficiency and modernization in order to allow the railways to perform its proper economic role. B. Traffic 6.02 In FY 1971, the SRT transported 4.7 million tons of freight in carloads (CL), 0.4 million tons in less-than-carloads (LCL), and over 48 million passenger trips. During the last decade CL net ton-km increased from 1.1 billion in 1960 to 2.3 billion in 1971, corresponding to an annual growth rate of 6.9%. Passenger traffic increased during the same period from 2.3 billion to 4.3 billion passenger-km, an annual growth of 5.8%. Only the LCL traffic has declined steadily. The table below gives a summary of the traffic development. 1/ Details for the period 1967-71 are given in Table 3. Freight Traffic Passenger Traffic Net Ton Ton-km Passenger Pass-km (Million) (Billion) (Million) (Billion) CL LCL Total CL 1960 3.1 0.6 3.6 1.1 39.9 2.3 1966 4.2 0.5 4.7 1.6 46.0 3.2 1971 4.7 0.4 5.1 2.3 48.2 4.3 6.03 The share of the SRT in freight and passenger traffic, relative to that of the highways, has gradually declined during the 1960's, mainly due to improvement and expansion of the highway network and vehicle fleet which has resulted in a logical shift in the relative roles of road and rail transport. The railway has lost local and LCL traffic, while it has been able to compete relatively well for long distance passenger, and bulky, unit load freight traffic. Table 11 analyzes SRT's 1967 and 1971 carload freight traffic by main commodity categories and shows that seven commo- dities (petroleum, rice products, cement, fluorspar, lumber, clinker and marl, and corn) represented 64.5% of the total freight traffic in 1967 measured in ton-kms. This percentage had increased to 73.8% by 1971. 6.04 The SRT's forecast is that this development will continue during 1972-1977 (Table 11). The forecast implies an overall annual growth rate of 3.9% in ton-kmns, and will result in an increase in the relative share of the seven most important commodities (para. 6.03) to 77.6% by 1977; no increase has been assumed for the remaining part of CL traffic. The LCL traffic is assumed to follow the past declining trend, representing about 5% of the total tonnage in 1977, compared with about 8% in 1971. The freight traffic forecast is considered realistic. It takes into account the expected 1/ The project evaluation excludes U.S. military traffic, which is of minor importance.  - 20 - decrease in economic growth during the period 1972-76 compared with the performance of the economy during the 1960's (para 2.03). In addition to the changed overall growth rate, the forecast is based on an analysis of the future transport requirements for each main commodity group. This analysis takes into account, besides the future production and consumption levels and patterns, the competitive situation between the railways and other nodes of transport, particularly highways. The SRT realistically assumes that it will not be able to compete with the highways for general cargo even with the present low railway tariffs. On the other hand, about 80% of SRT's freight consists of bulk transport, which is less sensitive to relative changes in road/rail charges. However, also for this freight the railways have assumed increased competititon; for instance, the railways' petroleum traffic is expected to increase by about 4.3% annually, even if the overall increase of this traffic is estimated to be close to 10,, annually. The forecast therefore takes into account the effect of an upward adjustment of the long distance freight tariff which may result from the proposed review of costs and tariffs (paras. 2.10 and 4.07). 6.05 The SRT's forecast for passenger traffic during the period 1972-1977 is shown in Table 12. The forecast assumes that the level of traffic from short and medium distance journeys of less than 300 km will remain constant due to keen road conpetition, while the long distance pas- senger traffic, representing 41.5% of the total in 1971, will increase annually by 5.6%, resulting in an increase of 2.5% per annum for the total pas- senger traffic, compared with the 5.8% annual growth achieved during the 1960's. As for freight traffic, the passenger traffic forecast is considered realistic. It takes into account the highways' strong competitive position concerning the short and medium distance traffic. This situation is less likely to change because some increases have been proposed in tne railways' commuter fares in greater Bangkok area, which at present are very low (para 5.12). The railways' competitive position is considered better fcr long distance passenger traffic, a situation which is expected to cor;tinue with the introduction of additional express trains and reduced travel times. This conclusion is supported by the fact that SRT has been particularly success- ful during recent years in operation of long distance express trains with growth rates double those for ordinary passenger trains in spite of-about 25% higher fares. 6.06 Most of the increase in freight and passenger traffic indicated in Tables 11 and 12 will be met through improved utilization of existing ,Ii.esel locomotives and rolling stock. The future utilization of existing and new rolling stock to be procured under the project has been analyzed in Annex 8. The required increase in capacity will be provided by slightly higher average loads per car and by the fact that the new diesels will provide an additional capacity of about 96 million ton-km, i.e., with about 18% of the required increase in freight-carrying capacity from 1972 to 1977 and about 50, of the required increase in passenger-carrying capacity during the same period. A summary of present and proposed train operations is presented in Table 13, while Annex 9 includes the planned rescheduling of train operations.  - 21 - C. Evaluation of the Project 6.07 The Project is designed to enhance the efficient operation of the SRT by: (a) reducing present operating costs; (b) increasing the rail- ways' capacity for carrying traffic; and (c) improving service levels and safety. The emphasis of the project is on reduction of operating costs to be obtained through continued dieselization, replacement of rolling stock and modernization of workshops. Closely connected with these cost-reductions is an increase in the traffic-carrying capacity. Improvement in service levels and safety will be obtained simultaneously with cost reductions and capacity increases. The project represents essentially a continuation of SRT's dieselization, renewal and modernization program, which for dieselization will be completed by the end of the 1972-76 Investment Program. The components included in the project were carefully selected with the purpose of achieving an optimum result in this part of the program by simultaneously removing a number of important, interdependent bottlenecks. Thus the neces- sary replacement of old steam locomotives 1/ with 1800 hp diesel locomotives was combined with rail renewals, bridge strengthening and workshop moderni- zation, all necessary investments to improve the operating efficiency and to utilize the new diesels. These project components were combined with procurement of new rolling stock, partly for replacement of worn-out passenger and freight cars, and partly to provide for an increased carrying capacity to meet the future increase in railway traffic (paragraph 6.06). As such the project will provide for a harmonious improvement within the main operational areas of the railways with a gradual increase in capacity closely corresponding to the expected increase in traffic. The project was also designed to maximize flexibility of decision during the latter part (1975-76) of the Investment Program (1972-76) when results of .the comprehensive plan covering all aspects of the final stages of dieselization are available (para 4.07). 6.08 The benefits resulting from the project investment have been cal- culated from (a) savings in locomotive and rolling stock operating and maintenance costs and (b) additional benefits resulting from increased capacity. The reduction in operating costs has been estimated by major investment items. This breakdown has, however, not been possible for additional benefits from increased capacity, which represent a combined effect of all main investment components. Also it has not been possible to quantify the benefits to be obtained from increased traffic safety. (i) Diesel Locomotives 6.09 The proposed use of the 54 1800 hp diesel locomotives has been detailed in Annex 8, and Table 13. The net effect of the procurement will be as follows: 1/ Steam locomotives as well as spare parts are not available from any manufacturers.  - 22 - (a) 116 steam locomotives, producing at present 5.2 million locomotive km, will be scrapped; (b) the revenue-earning capacity of the trains affected by the dieselization will increase by about 12%, due to increased trainloads and higher average speeds; and (c) in addition, one new express will be introduced which will further increase the revenue-earning capacity of the railway. The introduction of new diesels will involve several steps: 42 of the new diesels will replace 46 existing smaller diesels (of between 440 and 1320 hp), which in turn will replace 78 steam and Davenport diesels. The latter diesels, used at present for shunting, will finally replace 13 steam locomotives. Only 25 of the steam locomotives will be replaced directly with 10 new, bigger diesels. In addition, 2 1800 hp diesels will be used for operating the new express train. 6.10 The estimated variable operating costs, net of taxes, for the new 1800 hp diesels, existing smaller diesels, and for steam locomotives are shown in Table 14. These costs, which have been estimated by SRT, are acceptable and comparable to those for neighboring Malaysia. The operating costs of the 1800 hp diesels are about 10% higher per train-km than for the smaller diesels which they will replace. The cost per traffic unit (ton-km and/or passenger-km) will however be reduced because of increased average net train loads. On the other hand, the operating costs of the 1800 hp diesels will, per train-km, be less than half those for steam locomotives; the cost per traffic unit will be reduced considerably more in cases where steam traction is directly replaced by diesel because the average net train loads will be more than doubled. 6.11 Annual savings in locomotive operating costs amount to Baht 36.9 million in 1975, after the new diesels have been procured (Table 15), representing a 317 reduction in present operating costs on the affected services. This reduction is highly satisfactory considering that it is related to an advanced stage of changeover to diesel traction. 6.12 It is estimated that the operating costs of steam will increase annually by 4.0% if not replaced by diesel, because of increased maintenance and repair costs. As a result, the savings in operating costs will also increase correspondingly over the 25-year economic lifetime of the new diesel locomotives to be produced (Table 15). 6.13 The financial cost of the 54 1800 hp diesels is Baht 620 million excluding spare parts (Table 16). The economic cost of these diesels has been calculated at,Baht 525.0 million, excluding customs duties and taxes of Baht 95.0 million which were calculated on the basis of rates presented in Table 17, and allowing for scrap values of Baht 30,000 per steam locomotive to be replaced.  - 23 - (ii) Rolling Stock 6.14 The project includes procurement of components for 150 passenger and 470 freight cars to be manufactured locally bv SRT. Local manufacture is pteferred in this case, because SRT alreadv has the required technical capability and is competitive in economic terms (Annex 5, paras 5 and 6). The cost advantage is about 10-15% excluding customs duties and local taxes of about 10-15% on CIF price (Table 17). The main reasons for.this cost advantage are (a) that labor costs are considerably lower in Thailand than in the major manufacturin g countries and (b) that the cars are manufactured by utilization of SRT's available workshop capacity. 6.15 The 150 passenger and 470 freight cars to be manufactured will result in: (a) reduced maintenance cost by replacement of rolling stock with service life exceeding 40 years; and (b) increased traffic-carrying capacity to cater for the expected increase in passenger and freight volumes up to the year 1976. Utilization of passenger and freight cars from 1972 to 1974 has been analyzed in Annex 10. According to this analvsis, the increase in passenRer and freight cars is needed to provide for the expected increase in railway traffic. The new rolling stock will result in a reduction of the annual maintenance costs as specified in Annex 11. The savings have been estimated to Baht 12.01 million in 1975, with a 4.0% annual increase in future due to avoidance of increasin Fcosts on existing stock. 6.16 The financial cost of the rolling stock to be manufactured is Baht 241.3 million (Table 16). The economic cost has been calculated at Baht 196.6 million, excluding taxes and customs duties on components, but including local manufacturing costs. (iii) Improvement of Railway Infrastructure, Workshops and Operational Facilities 6.17 The improvement of railway infrastructure, workshops and opera- tional facilities includes the investment components additional to the procurement of diesel locomotives and manufacture of rolling stock. The main components are rail replacement; expansion and modernization of work- shops; bridge strengthening; procurement and laying of concrete sleepers; and station yard remodeling. Most of these investments are necessary for utilization of the new, heavier diesel locomotives and freight cars due to increased axle loads. However, the whole railwav operations will be favor- ably affected and the future procurement of additional locomotives and rolling stock will benefit as well. 6.18 The benefits directly quantiffable consist of reduction in onera- ting, maintenance and repair costs resulting from the inorovea facilities. These benefits amount to Baht 27.63 million in 1975 (Annex 12). In addition, the remaining, less important, items in the project will provide benefits over the medium and long run in improved operations, staff efficiency, and general service level of the railways. These benefits are not, however, directly quantifiable and are not included in the economic return calculation.  - 24 - 6.19 The total financial cost of these project components is Baht 461 millionl/ (Table 16). The taxes and customs duties amount to Baht 56 million calculated on basis of rates presented in Table 17. The economic cost has been calculated at Baht 405 million excluding these taxes and duties. (iv) Benefits from Increased Canacity 6.20 The project will result in an increase in revenue earning capacity of the railways by about 335 million passenger-km and about 96 million ton-km (Annex 8), which will be utilized gradually over the three-year period 1975-1977. In financial terms, the project will increase SRT's revenue earning capacity by Baht 56.35 million a year which will result in annual net revenues of Baht 50.79 million (Table 18), after deducting marginal cost detailed in Annex 13. In economic terms, the benefits to the economy represent the difference in costs, net of taxes, in carrying this traffic bv railways or alternatively by highways. This cost difference has been calculated at Baht 0.09 per passenger-km and Baht 0.25 per ton-Im2/, which would indicate total annual benefits to the economy of about Baht 54 million. In this particular case the financial net revenues to SRT and the benefits to the economy are of similar magnitude. This situation would, of course, change with changes in railway traffic. D. Economic Feasibility of the Project 6.21 The project will result in an economic rate of return (ER) of about 13% as suimmarized in Table 19. This return is considered satis- factory. The project was carefully designed to achieve optimum results during the first stage of SRT's Investment Program 1972-76 by simultaneously removing a number of important and interdependent bottlenecks (para. 6.07). The project was also designed to maximize flexibility of decision diuring the latter part (1975-76) of the Investment Proaram in order to incorporate the results of the comprehensive plan covering all aspects of the final stages of dieselization to be completed by 1977 (para. 4.07). As such, the project represents a feasible interim measure covering the earlier vears of the Investment Program, which will allow the railway and the Government the necessary time to establish a rational plan as a basis for subsequent invest- ment decision (para. 4.08). As indicated in Annex 8, only about 5% of the total train-kms remain to be dieselized after procurement of the 1800 hp diesel locomotives. 6.22 The ER of 13% is not sensitive to changes in benefit and traffic growth rates3/ and the greater part of the investment cost is based on firn estimates, while locomotive costs are based on a firm contract. 1/ Excluding operational spares for locomotives Baht 86 million. 2/ The additional cost for railways was calculated as indicated in Table 18; for highways it was calculated on basis of average variable costs. 3/ A change of + 20% in the benefit growth rate will result in only a + 1% change in the ER.  - 25 - 6.23 The year 1977 represents the first year full benefits are obtained due to the gradual increase in net revenues over the three-year period 1975- 77 (Table 15). In the latter year the benefits represent 11X of the total economic project costs, which is acceptable and in line with the estimated ER of 13%. 7. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During loan negotiations agreement was reached on the following principal points: (a) Preparation and arrangements for implementation of a comprehensive plan covering final stages of dieselization (para 4.07); (b) Adoption of earnings covenant and limitation on future long-term debt (para 5.11); and (c) Identification of uneconomic services and arrangements for their discontinuance or for Government compensation for the losses incurred. 7.02 As a condition of effectiveness of the Bank's proposed loan it has been agreed that the conditions of effectiveness of the French Banks' Credit Agreement shall have been fulfilled (para 5.08). 7.03 On the basis of the agreements reached, a Bank loan of US$15.0 million is recommended to be made to the State Railway of Thailand, with a guarantee from the Kingdom of Thailand, for a 20 year term including 4 years of grace.   A2NNEX 1 Page 1 THAILAND STATE RAILWAY OF THAILAND FOURTH RAILWAY PROJECT Previous Transportation Projects A. Highways - Loans: 341-TH, June 1963, US$35 million (First); 455-TH, June 1966, US$36 million (Second); 535-TH, May 1968, US$29 million (Third); 626-TH, June 1969, US$23 million (Fourth); 870-TH, December 1972, US$28.6 million (Fifth). 1. The main objectives of these projects were: (a) construction of 1,860 km of national highways; (b) feasibility studies and detailed engineering of roads to be constructed; (c) purchases of maintenance equipment; and (d) technical assistance to the Department of Highways, mainly to improve its capabilities in planning and maintaining the highway network. 2. The First Highway Project was completed on schedule; about US$13.1 million of the loan amount was cancelled because, at the Government's request, some road sections to be constructed were removed from the project. The Closing Date of the Second Highway Project was extended from September 30, 1970 to July 31, 1972 because construction of some road sections and the feasibility study and detailed engineering of one section took longer than originally scheduled. US$4.9 million was cancelled as most of the contingency allowance was not required. The Closing Date of the Third Highway Project has been extended by six months to complete the construction of one section which was delayed by floods, to complete detailed engineering of provincial roads to be constructed under the Fifth Highway Project, and to settle final payments. The Government intends to request cancellation of US$4.0 million of the loan which is expected to be surplus. No signi- ficant problems have arisen on the Fourth Project, which is expected to be completed on schedule and within the cost estimates. No evaluation can yet be made on the Fifth Project as it was only recently signed (December 1972). B. Ports - Loans: 37-TH, October 1950, US$4.4 million (First); 151-TH, October, 1956, US$3.4 million (Second); and 702-TH, August 6, 1970, US$12.5 million (Third).  ANNEX 1 Page 2 3. The first two projects were completed on schedule; about US$141,000 of the contingency allowance in the loan amount for the Second Project was cancelled. However, the Third Project is about 18 months behind schedule primarily because of delays in awarding civil works contracts. C. Railways - Loans: 35-TH, October 1950, US$3 million (First); 128-TH, August 1955, US$12 million (Second); and 280-TH, April 1961, US$22 million (Third). 4. The first two projects were completed satisfactorily; about US$7.5 million of the loan amount for the Third Project was cancelled because the Borrower chose to purchase equipment according to procedures that did not conform to Bank Group "Guidelines for Procurement". The third project was fully disbursed in October 1967 and is complete except for minor work on Bang Sue marshalling yard which was due to be in full operation by mid-1973.  ANNEX 2 Page 1 THAILkND STATE RAILWAY OF THAILAID FOURTH RAILWAY PROJECT Economic Setting and Transport Sector A. Economic Setting 1. Thailand, in Southeast Asia, is in area 514,000 km2 and had a population of 37.3 million in 1971. Climate and topography do not seriously impede transport movements but the long distances between borders necessitate long journeys for both passengers and freight. The climate is monsoon tropical, with three rainy seasons. Plains and rivers dominate the topography in central parts of the country. Mountains occupy most of the north and extend along the western border with Burma through the Malay Peninsula (including the Kra Isthmus). Two major rivers, the Mekong and Chao Phya, originate in these mourtains. The Mekong encircles the dry northeastern plateau, forms the border with Laos, and flows into the Khmer Republic. The Chao Phya and its tributaries irrigate the fertile Central Plain and end in the Gulf of Thailand. The country is divided into the Central, Northern, Northeastern and Southern Regions. (See Map.) 2. Thailand is predominantly rural. About 85% of the population lives outside urban centers and earns its livelihood from agriculture. Bangkok, the political, commercial, cultural, and now the industrial center, is the only major city. Its population is increasing by over 5% per annum (compared with a country average of 3%) and is now over 3 million. 3. Past development concentrated heavily around Bangkok where most of the manufacturing plants, public utilities and services were located. A large share of investments in agriculture, particularly irrigation works, were also made in the Central Plain. Large income disparities prevailed between Bangkok, with a per capita income of $500 in 1970, and the rest of the country, with a per capita income of $140. In the Northeast, where the government was particularly concerned over security conditions, efforts were made to promote community development by road building and provision of utilities, such as power and water, but there was slight progress in developing the region's productive capacity. B. Transport Sector Highways 4. Following the substantial and sustained growth in the 1960's, the number of cars, buses and trucks reached some 370,000 by 1970 (Table 1).  ANNEX 2 Page 2 Nearly 60% of these were registered in Bangkok, where there were 14 times as many vehicles (70 per 1,000 population) as in the rest of Thailand (5 per 1,000). The vehicle density in Bangkok may be compared with a similar density in Manila; while it was considerably lower, 30 or less per 1,000 population, in most other capitals in the region such as Taipei, Seoul, Djakarta. The difference does not reflect similar differences between per capita incomes, but depends on local policies and consumer preferences. 5. Road investments originally Dlanned under the program for the period FY 72 to FY 76 total more than Baht 16.6 billion (US$800 million), which is about 40% more in current prices than expenditure in the previous five years. The main items are the construction and improvement of some 13,500 km of national, provincial, and local roads which, if implemented, could be expected to give further substantial imnetus to the growth of road transport. This program, is, however, under review and will most likely be substantially reduced for the following reasons: (i) the original program exceeded the funds available; (ii) some of the projects included in the program were of uncertain justification and are being re-examined by the Department of Highways and consultants (P. T. Sullivan & Partners); (iii) the revised program will be more realistic in relation to a practical project preparation and implementation schedule. Railwavs 6. The State Railway of Thailand (SPT) operates over a 3,830 route-km system, all of which is meter gauge and, apart from one 90 km double-track section between Bangkok and Ban Pachi, is all single-track. The system offers good potential for railway oDerations, with traffic passing to and from points as far away from Bangkok as 1,100 km in the South (where traffic is exchanged with the Malayan Railway system), and 750 km ir: the North. 7. The railway has demonstrated some success in exploiting its inherent advantages for long-dist ace and large-scale bulk transport, but it is still regarded as a cormmon carrier for all types of traffic on the routes it serves, a role which is becoming out-moded as alternative road services are develoned. While some 480 stations are still open for traffic, or one for every 8 km of route, some 70% of freight traffic is forwarded and received at only 18 stations, five of which are in Bangkok, and seven others are on the busiest northern route between Bangkok and Chiang Mai. Passenger movements are more widely dispersed, but in FY 71 only 26 stations handled more than 1,000 originating passengers a day, while some 240 others with passenger traffic dealt with less than 100 a day.  ANNEX 2 Page 3 8. This contrast, between intensive operations at a few terminals and very light traffic at a large number of others, is also reflected in the types of train services provided by SRT. For customers offering large tonnages of bulk traffic between private sidings the railway provides more than 250 block trains a month. At the same time, many freight, passenger and mixed trains are required to serve all stations on a route, and the slow average speed, typically combined with low train loading, results in high-cost operations as well as an inferior service to the railway's customers. The amount of cross-subsidization between profitable and unprofitable traffic is not known because no comprehensive review of profitability has yet been attempted. There is an urgent need for such a review, particularly before the latter part of the 1972-1976 Investment Program is implemented. The proposed technical assistance (para. 4.07) includes suitable support in the preparation of such a review. Ports 9. The port of Bangkok handles annual traffic of about 10 million tons (including bulk petroleum products of about 2.5 million tons), which accounts for over 80% of the country's international sea trade and about 40% of its coastal traffic. In spite of the substantial dependence on a single port, Bangkok is not accessible to large modern vessels, because of its shallow and winding approaches. As a result, there has been lengthy study of two alternative sites: at Laem Krabang (by NEDECO), about 120 km southeast of Bangkok, and at Sattahip (by Louis Berger Inc.), about 56 km farther south, where an existing modern port is now used exclusively for military purposes. Selection of a site is expected during 1973 lwhen studies of the alternative sites will be available. Inland Waterways 10. Thailand has an inland waterways system of about 1,600 km (including some 500 lm open only seasonally), serving principally the Central Plains from Bang?zok northwards. From the latest figures available (for 1966) the waterways carry some seven million tons of traffic annually to Bangkok, but only half a million tons in the reverse direction. More than half of the southerly flow consists of sand and other building materials. Freight rates are low in relation to the road and rail equivalents and it is reasonable to assume that operating costs are also low. Thte scope for com- petition with other modes, however, is limited by the inconvenience and costs of collection and delivery by truck for many points away from the waterways, as well as the need for increased inventories associated with this slow means of transport. The main limitations to the development of inland waterways are the cited directional imbalance of the traffic, the lack of year-around navigability of part of the system, the cost of dredging and the competing demands on water for irrigation and power. Aviation 11. Air transport is of importance to Thailand and its thriving tourist business, international passenger arrivals at Bangkok having  ANNEX 2 Page 4 grown by over 25% p. a. since 1966 and reaching 620,000 by 1970. Domestic passenger traffic grew by more than 18% p. a. in the sane period, amounting to 220,000 passengers by 1970. This figure is negligible when compared with the 48 million passengers traveling by rail in that year, but a more appropriate comparison is with first class rail passengers, who numbered only 125,000. Domestic air freight traffic is still insignificant.  THAILAND STATE RAILWAY OF THAILAND ORGANIZATION OEEIfl*NMGEEACES ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ SOR OUIO' GN I z F F ECNANICAL t X 5TORES zURi AU l | TRAi 'C DteT L | DMINIYTRAT ONIV SION |LWACCORAININ t NcrNE H sDEPTIEI l ENINt R ~DEPTIeS l ISOREsotEINTNnrT l ^ SSISAN g r q TRNSVATAION m X Fce AsisANT r..ceNRAL J ......ME _ OOMTVERPAM-|IeNRL UEINeDeT | - CR t5T"L l |