Bolivia - Second Railway Project

Report No. 741-BO FILE COP Appraisal of a FIEri Second Railway Project Bolivia May 9, 1975 Latin America and Caribbean Projects Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency TEAivalents 1 Bolivian Peso ($b) = US$0.05 US$1.00 = 20.0 Bolivian Pesos (stb) 1 million Bolivian Pesos ($b) US$5D,000 Weights and Measures: Metric System Metric US Units 1 kilometer (km) 0.62 mile (mi) 1 meter (') 3.28 feet (ft) 1 liter (1) 0.22 imp. gallon 0.26 TS gallon 1 kilogram (kg) 2.20 pounds (lb) 1 ton = 2,205 pounds Fiscal Year January 1 to December 31 Abbreviatiqns and Acronyms ALALC - Latin America Free Trade Association CEPAL - Comision Econoinca para Ainrica Iatina (Naciones Unidas) COMIBOL - Government Mining Company CfKAVI - National Housing Council IKJM - Daniel, MIann, Johnson & Mendenhall - Consultjng Firm, Los Angeles (USA) ENFE - National Railway Enterprise of Bolivia, Bolivian Railways IDB - Interamer4can Development Bank MTCCA - Ministry of Transport, Communications and Civil Aviation SOFRERAIL - Societe Francaise d'Etudes et de Realisations Ferroviaires - Consulting Firm, Paris (France) UNDP - UJnited Nations Developnent Program USAID - United States Agency for International Development YPFB - Yacimientos Petroliferos Fiscales Bolivianos Latin America and the Caribbean Projects Department  BOLIVIA APPRAISAL OF A SECOND RAILWAY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ............................... i - ii 1. INTRODUCTION .1 2. BACKGROUND.. 2 A. General. 2 B. The Transport Sector. 2 C. Transport Investment Planning and Coordination 5 3. THE NATIONAL RAILWAY ENTERPRISE OF BOLIVIA (ENFE) 6 A. General. 6 B. Organization and Management. 6 C. Staff. 7 D. Railway Property. 7 E. New Lines. 8 F. Operations. 8 G. Commercial Policy. 9 4. THE INVESTMENT PLAN AND THE PROJECT. 9 A. The Plan. 9 B. The Project and the Proposed Loan .10 C. The Action Program .12 D. Execution of the Project, Procurement and Disbursement .12 5. ECONOMIC EVALUATION ..14 A. General .14 B. Economic Benefits of the Plan .14 C. Rate of Economic Return, Sensitivity and Risk Analyses 16 D. Basic Criteria Used in Preparing the Plan and the Project .16 6. FINANCES ..16 A. Accounts, Budgets and Audit .16 B. Financial Position .17 C. Tariffs and Costs as of December 1974 .18 D. Future Prospects .19 E. Financing Plan .20 7. AGREEMENTS REACHED AND RECOMMENDATION .21 This Appraisal Report has been prepared by Messrs. Buratti and Dominguez (Engineers), Hurtado (Consultant Economist) and Rasheed (Financial Analyst), and has been edited by Miss V. Foster.  TABLE OF CONTENTS (Continued) TABLES 1. Selected Operating Statistics 2. 1975-1979 Investment Plan 3. Investments to be Committed in 1975-1976 4. Freight Traffic Forecasts 1975-1980 5. Passenger Traffic Forecasts 1975-1980 6. Economic Costs witl and without the Investment Plan 7. Income Projections 1975-1979 8. Summary Balance Sheets - 1970-1979, Actual and Forecast 9. Cash Flow 1970-1979, Actual and Forecast ANNEXES 1. International Financing in the Transport Sector 2. Highway Plan - Principal Projects for the Primary Road System 3. Estimate of Road User Charges Paid by a 12-ton Diesel Truck 4. Estimate of the Marginal Maintenance Cost of Road Use per Type of Vehicle 5. Brief Description.of Railway Property 6. New Lines under Construction or Proposed 7. Time-Phased Action Programs 8. Main Items of the 1975-1979 Investment Plan 9. Scope of Technical Assistance Services to ENFE (Oct. 1975 - Dec. 1976) 10. Action Program of First Railway Project. Evaluation of Progress as of December 31, 1974 11. Tentative Disbursement Schedule 12. Ecanomic Evaluation of the Plan 13. Estimated Economic Cost of Transport of Freight by Road 14. LIethodology Used in Traffic Forecast and Analysis of Future Traffic by Major Commodities 15. Forecast Operating Accounts 1975 to 1979 - Notes and Assumptions CHART S 1. IBRD-6359 (2R) - Bolivian Railways Freight Traffic Density 2. Organization of ENFE MAP 1. IBRD-11455 - Bolivia - Roads and Railways  BOLIVIA APPRAISAL OF A SECOND RAILWAY PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project consisting of the second stage of a plan for the technical and financial rehabilitation of the National Rail- way Enterprise of Bolivia (ENFE). The objectives of the plan are to enable the railways to fulfill their essential role in the national economy and to establish ENFE's financial and technical viability. The proposed loan of US$32 million equivalent would be the third Bank Group lending operation to Bolivia for development of its transport infrastructure (Bank Loan 635-BO of US$23.25 million was made in 1971 for a gas pipeline, and IDA Credit 346-BO of US$8.0 million was granted in 1972 for the first stage of ENFE's re- habilitation). ii. Transportation in Bolivia has developed piecemeal and without coordination. In the west, a series of independent railways was built, mostly by mining interests, to connect the highlands with Pacific ports for export. In the east, rail connections of Santa Cruz with the Argentine and Brazilian Railways are relatively recent. The Eastern and the Western Systems are interconnected only via a 600-km detour through Argentina, The highway network connects major cities in the southwest and provides the only land link between Bolivia's high and low lands; it provides no adequate link to the ports. Thus, foreign trade depends, to a very large extent, on the railways, which are an essential transport link for the Bolivian economy. iii. Highway competition for internal traffic has grown considerably over recent years, but only in those limited areas where highways have been built (28,000 km of roads, of which only 1,100 km asphalted). Actually, road competition is keen mostly on the La Paz-Oruro-Cochabamba road. iv. Since its creation in 1964, ENFE has had to face a staggering combination of problems, which has resulted in a difficult technical and financial situation, aggravated by inadequate Government support. Since 1970, however, a program of technical assistance, financed by UNDP grants totaling US$2.3 million and administered by the Bank, has resulted in substantial im- provements in ENFE's organization and management. The arrival, in the last quarter of 1974, of the first materials, tools and equipment bought under IDA Credit 346-BO should prove to be a decisive step on the road to rehabilita- tion. The success of ENFE's rehabilitation plan will continue to depend on three basic elements: (a) a strong financial and political support from the Government; (b) the ability of ENFE's management to carry on successfully its various time-phased Action Programs; and (c) the materializatirn of ENFE's forecast traffic. The first two elements have been present in increasing amounts during the last two years, and indications are that they will continue to increase in the future. The traffic prospects are difficult to assess in view of their heavy reliance on exports and imports, which vary with world trade conditions; on domestic agricultural production; and on the ever present  - ii - possibility of traffic interruptions during the rainy season. The forecasts in this report are the best estimates in the light of present conditions, but are subject to upward and downward variations. v. The project covers the investments to be committed during the first two years (1975-1976) of ENFE's revised Investment Plan (1975-1979); it will include the continuation of a program of technical assistance and of a series of interrelated Action Programs designed to complement the acquisition of materials and equipment in order to further the rehabilitation of ENFE. The equipment and works to be financed by the proposed Bank Loan include the re- habilitation of, and equipment for, the main diesel worlshop at Viacha and two lesser diesel shops at Oruro and Guaracachi and the purchase of six main line diesel electric locomotives, some 300 freight cars, two ferrobuses, spare parts for the motive power fleet, and equipment for track rehabilitation, including rails for the renewal of 68 km of track. The items which had to be dropped from the first project due to-cost increases, and which totaled about US$4 million at 1973 prices, are included in the present Investment Plan. The project has a total estimated cost of about US$41 million equivalent, including a foreign exchange component of US$32 million equivalent at costs expected to prevail on the disbursement dates. All purchases in foreign currency are to be made through international competitive bidding except for: (a) spare parts, which will be purchased from the manufacturers of existing equipment; and (b) diesel locomotives, for which ENFE is seeking bilateral financing, or, failing this, by competitive bidding restricted to the manu- facturers of the existing locomotives and of those in wide use in neighboring countries. vi. The First Railway Project estimated at 21% the economic rate of return on the total rehabilitation investment, dieselization and modernization. The rate of return for the revised investment (1975-1979) is conservatively estimated at 24%. The financial benefits will also be substantial and, consid- ering the tariff increases of January 17, 1975, it should be possible for ENFE to substantially improve its financial position. The achievement by the end of 1976 of working and operating ratios of about 85% and 95%, respectively, which would eliminate ENFE's reliance on Government's financial suDport except for debt service, is considered to be a reasonable and attainable target for future financial performance, even considering the difficulties wlhich ENFE still has to overcome. vii. The project is suitable for a Bank loan of US$32 million equivalent, to be made available to ENFE for a term of 25 years, including a five-year period of grace with a Government guarantee. If ENFE can obtain bilateral financing for the procurement of diesel locomotives, an amount of US$3.3 million of the loan will be canceled.  BOLIVIA APPRAISAL OF A SECOND RAILWAY PROJECT 1. INTRODUCTION 1.01 The-Government of the Republic of Bolivia and the National Railway Enterprise of Bolivia (ENFE) had asked the Bank Group for assistance in financing the 1973-1977 Investment and Rehabilitation Plan for the Railways, prepared by ENFE with the assistance of SOFRERAIL, 1/ a French consulting firm. The proposed five-year investment was estimated at US$37 million equivalent. Investments during the first two years were estimated at $b 139 million (US$11;6 million equivalent), with a foreign exchange component of US$8 million. In 1972, IDA granted the Government a US$8 million credit (Credit 346-BO) to cover the foreign exchange component for the years 1973-1974. 1.02 The original five-year investment plan (1973-1977) has now been revised and extended to cover the period 1975-1979. The revision includes an updating of costs, a carryover of goods which had to be excluded from the IDA Credit because of price increases, and some new items, the necessity for which has become apparent as a result of the studies carried out during the years 1973 and 1974. The present revised five-year investment plan (1975-1979), prepared by ENFE with SOFRERAIL's assistance, is estimated at $b 1,952 million (US$98 million equivalent) with a foreign exchange equivalent of US$77. million, at current prices. Investments during the first two years of the plan (1975- 1976) are estimated at $b 748 million (US$37.4 million equivalent) with a foreign exchange component of US$29 million equivalent, at current prices. Corrected to include escalation to the probable dates of disbursement, the investment for 1975-1976 becomes $b 820.0 million (US$41.0 million equivalent) with a foreign exchange equivalent of US$32 million. The proposed Bank loan would finance this foreign exchange requirement. 1.03 To date, the Bank Group has lent only twice to the transportation sector: (a) in 1971, it helped to finance a gas pipeline (Loan 635-BO, US$23.25 million) which has been satisfactorily completed and is in service; and (b) it helped to finance the first two years (1973-1974) of ENFE's Investment Plan (IDA Credit 346-BO, 1972, US$8.0 million), which, after some delay, brought about by the necessity of reducing the purchase program in the face of sharp rises in costs, is now proceeding satisfactorily. 1.04 In the past, the United States Agency for International Development (USAID) financed 1,861 km of highways for a total of US$133.35 million. The Inter-American Development Bank (IDB) financed the construction of the La Paz-El Alto Road (US$13.7 million), the engineering and construction of the Oruro-Cochambamba road (US$44.03 million), the construction of the new Santa Cruz-Cochabamba Road (US$35.0 million) and miscellaneous highway improvements (US$10 million). The Brazilian Government gave Bolivia a credit of US$17 1/ SOFRERAIL - Societe Francaise d'Etudes et de Realisations Ferroviaires.  million to purchase road maintenance and construction equipment and is financ- ing the studies of the Santa Cruz-Cochabamba railway connection (feasibility) and of the Santa Cruz-Cochabamba road (feasibility and design). The Government of Argentina is financing the construction of a railway line from Santa Cruz to the Mamore river, which is being built by a joint Argentina-Bolivia com- mission (Annex 1). 1.05 This report is based on (a) the five-year Investment and Rehabilita- tion Plan (1973-1977) prepared by ENFE, with the assistance of SOFRERAIL, and updated for the period 1975-1979, in agreement with the Bank: (b) data supplied by the Government of Bolivia; and (c) findings of an appraisal mission in November 1974, and a further updating mission in February-March 1975, both comprising Messrs. C. Buratti and F. Dominguez (Engineers); Mr. C. Hurtado (Consultant Economist); and Mr. N. Rasheed (Financial Analyst). The report was edited by Miss V. Foster. 2. BACKGROUND A. General 2.01 Bolivia has a land area of about one million square km and a popula- tion of five million. Two-thirds of the population are rural; 84% live in the western highlands at an altitude of 3,000 to 4,000 meters, and in the valleys of the Andes, which together represent 40% of the country's area; the other 16% live in the eastern tropical plains, which cover 60% of the country. The main transport problems are the scarcity of settlement, the lack of adequate connections between rural and urban areas, and the need to provide economic and rel-able transport from the landlocked country to the ports and to open the rich eastern plains to migration and economic activity, 2.02 Between 1965 and 1971, GDP grew, in real terms, at a yearly rate of 5.9%; between 1971 and 1974. the growth rate was 6.1% a year. Future develop- ment prospects depend heavily on the successful growth of oil, mineral and agricultural production. The growth of manufacturing will have to rely to a iar,ge extent on the possibilities of exporting, mainly to neighboring countries. As e result, the lack of adequate transport to move increasing quantities of exports may become one of the critical bottlenecks for maintaining or increas- ing past growth trends. B. The Transport Sector ti) General 2.03 The railways of western Bolivia (2,101 km) were built in the late ~i h and early 20th centuries, largely in response to the needs of the mining industry; their routes were selected to provide the most direct and least expensive transport from the mines to Pacific ports. The railways of Eastern Bolivia (1,232 km), connected to the west only through a 600-km detour in  Argentinean territory, were built in the early 1960's as a means of develop- ing the Santa Cruz region and of providing it with connections to Atlantic ports. The only line not operated by ENFE is the one from Machacamarca to Uncia (105 km), which is operated by the Government mining company COMIBOL. On the Eastern System, a line between Santa Cruz and Puerto Mamore is being constructed under an agreement between Bolivia and Argentina. The feasibility of connecting the Eastern and Western rail systems, probably through a line joining Santa Cruz and Cochabamba, will be studied soon as a result of an agreement between Bolivia and Brazil. 2.04 The present road system consists of approximately 28,000 kIn, of which 1,104 are asphalted. Most of the system is located in the altiplano, in extremely difficult mountainous terrain. In contrast, the low lands of the eastern and northern regions contain very few roads. The most significant among the expected future additions to the road system are given in Annex 2. Except for the connection between Patacamayo and the Chilean border, which is expected to be ready by 1980, the construction of all other roads linking Bolivia with neighboring countries is either very difficult technically, or very expensive, or both; none of these roads is expected to be completed before 1980. 2.05 The state oil company, YPFB, operates over 2,600 km of oil pipelines and 640 km of gas pipelines. The system of pipelines reaches from Santa Cruz north to Puerto Villarroel, west to Cochabamba, Oruro, La Paz and Arica and south to Yacuiba on the Argentinean border. There is also a pipeline from Camiri to Cochabamba. The gas pipeline connects Colpa with Yacuiba. 2.06 Air transport faces serious problems, such as the poor quality of landing strips, a shortage of navigational aids, and the inadequate organi- zation of the Government agencies dealing with civil aviation; scheduled services are provided among 30 airports. International flights connect La Paz and Santa Cruz with Lima, Buenos Aires, Asuncion, Salta, Santiago, Arica, Corumba and Sao Paulo. Air traffic, both national and international, is very important in Bolivia. Between 1968 and 1972, the growth of the number of passengers moved by air has been 12% a year for national traffic and 10% for international. The tonnage of international air freight increased from approximately 2,200 tons in 1971 to 11,500 tons in 1973, an indication of the lack of capacity and delays in alternative means. 2.07 There are three main waterways used by Bolivia: '(a) the Rio Mamore, which provides a link in connecting Trinidad in the lowlands with Santa Cruz and Cochabamba; (b) the Rio Beni, which provides a link between the extreme north, the Yungas and La Paz; (c) the Rios Paraguay and Parana linking Bolivia, Brazil, Paraguay, and Argentina and providing a connection between Corumba on the Brazil-Bolivia border and the Atlantic Ocean. Traffic on these waterways is very light. There is also commercial shipping on Lake Titicaca between Guaqui and Chaguaya (Mina Matilde) in Bolivia and Puno in Peru. This service is the key link in the rail route to the port of Matarani in Peru.  - 4 - (ii) Role of Railways in the Transport Sector: Present and Future 2.08 In Bolivia, the railroads are the most reliable connection with the rest of the world for import and export traffic. As a result, most exports and imports, especially those of bulky, high volume and low value goods, rely on the railroads. International traffic was approximately 70% of total 1973 rail freight traffic on the Western System and 80% on the Eastern System. On the Western System, the export traffic consists mostly of minerals and sugar. The imports are mainly wheat and flour, iron and steel for construction and other miscellaneous products. On the Eastern System, exports are mostly wood and cotton, while imports are diversified. All the key exports of the country, with the sole exception of oil and gas, rely on the railroads for most of their transport requirements. Chart 1 indicates ENFE's freight traffic densitv. 2.09 The highway system serves most of the internal traffic in the south- west portion of the country and, where possible, complements the railroads in the transport of high value international trade goods and other goods that the railroads cannot move due to the present shortage of capacity; 63% of the total ton-km, excluding oil, was moved by road, 31% by rail and the rest by river or air transport. 2.10 Passenger land transport from Santa Cruz to the east and south relies exclusively on the railroads. In spite of the extremely poor service conditions due to the lack of equipment (occupancy ratios of 125%), there has been a permanent and quite substantial increase in traffic (10.6% a year). In the west, buses provide an alternative. The scarcity of railway equipment, together with the paving of the road from La Paz to Oruro, reduced substantially the number of passengers moved (by 13% between 1970 and 1973) between these two cities. Pass-km decreased by 9% in the same period. Nevertheless, the high occupancy ratios of the equipment in operation (68%) show that there is a demand for the service. 2.11 The development of production in the east, on which the overall development of the country depends so heavily, relies on the availability of adequate rail transport. Road alternatives, if and when provided, will not be competitive for the transport of the bulky commodities constituting the basic production of the region that shall be moved to ports or consumption centers over 2,000 km away. Moreover, the opening of the road to Brazil (about 600 km) and the improvement of the one to Argentina will take a long time, leaving the railroads as the only viable alternative for at least a decade. 2.12 In the west, where road alternatives exist, comparisons of long run railway marginal costs with road transport costs show that the latter are substantially higher (about 100% on the average). Despite the low level of road user charges (Annexes 3 and 4), average truck fares are slightly higher than rail freight tariffs. Although shippers consider other elements, particularly quality of service, reliability and speed, the traffic being moved by the railroads consists, to a large extent, of bulky, relatively low  - 5 - value products, with long hauls, for which transportation cost is a prime factor. The improvement in the road system, particularly the roads to Arica and the one between Oruro and Cochabamba, will increase the competitiveness of road services; this has been considered when projecting rail traffic. However, it should be recalled that a substantial amount of rail traffic will not be affected by these roads either because of its nature or because of its location, and that considerable improvements in the quality of rail services should be expected as a result of the Investment Plan. The conclusion is that the railroads will remain the basic mode for the transport of foreign trade. 2.13 The future role of the Western System in the transport of passengers is not yet clear. The fact that the railroads, with present fares higher than buses, tover their marginal costs and have high occupancy ratios in most services, indicates that there are quality and locational advantages in some rail passenger services over existing bus services. The proportion of these services where rail has an advantage is likely to dwindle as the road system improves. Considering these elements, the Investment Plan is quite conservative in the provision of new equipment for the transport of passengers on the Western System, especially during the next two years. The future role of the railroads in the transport of passengers should be evaluated with great care before more important long term investment commitments are made for these services. C. Transport Investment Planning and Coordination 2.14 A general Transport Survey for Bolivia, financed by the UNDP, was completed in 1969, with the Bank acting as Executing Agency. It proposed a program for integrated transport development over the following ten years. One of its main recommendations was that a Department of Transport Planning and Coordination should be created. The Department was created and, for a time, was attached to the Ministry of Coordination and Planning. It is now in the Ministry of Transport and Communications and Civil Aviation and will be activated with assistance from the UNDP. In a country where substantial new investments in transport are required, where many new diverse projects are being considered and where there are growing intermodal relationships and conflicts, the lack of adequate planning is a serious shortcoming that may result in extremely costly errors. There are important issues related to transport planning and coordination in Bolivia that should receive priority attention. During the next 20 years, Bolivia has to construct and improve a substantial extension of roads. This program, which will cost several hundred million dollars, has to be carefully defined, evaluated and scheduled, if proper use of the scarce resources available is desired; it should fully consider the alternatives offered by the other transport modes. A policy for financing of construction, improvement and maintenance of highways has to be defined in order to provide both for the resources needed by the highways program and for an adequate setting for competition between road and rail. 2.15 For achieving better planning and coordination, a strengthening of the Department of Coordination and Planning is required. A UNDP program to provide technical assistance to this Department is scheduled to start in 1975.  - 6 - The UNDP will provide the services of a resident adviser to the Department, who will, in time, be assisted by short term specialists. The Bank was instrumental in securing UNDP assistance to the Department and will follow closely the progress of the studies to be carried out. 3. THE NATIONAL RAILWAY ENTERPRISE OF BOLIVIA (ENFE) A. General 3.01 ENFE was founded in 1964 to take over (a) the former British-owned "Bolivian Railway Company" (BRC) main trunk lines of the Western System (1,199 km) and (b) the Government-owned branch lines (992 km) radiating from the BRC lines. In 1967, the Eastern lines, connecting Santa Cruz with Argentina (532 km) and Brazil (651 km), were also transferred to ENFE and operated as the Eastern System. In 1974, as part of an agreement with Peru, ENFE took over the Guaqui-La Paz line (96 km). The only rail connection between the Eastern and the Western Systems is via a 600-km detour through Argentina, over the Belgrano railway (see Map). B. Organization and Management 3.02 ENFE is governed by a Board of Directors chaired by the Minister of Transport and Communications. The other six members of the Board are repre- sentatives of the Ministries of Transport (1), of Industry and Commerce and of Mining and Metallurgy (1), of the National Planning Council (1), of Labor (2), and the General Manager (non-voting). The General Manager is appointed by the President of the Republic and acts as chief executive: he refers most policy cn-.-)1 o LO e Board. Agreement was reached during negotiations of the first IDA Credit Lhat amendments to the Enterprise Law governing ENFE would not be made withc - previous approval of the Association, and a similar clause has .-en inlro.iced into the Guarantee Agreement. The present organization of !iNPT is iven in Chart 2. .03 A group of young, able and dedicated engineers has recently joined ENFE and is filling the gap in responsible personnel created by the early retirement in 1970, largely under union pressure, of some 100 senior staff members. The impact of these young engineers can be felt throughout ENFE, but mostly in the crucial Mechanical and Shops Department., Training programs have been started at all levels of the hierarchy, and the improvement in the quality of work has been most noticeable in the workshops. Long discussions of the work plan, involving management, the consultants and the union leaders, have "sulteJ in an easement of past tensions and, in some cases, in close co peration between management and labor. '1rit The last two General Managers were in office for about three years each, and both maintained good relations with the consultants and with the Bank. There has, therefore, been a good continuity in ENFE's incipient efforts coward technical and financial rehabilitation, an effort which is developing  along three main lines: (a) improvement in operations, increase of freight carried, and reduction of costs; (b) training of staff, at all levels, in sound railway procedures and aggressive commercial policies; and (c) invest- ment to rehabilitate the railways' equipment and facilities. The first two lines of action have been carried out since October 1970, with the help of consultants' services (SOFRERAIL) financed by the UNDP. The third line of action was started in 1972 with the help of IDA Credit 346-BO for US$8.0 million. The purpose of this Second Railway Project is to provide for the continuation of the three lines of action mentioned above and of tbe technical assistance services when the UNDP-financed program terminates in September 1975. 3.05 In January 1975, the Government named a new General Manager and considerably increased its financial and administrative help to ENFE. Because of the strong backing of the Government, this new General Manager has been able to take a number of positive measures for the improvement of ENFE's operation. C. Staff 3.06 The number of ENFE permanent employees on the Western System decreased from 6,800 in 1957 to 4,850 in 1974; on the Eastern System, it varied from 1,320 in 1971 to 1,390 in 1974. In addition to these 6,240 permanent employees, ENFE, in 1974, had about 450 employees under temporary contracts. ENFE has already taken some steps to reduce and rationalize its staff, e.g., in 1973-1974, it retired 487 of the 920 employees eligible for retirement, and, whenever possible, it cancels the slot of a retired employee. When this is not possible, ENFE fills the slot with an employee from con- tracted force and cancels the contract position. A detailed study of the manpower required by the Ways and Works Department was carried out by the consultants and showed that some 200 additional employees were needed to carry out the Work Program; similar studies are now being conducted throughout ENFE. The final result of those studies will provide a clear idea of the size of the staff needed by ENFE. During negotiations, the goal of 5,500 employees in 1977 indicated in the IDA-Credit documents was revised and temporarily fixed at 6,300. 3.07 Salaries for management and professional staff, scaled down from the salary of the General Manager which, by law, cannot be higher than that of a Minister of State, are competitive with those of other Government-owned enterprises or agencies. The chaotic mix of the non-managerial and non- professional salary systems of the different railways which were amalgamated to form ENFE has now been unified and greatly simplified. Social benefits in excess of those granted to employees of other Government-owned enterprises are being reviewed. D. Railway Property 3.08 ENFE's track and structures will be adequate once essential renewals of materials, particularly sleepers, track fittings and some rails, are com- pleted and a number of badly understrength bridges are replaced. A first tranche of the materials required for these renewals and substitutions has  -8- been purchased under the first IDA Credit, and deliveries started in the second half of 1974. Although a considerable program for scrapping part of the roll- ing stock and rehabilitating the remainder is in full force, much new material will be required to replace the scrapped units and to provide for expansion of traffic. A brief description of the property is given in Annex 5. E. New Lines 3.09 Annex 6 gives details of new lines under construction or being proposed. The Argentine-Bolivian Joint Commission, which built the Yacuiba- Santa Cruz Line, is now building a 310-km extension from Santa Cruz to Puerto Mamore, of which the first 120 km are completed but not in operation. This extension will probably operate at a loss for many years. Furthermore, its construction is below ENFE's standards, and ENFE will have to improve the track substantially before it can start commercial operations. The Credit Agreement of the First Railway Project (section 4.04) stipulates that (a) the Puerto Mamore-Trinidad extension of this line would not be built until economic studies had been carried out and the Association had been given an opportunity to exchange views with the Government; (b) the finances of the new Santa Cruz-Puerto Mamore line or any extension thereof will be separated from those of ENFE until operating revenues on these lines cover operating expenses and debt service; and (c) the Government will reimburse ENFE for any losses derived from the operations of such lines once they are incorporated into ENFE. During negotiations, it was agreed to include these stipulations in the Guarantee Agreement for the Second Railway Project, with the additional proviso that the incremental cost of upgrading the lines built by the Joint Commission to ENFE's operational standards will be underwritten by the Govern- ment. It was also agreed that the investment for the interconnection of the Eastern and Western Systems will be made only after an adequate study demon- strating the economic justification has been made, and the Bank has been given a reasonable opportunity to comment on said study. Finally, it was agreed that the accounts of the Guaqui-La Paz Line (para. 3.01) would continue to be kept separately from those of ENFE until the line's operations can be reorgan- ized, and its revenues will cover its operating and financial expenses. Until such time, the Government will underwrite the line's deficit. F. Operations 3.10 Train operations were drastically changed by the introduction of the "Transport Plan" concept on the Western System in August 1971 and on the Eastern System in mid-1973, by the creation of Command Posts (Oruro, 1971; Santa Cruz, 1973; La Paz, 1974) to control and govern train circulation, and by the inception of a new system of car allocation. The new methods, in spite of the poor level of telecommunications, brought significant improvements to ENFE's operation. Unfortunately, the constant and increasing problems expe- rienced by ENFE with its diesel traction since 1972, and the year long inter- ruption of the main line north of Oruro caused by the January 1974 floods, have severely eroded the progress achieved. The system, however jeopardized by circumstances, has nevertheless subsisted, and it is expected that the full benefits of the new methods will be felt throughout ENFE as a result of  - 9 - the rehabilitation of the diesel locomotives, of the complete elimination of steam traction by 1979, of the reopening of the main line Viacha-Oruro early in 1975, and of the improvement of telecommunications under the Second Railway Project. Selected operating statistics are given in Table 1. G. Commercial Policy 3.11 One of the many problems which ENFE had to face when it was created was the aggressive competition, in the western region, of the young trucking industry, competition which ENFE fought mostly by granting arbitrary tariff rebates. Under the guidance of the consultants, a Commercial Department was created in 1973, and the foundations of a commercial policy were established. Transport unit costs are now being calculated by the Planning Department and used by the Commercial Department to establish rates and fares. As a matter of commercial policy, no effort is made to compete with highways where the odds are too high, as, for example, ini passenger traffic between La Paz and Oruro. On the other hand, the new tariff structure favors the users of com- plete freight cars. The Commercial Department has been surveying possible customers and trying to find solutions to their transport problems. It has had some success, but its action is limited by ENFE's traction and equipment shortages, by the interruption of the main line, and by poor telecommunications. With the improvement of the quality of its services, ENFE should be able to attract new customers. 4. THE INVESTMENT PLAN AND THE PROJECT A. The Plan 4.01 A US$2.32 million program of technical assistance to ENFE, financed by UNDP grants, started in 1970 and will terminate in September 1975. Its purpose is to (a) prepare a plan for ENFE's technical and financial rehabili- tation; (b) help ENFE implement a series of Action Programs (Annex 7); and (c) train ENFE's staff in modern engineering, managing and commercial prac- tices. In 1972, ENFE, with the help of its consultants, prepared a five-year Investment and Rehabilitation Plan (1973-1977), the objectives of which were to make up heavy arrears in maintenance of track and equipment, to complete the dieselization of the traction power, to renew the over-aged rolling stock plant, to modernize the workshops and to improve operations. 4.02 In 1974, again with the assistance of its consultants, ENFE revised and updated the Investment Plan, extending it to cover the 1975-1979 period and to intensify the pursuit of the objectives defined for the first plan. Additional technical assistance will be required at the operational level after October 1975, when the rehabilitation program will be gathering momentum with the arrival of spares, tools, materials and equipment. 4.03 The Investment Plan for 1975-1979 has been reviewed and slightly modified by the Bank, in agreement with ENFE. Investments in each sector have been reduced to the minimum level below which further compression would harm  - 10 - the inner balance of the rehabilitation program. It was agreed during negotiations that the Government and ENFE will implement the full Plan, will review it periodically, and will make no changes without the previous agree- ment of the Bank. Annex 8 describes the main items of the 1975-1979 Investment Plan. Table 2 gives the details of the Plan; a summary follows. 1975-1979 Investment Plan Summary % of $b million US$ million Total Local Foreign Total Local Foreign Total Expenditure 1. Way and Works and Telecommunications 217.4 404.0 621.4 10.9 20.2 31.1 31.8 2. Rolling Stock - 468.0 468.0 - 23.4 23.4 24.0 3. Motive Power - 226.0 226.0 - 11.3 11.3 11.6 4. Rehabilitation of Rolling Stock and Motive Power 11.7 56.0 67.7 0.6 2.8 3.4 3.5 5. Station Installations 1.7 4.0 5.7 0.1 0.2 0.3 0.3 6. W4orkshops 6.0 28.0 34.0 0.3 1.4 1.7 1.7 7. Technical Assistance 2.3 32.0 34.3 0.1 1.6 1.7 1.7 8. Base Cost Estimate 239.1 1,218.0 1,457.1 12.0 60.9 72.9 74.6 (Dec. 1974 prices) 9. Contingencies Physical 20.3 12.0 32.3 1.0 0.6 1.6 1.6 Price /1 152.9 310.0 462.9 7.6 15.5 23.1 23.8 10. Grand Total 412.3 1,540.0 1,952.3 20.6 77.0 97.6 100.0 /1 Price contingencies are based on estimated date of commitment. B. The _r oJ,ct and the Proposed Loan 4.04 The project consists of: (a) investments included in ENFE's Five- Year Investment Plan and which are to be committed in 1975 and 1976 (paras. 4.05 and 4.06); and (b) a program of teclnical assistance, mostly at the operational level (Annex 9). In the First Railway Project, the emphasis was primarily on completing the consultants' recommendations and on starting their implementation, with a small investment in capital goods. In the Second Rail- way Project, the investment will be substantially higher; the progress in ENFEis management and organization justifies this shift in emphasis. A detailed description of the project and of the items to be financed by the proposed loan is given in Table 3. A summary is given on the next page.  - 11 - % of $b million US$ million Total Local Foreign Total Local Foreign Total Expenditure 1. Way and Works and Telecommunications 99.9 170.0 269.9 5.0 8.5 13.5 42.8 2. Rolling Stock - 162.0 162.0 - 8.1 8.1 25.6 3. Motive Power - 78.0 78.0 - 3.9 3.9 12.3 4. Rehabilitation of Rolling Stock and Motive Power 10.5 56.0 66.5 0.5 2.8 3.3 10.4 5. Station Installations 0.3 4.0 4.3 0.1 0.2 0.3 1.0 6. Workshops 6.0 28.0 34.0 0.3 1.4 1.7 5.4 7. Technical Assistance 2.3 14.0 16.3 0.1 0.7 0.8 2.5 8. Base Cost Estimate (Dec. 1974 prices) 119.0 512.0 631.0 6.0 25.6 31.6 100.0 9. Contingencies: (a) Physical 10 6 16 0.5 0.3 0.8 2.5 Subtotal 129 518 647 6.5 25.9 32.4 102.5 100 (b) Price increases- 51 122 173 2.5 6.1 8.6 26.5 10. Grand Total 180 640 820 9.0 32.0 41.0 126.5 /1 Estimated for the expected dates of delivery. 4.05 The items which had to be eliminated from the First Railway Project because of sharp cost increases have been incorporated into the new project. Included in way and works are (a) essential track works, materials, rail,sleepers, tools and equipment, needed to continue and expand the track rehabilitation; (b) replacement of bridges in the Uyuni area; (c) earthmoving equipment for the sectors affected by floods, especially between Oruro and Cochabamba; (d) telecommunication materials and equipment, possibly the most urgent item of the plan; and (e) equipment for producing, transporting and placing ballast. Motive power includes six main line diesel electric locomotives and two ferrobuses. Rolling stock includes 300 freight cars and five passenger cars- 4.06 Rehabilitation of rolling stock and motive power includes the pro- vision of (a) components to rehabilitate existing diesel locomotives, rail- cars, freight and passenger cars and (b) a basic stock of spare parts, essen- tial to implement a rational maintenance program. In order to avoid the crippling downtime of motive power which has plagued ENFE during the last three years, this basic stock has to be of sufficient volume to compensate for the exceptionally long lead time for deliveries from the Japanese manu- facturers. Operations includes some cargo handling equipment for the main stations. Workshops includes machine tools, hand tools, and control and measuring devices.  - 12 - 4.07 Technical assistance includes the services of experts to help im- plement the consultants' recommendations, update them where necessary, and train the staff in modern operational and administrative railway procedures. Draft terms of reference and a bar chart for the technical assistance are given in Annex 9. 4.08 Cost estimates are based on late 1974 prices; physical contingencies for local currency costs, which correspond mostly to civil engineering works, were assumed to be 8.5% and, for foreign currency costs, were assumed to vary between 0% (for locomotives) and 5% (certain tools and spares), and their weighted average of 1% was adopted. Price contingencies for local currency expenditures were assumed to be 20% in 1975, 17.5% in 1976, and 15% in 1977. For foreign currency expenditures, average contingencies of 12% in 1975, 10% in 1976, and 8% in 1977 were applied. C. The Action Program 4.09 Although ENFE's progress in implementing the Action Program under Credit 346-BO was slowed down by a number of factors (the very long lead time for delivery of certain equipments and materials purchased under the Credit, the disastrous interruptions of lines, caused by the January 1974 floods, the scarcity of financial and material reserves), positive results were nevertheless achieved in several fields. A more detailed review of the progress achieved appears in Annex 10. A revised Action Program designed to achieve quantitative targets of performance in operations and finance and to continue the rehabilitation in each sector (Annex 7) was agreed during negotiations and will be carried out by ENFE with the assistance of SOFRERAIL. D. Execution of the Project, Procurement and Disbursement 4.10 The progress realized by ENFE's staff and management during the last few years qualified them, with the specialized assistance of the consultants, to execute the project. The new management has taken energetic measures to accelerate the rehabilitation of ENFE and appears to enjoy urnprecedented Government support. 4.11 The proposed Bank loan for the project would cover the estimated foreign exchange cost (US$32.0 million). It was agreed during negotiations that contracts for goods estimated to cost less than the equivalent of US$100,000 could be awarded after solicitation of quotations from at least three suppliers in Bank Member Countries (and Switzerland). However, the total value of goods purchased in this manner shall not be more than the equivalent of US$400,000. Except for this and for the procurement of the items discussed below in para- graphs 4.13 and 4.14, all goods financed under the proposed loan would be pro- cured by international competitive bidding in accordance with the Bank Guide- lines on Procurement. Bolivia is a member of the Latin America Free Trade Association (ALALC), but preferential trade agreements are not applicable in the case of ENFE because it is exempt from duties on imported equipment.  - 13 - 4.12 Under the project, ENFE needs to acquire only two ferrobuses for the Eastern System. They should be identical to the 10 already owned by ENFE, for operational and maintenance reasons. In the First Railway Project, the purchase of three ferrobuses was the object of an international call for bids. The maker of the existing ferrobuses, Ferrostal from Germany, submitted the lowest eval- uated bid. The order was not placed because of the decreased purchasing power of the IDA Credit, but Ferrostal decided to maintain its offer until the end of 1975, with the normal escalation clause. ENFE intends to take advantage of this situation, and the purchase will be financed under the proposed loan. No bilateral financing could be found by ENFE for this equipment. 4.13 Spare parts needed for the rehabilitation of the existing rolling stock and for the enlargement of the stock for normal and periodic repairs of the existing equipment must come, of necessity, from the manufacturers of the equipment and should be the object of direct negotiations. This item is estimated at US$2.8 million, not including financial contingencies. 4.14 ENFE's diesel electric line locomotive fleet consists of 19 units purchased in Japan (from Hitachi and Mitsubishi, Associated). It is envisaged to purchase six additional diesel electric locomotives under the present project and seven under the next one (1978). The thirteen diesel locomotives should be purchased either from the manufacturer of the existing locomotives, or though international competitive bidding restricted to the manufacturers of the locomotives operating in the neighboring countries. In the first case, the great advantage would be the standardization of the fleet; the main objection would be the necessity for maintaining a large stock of spare parts because of the unusually long lead time required to obtain spares from the Japanese manufacturer. In the second case, the advantages would comprise the interchange of equipment, spare parts and crews with the neighboring countries, the possible use of their facilities for training and for repair of equip- ment, and the opportunity to have certain infrequent but necessary repairs made without having to equip ENFE's workshops with the expensive equipment required. This procedure for the locomotive procurement was agreed during negotiations. At the Bank's suggestion, ENFE has been inquiring about the possibility of obtaining bilateral financing for the purchase of locomotives. Since no firm commitment has yet been obtained from any source, it was agreed at negotiations to maintain the amount of the loan at US$32 million and to make conditional all disbursements for locomotives until ENFE gives the Bank satisfactory evidence that such bilateral financing is not available. Should bilateral financing become available, an amount of US$3.3 million of the loan will be canceled. 4.15 After October 1975, when UNDP financing will terminate, ENFE will have to contract technical assistance services. ENFE has decided to retain, through direct negotiations, the same consultants, SOFRERAIL, who have been helping them since 1970. 4.16 The proposed loan of US$32 million would cover the estimated foreign exchange component and would be equivalent to 78% of the total project cost of US$41 million. The balance of funds required for the completion of the  - 14 - project would be generated by ENFE and contributions from the Bolivian Government. The loan would be disbursed over a period of about three years. Disbursements would be made for the full CIF cost of imported goods and for the foreign cost of technical assistance required for the project. The estimated quarterly and annual rates of disbursement of the proposed loan are given in Annex 11. It is proposed that, if there are any savings in loan- financed items of the project, they will be used to finance the foreign exchange costs of similar items of the plan subject to review and agreement with the Bank, or otherwise be canceled. 5. ECONOMIC EVALUATION A. General 5.01 ENFE's Investment Plan is a coordinated program of rehabilitation, modernization and increase in transport capacity, designed to enable the railways to perform efficiently and to carry the traffic forecast for the 1975-1979 period. If the Investment Plan is not implemented, declining quality of service and diminishing capability to move traffic will result partly in diversions to more expensive transport modes and partly in complete loss of traffic in areas where roads do not exist. 5.02 The Investment Plan for the years 1975-1976 has been prepared on a prudent basis, including only high priority works and acquisitions, whose postponement beyond 1976 would be highly detrimental to adequate operation. All measures indispensable to the full rehabilitation and adequate operation of the existing equipment have been considered. New acquisitions of locomo- tives and cars have been reduced to the minimum level compatible with the traffic to be served, assuming that improvements in the utilization of the equipment are obtained and that the heavy reliance on foreign equipment is only partially reduced. 5.03 The full benefit of the investment in any one item (renovation of track, modernization of shops, rehabilitation and acquisition of equipment) is, to a large extent, dependent on the implementation of investment in other items; for this reason, the economic evaluation considers the plan as a whole, separating only the returns of investments on the Eastern and Western systems of the railroad. The rate of return was calculated taking into account two alternatives: (a) making no investment in the railway and (b) implementing the Investment Plan. A detailed analysis of the economic costs used in each alternative and the procedures used to estimate them apptar in Annex 12. A special evaluation was also made of the return of the dieselization program and of the improvement of the line between Oruro and Cochabamba. B. Economic Benefits of the Plan 5.04 The economic benefits of the plan are obtained by avoiding the additional costs which would otherwise burden the Bolivian economy if the railway Investment Plan were not implemented. These costs are: (a) the higher  - 15 - cost of transporting by road the freight and passengers lost by the railroads if the plan is not implemented; (b) the economic cost of partial loss of traffic in the east where no reasonable alternative to railway exists; and (c) the cost of increased transport time due to the lack of capacity without the plan. Items (a) and (b) generate about 89% of total benefits, item (c) 11%. No allowance is made for the increase in highway construction expenditures if the plan is not implemented. For calculating the marginal cost of transport by road, an estimate of economic costs was used (Annex 13). The assumption was made that, after 1980, these costs will decrease by 10%, after 1985, by 20%, and, after 1990, by 30%, as a result of road improvement. 5.05 A traffic forecast for ENFE up to 1980, assuming the Investment Plan is carried out, was prepared by SOFRERAIL and ENFE and reviewed by the Bank. For freight, it shows that traffic will grow in ton-km at a rate of 4.3% on the Western System and 9.9% on the Eastern System, resulting in an overall growth of 6.3% p.a. For passenger traffic, the projected annual growth in pass-km is 4.5% for the west and 3.4% for the east. Annex 14 explains the methodology and assumptions used in the traffic forecast and contains a detailed analysis of future traffic by major commodities. The revised version of the traffic forecast is given in Tables 4 and 5. 5.06 In the absence of the plan, rail traffic is expected to decrease steadily, reaching, in 1980, a level of 60% of projected freight traffic and 64% of projected passenger traffic on the Western System and a level of 50% for freight and 58% for passengers on the Eastern System. It was assumed that, in the absence of the plan, freight traffic will decrease at 6% a year until 1986 on the Western System, remaining constant at the 1986 level there- after. On the Eastern System, after 1981, traffic is assumed to remain con- stant in the no-plan alternative. This same assumption was made regarding passengers on both systems. With the plan, freight traffic after 1980 was assumed to grow at 6% a year on the Eastern System and at 3% on the Western. Passenger traffic was assumed to remain stable on the Western System and to increase at 2% a year on the Eastern (Table 6). 5.07 A quite substantial portion of the benefits of the program is ex- plained by the fact that, in spite of the sizable differences in traffic moved with and without the plan between 1975 and 1980, the difference in the total cost of operation of the railroads is relatively small. This indicates that, without the plan, the railroads face a reduction of capacity not paralleled by a significant reduction of costs, since most costs, to a large extent, are fixed. The estimates of long-run rail marginal costs for freight, made on a conservative basis, indicate that they are about 42% of the alternative cost by road. In the case of passenger traffic, the lorig-run possibilities of the railroads on the Western System, while questionable in general (para. 2.13), are probably good for some routes and some services for which buses cannot favorably compete. On the Eastern System, the lack of alternatives for the relevant future constitutes a very favorable situation for the railway.  - 16 - C. Rate of Economic Return, Sensitivity and Risk Analyses 5.08 The rate of return expected for the overall program is 24%. For the investment on the Western System, it is 21% and for the investment on the Eastern, it is 28%. An extensive sensitivity analysis of the rates of return estimated for the Eastern and Western Networks and for the overall program was performed. The variation of these rates to the independent increase or decrease of each of the cost and benefit streams used in the calculation was tested. Tests were also made of the sensitivity of the rate of return to the joint variation of correlated streams and to variations in the estimated traffic with and without the program. The rate of return is most sensitive to the estimated cost of moving the displaced freight and passengers by road when the plan is not implemented. A 30% decrease in this cost will reduce the rate of return to 13% on the Western and to 20% on the Eastern System, leaving the overall rate at 16%. The rate of return is quite insensitive to a 10% reduction in the traffic projected with the plan since this reduction will only postpone the investments in locomotives and rolling stock of the 1977-1978 period to 1980-1981, leaving the return practically equal. A risk analysis was made assuming probabilities for the consolidated values of cost and benefit streams. This analysis shows that the probability of obtaining a rate of return below 10% for the overall program is 4% and that of obtaining a rate of return below 15% is 15%. D. Basic Criteria Used in Preparing the Plan and the Project 5.09 Conservative criteria have been used for dimensioning the program of acquisition of new equipment. In the east, even with the acquisition of three new locomotives between 1975 and 1976, reliance on foreign traction will continue. The acquisition of freight cars in the east and west reduces, but does not eliminate, the deficit of car exchanges with other countries. Passenger traffic is carried, until 1977, essentially with the equipment now available and that to be rehabilitated. Even with the acquisition of new equipment, the occupancy ratios will still remain well above normal. The danger of excessive investment in new equipment is practically nil. Less conservative criteria have been used to project the needs to 1979 in order to avoid underestimating the investment required. These needs should be reviewed on the basis of the 1975-1976 experience. 6. FINANCES A. Accounts, Budgets and Audit (i) Accounts 6.01 With the assistance of consultants SOFRERAIL, who designed the schedule of expenses, ENFE revised its accounting system starting January 1974. The new operating accounts present an accurate picture of the railways and are suitable for cost analysis purposes. Further technical assistance will be  - 17 - provided to improve balance sheet presentation and to complete the training of personnel in the new mechanized accounting procedures. A revaluation of assets was only partly done and incorporated into the assets accounts for 1974. Agreement was reached during negotiations that the remaining assets will be revalued and that the results will be incorporated into the 1975 balance sheet. ENFE has also agreed to submit to the Bank a report on the revaluation of assets, together with the auditors' report and comments. (ii) Budgets 6.02 In October of each year, ENFE prepares and submits to the Ministry of Finance the financial requirements for railway operations and local invest- ments for the ensuing year. The Ministry then adjusts the requirements accord- ing to the availability of Government funds. In 1973 and 1974, Government contributions toward ENFE's cash requirements for local investment and debt service charges improved considerably over previous years ($b 74 million in 1973 and $b 101 million in 1974), although these contributions were not always made in advance, every month, as was agreed untder Credit Agreement 346-BO. During negotiations, it was agreed that the Guarantor will provide to ENFE, during the first week of each quarter, funds that are required to cover the estimated expenditure for the following quarter not covered by ENFE's operating revenues. These funds will be required for railway operations, local invest- ment and debt service charges. (iii) Audit 6.03 In accordance with legal dispositions, the external audit of ENFE's accounts is carried out by the Contraloria General de la Republica; however, the Contraloria is behind schedule in its auditing programs of 1973 and 1974. The submission to the Bank of the 1973 audit report is a condition for loan effectiveness. The Contraloria has recently strengthened its staff and it has informed ENFE that it will submit the 1973 report before June 30, 1975 and the 1974 report by October 31, 1975. The submission of future audit reports to the Bank within six months of the close of the fiscal year was agreed during negotiations. B. Financial Position 6.04 ENFE has faced financial difficulties since its creation in 1964. In 1968, the working ratio reached a high of 109; this was due to the poor state of its plant, to deficits in operations, caused mainly by failure to raise tariffs in order to compensate for inflation, and to inadequate financial assistance from the Government to meet local investment requirements. In 1969, there was an improvement since traffic and revenues increased by 17% while expenses rose by only 5%, thus improving the working ratio from 109 to 93. However, after 1970, the financial situation gradually deteriorated, and the working ratio increased from 93 in 1969 to 122 in 1973. Between 1969 and 1973, the revenues increased by 31%, whereas the costs jumped by 91% mainly due to increases in staff costs. The net operating loss increased from $b 31 million in 1971 to $b 82 million in 1973. Income and expense figures for 1968 to 1974 are given in Table 7.  - 18 - 6.05 The balance sheets for the years 1970 to 1974 are represented in Table 8. The major portion of current assets in 1973 consisted of railway stores, which were high in relation to operating costs and included many slow moving and obsolete materials. Most of the receivables (sundry debtors) represent amounts which have been outstanding as much as ten years, many of them from firms no longer in existence; they should now be treated as bad debts and written off. The working capital has been decreasing since 1970 and, although the Government contributions were gradually increasing, they were not adequate or timely until 1973. Long-term debts amounted to $b 96 million in 1973 and consisted mainly of a foreign loan from Japan to finance diesel locomotives and freight cars. All principal and interest payments are being met by the Government. In order to improve ENFE's financial situation, tariffs were raised substantially in November 1973 and February 1974, but the situation did not improve because of even higher rises in costs. Staff costs have doubled since 1969, and material costs have gone up by about 60% since 1973. ENFE's losses on subsidized food "pulperias" have gone up nearly ten-fold since 1971. The cash position of ENFE was critical during 1974. C. Tariffs and Costs as of December 1974 6.06 ENFE's tariff structure remained basically unchanged between 1964 and 1972. It was based on six commodity classifications, varying according to the route of shipment. In many cases, the revenues failed to cover even the variable costs of railway operations. In order to alleviate this, ENFE first adopted a new and unified tariff structure in 1972, then raised tariffs substantially in late 1973 and early 1974 for both freight and passenger services. This resulted in recovering the variable portion of freight costs. The average revenue per ton-km for the system in 1973 was $b 0.42, and the variable cost was about $b 0.34 per ton-km. While this indicates an improvement, the revenues still fell short of fully allocated costs. For passenger services, the ferrobuses and second class conventional trains are recovering long run variable costs but contributing very little toward the recovery of fixed costs. First class passenger services are not recovering even the variable costs. Passenger trains are facing very keen competition between La Paz- Oruro-Cochabamba of the Western System. As mentioned in paragraph 2.13, a review of the railroads' future role in passenger transportation should be performed before any additional long term investment is made in this sector. ENFE has decided to conduct a study of first class passenger services with the aim of absorbing variable costs either by increasing fares or reducing costs. Bus fares, in many cases, are lower than railway fares. At the end of 1974, a detailed study of railway variable costs, railway rates and fares, truck rates and bus fares was conducted by ENFE with Bank assistance, and it was concluded that it was necessary and feasible to increase freight tariffs.  - 19 - D. Future Prospects 6.07 In January 1975, ENFE, with Government approval, raised freight tariffs substantially. The general cargo and mineral rates were increased by 68%, and basic food commodities were increased, first by 68% and then by another 52%. Even after such increases, ENFE's tariffs are not expected to adversely affect the international traffic which constitutes 75% of its business. The Government's main objective in approving such high tariffs is to make ENFE financially self-sufficient. In December 1974, the Government also (a) tranferred $b 6.0 million to ENFE toward the retirement of 123 over-aged personnel and their replacement by younger men presently under contract (an annual saving of over $b 2.0 million); (b) agreed to close ENFE's medical services, from March 1975, transferring its responsibilities to the Caja de Seguro Social de Ferroviarios y Anexos (an annual saving of about $b 10.0 million) and (c) arranged an immediate short-term loan of $b 95.0 million for badly needed working capital. No increase was implemented in passenger train fares in view of keen competition with buses. The passenger revenues in 1975 form only 10% of total revenue against 15% in 1973. 6.08 Based on the traffic forecast discussed in Chapter 5, the above- mentioned tariff increases and the proposed Investment Plan, a forecast of operating revenues and expenses was prepared for the years 1975-1979 (Table 7), showing resulting financial improvements. The assumptions and explanatory notes are provided in Annex 15. 6.09 The forecast income accounts are shown in Table 7 and a summary is shown in the following: 1975 1976 1977 1978 1979 -- ($b million) --------------- Operating revenues 475.6 500.8 525.1 549.1 573.3 Working expenses 404.9 423.7 432.8 435.5 448.4 Working revenues 60.7 77.1 92.3 113.6 124.9 Depreciation 51.8 54.1 66.2 80.0 91.8 Net operating revenues 18.9 23.0 26.1 33.6 33.1 Working ratio /1 85 (90) 85 (84) 82 (79) 79 78 Operating ratio L/ 96(104) 95 (98) 95 (92) 94 94 /1 Figures in brackets are from appraisal forecast for the first railway project. 6.10 Average freight revenue per ton-km rose from $b 0.301 in 1971 to $b 0.420 in 1973, a 40% increase in two years, but, due to recent substantial tariff increases, the revenue is expected to increase to about $b 0.95 per ton-km in 1975 through 1979 in terms of 1974 constant peso value, an increase of 126% from 1973. Average revenue per passenger-km rose from $b 0.103 in 1971 to $b 0.112 in 1973 and is expected to rise to $b 0.170 in 1979 due to a higher traffic increase in railcar service, for which fares are higher than for second class. ENFE is expected to generate sufficient income to cover  - 20 - all the operating costs, debt service charges and local investments for 1975; however, during 1976 to 1979, it will need some financial support from the Government because of higher local investment cost for rehabilitation and much greater interest charges. 6.11 As a result of tariff increases and Government financial assistance (para. 6.07), ENFE is in a much stronger financial position than it was until a few months ago. Freight traffic is also rising at the rate of 6.3% per annum (para. 5.05). The total revenue is expected to double from 1974 to 1979 while total operating costs are expected to increase by 38% in constant Bolivian pesos. Therefore, there should be no doubt that significant progress can be made by ENFE to achieve the financial targets mentioned in the Action Programs (Annex 7). In 1979, the working and operating ratios are estimated to be 78 and 94; respectively. In order to prevent a deterioration of ENFE's finances, an agreement was reached during negotiations that the Government would allow ENFE to promptly raise its tariffs by an amount sufficient to offset increases in costs. 6.12 Achievement of the financial targets is highly dependent upon the projections of ENFE's freight traffic. This traffic depends on exports and imports which can be affected by world trade conditions and Government policies. The sensitivity of the financial projections to a reduction of 5% and 10% in traffic was examined. A 5% fall would reduce ENFE's earnings by about $b 42.0 million for 1975-1976 and by about $b 112.0 million over the plan period; 10% would result in reduction of $b 85.0 million and $b 226 million, respectively. The annual working and operating ratios would deteriorate from about 4 to 7 points, respectively. E. Financing Plan 6.13 Table 9 gives the details of cash flow and the financing plan, and a summary is presented in the following. Since project items extend into 1978, the financing plan was prepared to cover the plan period of 1975-1979. 1975-1979 % ($b million) Requirement of Funds Investment: Proposed Project 644 Other 863 1,507 80 Debt service 354 19 Other 27 1 1,888 100 Source of Funds Internal generation by ENFE 478 25 Proposed Bank loan 515 Other loans from international sources 714 IDA Credit (346-BO) 14 1,243 66 Government 167 9 1,888 100  The Government coatribution is about 9% of total funds required, while the proposed Bank Loan, other loans from international sources and the balance of IDA Credit 346-BO represent 66% and ENFE 25%. 6.14 Because of a substantial increase in ENFE's internally generated cash, the Government's financial obligation for 1975-1979 will be on the order of about 170 million pesos. From 1980 onward, ENFE's cash requirement for local investment sthould be reduced considerably, but, at the same time, ENFE's debt service charges will be increased because the grace period for the proposed loan will end in that year. It is anticipated that ENFE should be able to carry the total financial burden on its own beyond 1980. 6.15 Assuming further borrowing in 1978 on the same terms as the proposed Bank loan, to finance the foreign costs of the last two years of the Investment Plan, ENFE's debt to total capitalization will increase to 59% by the end of 1979. Debt coverage in that year will be 1.1 times, but may decline slightly in 1980 when the grace period comes to a close. In order to maintain ENFE's financial position, the amount and terms of future borrowing should be carefully controlled and limited. Agreement was reached during negotiations that FNFE will not incur any further debt without the Bank's agreement unless net cash generated from operations is at least 1.25 times maximum future debt service requirements when such debt is incurred. 6.16 The forecast balance sheets have been prepared by including estimated revaluation of the gross assets and the related depreciation, financing plan and forecast operating results. Summary forecast balance sheets for years 1975-1979 are given in Table 8. From 1975 onward, the liquid cash position improves; railways stores and accounts receivable are expected to grow simultaneously with operating expenses and freight revenues. 7. AGREEMENTS REACHED AND RECOMMENDATION 7,01 During negotiations, the following major agreements were reached with the Government and ENFE: (a) The extension of the Santa Cruz-Puerto Mamore Line to Trinidad will be made only after economic studies thereof have been carried out and the Bank has been given a reasonable opportunity to exchange views (para. 3.09); (b) The finances of the new Santa Cruz-Puerto Mamore Line or any extension thereof will be separated from those of ENFE until operating revenues on these lines cover operating expenses and and debt service (para. 3.09); (c) Investments for the interconnection of the Eastern and Western Systems will be made only after economic studies have been carried out and the Bank has been given a reasonable opportunity to submit comments (para. 3.09);  - 22 - (d) The cost of upgrading the lines built by the Joint ComhisSion to ENFE's operational standards will be underwritten by the Government (para. 3.09); (e) The accounts of the Guaqui-La Paz Line will be kept separate from those of ENFE until the line's revenues are sufficient to cover its operating and financial expenses. Until such time, the Government will compensate ENFE for any deficit resulting from the operation of said line (para. 3.09); (f) The Government and ENFE will carry out the full Investment Plan, will review it periodically, and will make no charges without the previous agreement of the Bank (para. 4.03); (g) ENFE will carry out the agreed Action Program (para. 4.09); (h) If ENFE obtains bilateral financing for the procurement of diesel locomotives,an amount of US$3.3 million of the loan will be canceled. Otherwise, the locomotives will be procured after competition among the manufacturers of the units used in Bolivia or in Bolivia's neighboring countries (para. 4.14); (i) The Government will provide in advance, in the first week of each quarter, the funds necessary to cover ENFE's estimated shortfall, if any, in operating, debt services, and investment expenses during said quarter (para. 6.02); (j) The Government will allow ENFE to promptly increase its fares and tariffs by an amount sufficient to offset increases in cost (para. 6.11); (k) ENFE will not incur long-term debts without the Bank's agreement unless net cash revenue is at least 1.25 times the maximum future debt service requirement (para. 6.15). 7.02 The submission of ENFE's 1973 audit report will be a condition for loan effectiveness (para. 6.03). 7.03 The proposed project provides a suitable base for a loan of US$32 million equivalent to ENFE, with a guarantee of the Government, to be repaid over a period of 25 years, including a grace period of five years. May ', 1975  BOLIVIA A?011AI0A1 OF A BE01*1 RATLWAY PROJ20T TAM1 1969 1970 1971 1970 1973 1976 TU.i 0 E TOOTblE I E OceAlt Et TOTAL 0 0 TOTAL W I TOT&1 S IC TOTAL, On-to An 2 101 1,22 2 3,3 23 2,102 1,222 3,322 2,101 0, 222 3,323 2,101 1,222 3,3023 10 1,222 3,323 0,701 1,0202 3,313 22. ORAFI'tC Passege- -arIed 000 964 2527 1,221 1,002 228 1,230 924 224 1,130 907 243 1,130 869 290 1,149 668 766 934 Feee-g- knn nil1. 192 63 211 210 50 269 210 59 269 194, 66 260 182 97 269 145 96 oh1 l-nran Jn-rn Inc 700 243 200 210 258 220 230 265 232 2 10 272 230 210 312 2035 016 363 0905 Freight net coca caried - 0ev. earnig 000 004 205 2,189 936 140 1.907 906 210 1,221 749 222 971 732 22. 955 609 275 955 Freight e o km - R.-.nn earing 090 001 92 373 259 60 319 261 04 34 7 045 III 32 6 030 2375 365 2oo 12.5 359 Avera.ge Ome A 297 440 313 272 430 295 2898 400 310 327 S00 360 30 5201 303 311 5206 354 Tr-tfir Ot c- ce 73- 123 620 460 210 306i 471 243 610 430 177 616 437 202 634 353 24.1 594 Paee-gr-k,a per Rcofr'Ae. 000 92 52 72 102 40 S2 100 49 Al 02 34 78 96 71 82 69 79 73 Freight In-n -e ne-knI 0n0 103 75 209 122 50 96 124 20 104 111 91 107 f9 9n fLlO 99 413 oo6 1V. TRA03 RUN TrI-le - Pseger 000 630 90 710 Freight 000 1,360 170 2,030 - tla 000 1,990 750 2,740 -rnac-km r .e..ge eiI. 109 23 222 - re.igh coO. 593 256 8019 -T.ci1 oIl, 002 290 1,771 rce- Toed nO teegil r-eo n 435 380 410 let lead of Lenigh taO a200 137 184 Nmbee of etaclonotil- In fleet 04 44 120 15 37 12 53 37 92 6c L.V 75 65 1 72 60 1.5 75 OneO-enfetnnotoolcnp-t-in 36 27 03 32 22 34 32 22 34 202 31 23 9 30 006 9 32 N-b-hr at rain line dir-c i -Ioninaa 20 5 25 20 3 23 22 5 25 20 5 27 20 5 25 i9 24 A-eilability 'A 70 62 72 72 60 72 25 60 2 70 00 61 49 30 45 6o 403 55 et, tad-.1e -ion-in Oct O20 43 On 69 '64 21 65 159 44 149 732 OnaO.enstF glototOng dlonl l'pnnnutvrn I - 4 -L 4 - 43 4 4 - 4 4-a N-nOe of dieol relinaa h 12 '02 2 22 00 2 12 22 2 12 to 0 12 IC 2 42 OA-l.lbility 903 100 92 16 56 56 60 58 65 60 57 30 49 10 33 45 Sonbor of ncecogOrnar 231 0 28 10 0 03 0 0 60 i8 84 33 1i7 34 33 n17 A-ilobOIity 72 69 32 63 87 79 85 45 39 43 N,n,br at cncna 000000 tof-it cane 1,353 4.34 1,041 1,354 464 1,643 2,310 404 1,843 1,262 463 1,702 1,109 h71 1,759 7,104, 548 1,470 tnabon ofatooltealrfOleog 1oc ,056 315 1,321 1,320 l,OOi 369 1,300 730 228 966 043 252 i.o76 AncIlabtIiIy 1 ~ ~~~ ~ ~ ~~~ 70 65 75 74 80 fi2 25 63 75 09 75 4o 64, TreIgh Tret tan-l.a por ,,rnleeatle rat 000 277 235 298 259 244 390 320~~~~~~~~~~~~~~~~~~~~23 29 25 24 35 32 02 STAFF 60168 695 Onot.en nO eepsnneee ~~~~~ ~ ~~~~~~ ~~~~6 205 6,160 5,123 1,734 6,437 5.065 1,306 6,391 5,9 1,507 ,01 5,2715 ,0 ,5 TrafftearIt, le- enl e - Otal 000 221 80 92 209 95 06 235 96 39 vi,2 4+6 67 543 8s 3/ P --egnnaa Figerr inclnde dining me, aeelevi iens nbnn-c no baggege van.- Te--reS pe- -rtl 1oitid 973 - Wiet-r Tegioc 224; cne- rn legiOr 117. T~, 1974. -l Onatne gine 636, OE-t-e Regie 306. INlet, Al, blank Ipeer rofl,n- teeiabil ity of ole net6 tina dta Ma-h LVI75   TABLE 2 Page 1 bOLIVIA MFoat-ry Unit, million U8$1.00 - $b 20.00 APPRAISAL OF A RAILWOAY PROJECT 1975-1979 1nre-teent Plan Total apepdit-rc 1975-1979 1975 1976 1777 1978 1979 L-an Far.i"e Total Laoal Foreign Total Local Forei-g Tto3l Locl Foredg Total Local Foreign Total L-an Foreign T0tal $b .$ $i us$ $b us$ $b us$ $b Us $ $b TOE$ $b us$ i$b 10$ $b US$ $b US$ $b us$ $b us$ A. WAY ANDS WORKS 1. REHABILITATID.0 OF TRACK 1.1 W.od tiec 33.00 -- 33.00 1.650 3.42 -- 3.12 0.171 9.68 -- 9.68 M.A9 7.10 -- 7.10 0.355 7.10 -- 7.10 0.355 5.7o -- 5.70 0.285 1.8 Rai Ls, tr:k eaterials, t-rannti -- 4.190 03.80 2 .170 -- 2.090 41.90 2.0o0 -- 7.700 14.00 .770 -- 0.50