Bolivia - Third Railway Project

Report No. 1466b-BO Bolivia: Appraisal of a FILE COPY Third Railway Project April 29, 1977 Latin America and the Caribbean Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizationr  Currency Equivalents 1 Bolivian Peso ($b) US$0.05 US$1.00 = $b 20.0 1 million $b = US$50,000 Weights and Measures Metric US Units 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) 3.28 feet (ft) 1 liter (1) = 0.22 imp. gallon = 0.26 US gallon 1 kilogram (kg) = 2.20 pounds (lb) 1 ton 2,205 pounds Fiscal Year January 1 to December 31 Abbreviations and Acronyms ALALC - Latin America Free Trade Association COMIBOL - Bolivian Mining Company CONAVI - National Housing Council DMJM - Daniel, Mann, Johnson and Mendenhall - Consulting Firm, Los Angeles (USA) ECLA - Economic Commission of Latin America ENFE - The Bolivian National Railways FOMO - National Manpower Development Service IDB - Inter-American Development Bank LAB - Lloyd Aereo Boliviano (Airline) MTCCA - Ministry of Transport, Communication and Civil Aviation SOFRERAIL - Societe Francaise d'Etudes et de Realizations Ferroviaires - Consulting Firm, Paris (France) SNC - The National Highway Service UNDP - United Nations Development Program USAID - United States Agency for International Development YPFB - Yacimientos Petroliferos Fiscales Bolivianos Latin America and the Caribbean Projects Department  FOR OFFICIAL USE ONLY BOLIVIA APPRAISAL OF A THIRD RAILWAY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ......... . . . . . . . ................. ....... . i-iii 1. INTRODUCTION ....................................................... 1 2. THE TRANSPORT SECTOR ................................... 2 A. General .... ....................................... 2 B. Transport System ............ .... . 2 C. Transport Planning and Coordination 4 D. Development Plan ... . ........ . . 6 3. THE BOLIVIAN NATIONAL RAILWAYS (ENFE) ............. 7 A* General .......t...o............ 7 B. Organization and Management 7 CG Staff. . 8 D. Railway Property ......... . ... .. . 8 E. New and Uneconomic Lines. 9 F. Operations.. ........ ..... .. . 9 G. Commercial Policy .... ............10 4. THE INVESTMENT PLAN AND THE PROJECT . ........ 11 AA. The Plan ... ................................ 11 B. The Project and the Proposed Loan ... 11 C. The Action Program ... 14 D. Execution of the Project, Procurement and Disbursement .......... ............ . ....... 14 E. Project Risks .... . .....15 5. ECONOMIC EVALUATION ....... .. ............ ...... 15 A. General ...................0... 15 B. Traffic .16 C. Economic Benefits of the Plan.. 16 D. Economic Returns for Freight and Passenger Traffic. 17 E. Individual Track Rehabilitation Works . .17 This Appraisal Report has been prepared by Messrs. Buratti (Engineer), Mumme (Economist), Rasheed (Financial Analyst) and Dominguez (Consultant Engineer) and has been edited by Miss V. Foster. This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Continued) Page No. r 6. FINANCES ............................................... 18 A. Financial Position ................................ 18 B. Tariff and Costs .................................. 19 C. Future Prospects .................................. 20 D. Financing Plan .................................... 22 E. Accounts, Budget and Audit ........................ 23 7. AGREEMENTS REACHED AND RECOMbIENDATION .... .............. 24 TABLES 1. Total Freight Movement in Bolivia 2. Selected Operating Statistics 1973-1976 3. 1977-1981 Investment Plan 4. Investments to be Committed in 1977-1978 5. Freight Traffic 1971-1981, Actual and Forecast 6. Passenger Traffic 1970-1981, Actual and Forecast 7. Economic Evaluation 8. Economic Evaluation of Track Rehabilitation Program 9. Income Statement 1973-1981, Actual and Forecast 10. Summary Balance Sheets 1973-1981, Actual and Forecast 11. Cash Flow 1973-1981, Actual and Forecast ANNEXES 1. International Financing in the Transport Sector 2. Summary and Conclusions of Bolivia Transport Sector Report 3. Brief Description of Railway Property 4. New and Uneconomic Lines 5. Main Items of the 1977-1981 Investment Plan 6. Scope of Technical Assistance Services to ENFE (July 1977-May 1979) 7. Summarized Terms of Reference - National Transport Survey 8. Summarized Terms of Reference - Advanced Technical Assistance for Highway Maintenance 9. Action Program of Second Railway Project (1975-1979) - Evaluation of Progress Achieved as of December 1976 10. Time-Phased Action Programs 1977-1981 11. Tentative Disbursement Schedule 12. Methodology Used in Traffic Forecast and Analysis of Future Traffic by Major Commodities 13. Estimate of Long-Run Marginal Rail Costs 14. Estimate of Road Vehicle Operating Costs 15. Estimate of Marginal Road Maintenance Costs 16. Estimate of Trucks and Buses Needed to Carry Diverted Traffic from the Railways 17. Estimate of Average Rail Revenues 18. Present and Future Role of the Railways 19. Traffic Costing Study 20. Forecast Income and Expense 1977-1981 - Assumptions and Explanatory Notes  TABLE OF CONTENTS (Continued) CHARTS 1. Bolivian Railway Freight and Passenger Traffic Density Passenger - IBRD 12707 Freight - IBRD 12708R 2. ENFE's Organization Chart - World Bank 16949 MAPS 1. Bolivia Transportation System by Mode - IBRD 11455R1  I  BOLIVIA APPRAISAL OF A THIRD RAILWAY PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project consisting of the third stage of a plan for the technical and financial rehabilitation of the Bolivian National Railways (ENFE) and concludes that it warrants Bank support. Railways are playing an important role in the economic development of Bolivia since they constitute the economic means of transportation of minerals and other high volume and low value commodities over long hauls. The Government has given its full support to the continued rehabilitation of track, rolling stock and workshops. The proposed loan of US$35.0 million equivalent would be the fourth Bank Group lending operation to Bolivia for development of its trans- port infrastructure and the third to ENFE. ii. The existing inadequate transport infrastructure has developed, without coordination, in an irregular and unbalanced fashion. Several private railways were built between 1870 and 1920 in the western region of Bolivia where economic activity is concentrated with the main objective of mineral exports through Pacific ports. In the eastern region, Santa Cruz was connected with Argentine and Brazilian Railways in the 1950's. The only rail connection between the Western and Eastern Systems is 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. This inadequate infrastructure is still a major obstacle to the development of Bolivia, impeding the economic integra- tion of vast stretches of territory possessing great natural resource poten- tial. Bolivia's foreign trade depends mainly on the railways. With the exception of the low-level unpaved roads that link La Paz with Peru and Chile in the west and Tarija with Argentina, and of pipelines for petroleum and natural gas, all cross-border traffic is hauled by rail. iii. ENFE has been facing technical and financial difficulties since it was created in 1964. In 1974/1975, the Government took major steps to save ENFE from its increasing problems by providing badly needed funds; by appoint- ing a new, well experienced and industrious General Manager; and by granting substantial tariff increases effective January 1975. The main objective of such steps was to make ENFE financially viable. The tariff structure is now adequately based on the criteria that it should cover at least the long run marginal cost plus a contribution toward the recovery-of fixed costs. Also, tariffs are uniform across the country. As a result of this, ENFE's financial condition started improving; the year 1975 was a turning point in its finan- cial history when, for the first time, it generated net operating revenues. Since then, ENFE's revenues have been meeting all operating expenses and debt service charges. The arrival of materials, tools and equipment, purchased  - ii - under IDA Credit 346-BO and Bank Loan 1121-BO, are improving railway opera- tions. The availability of motive power and rolling stock has improved. A new train scheduling program was introduced on April 1, 1976 on the Western System, and, consequently, there has been a marked improvement in train operations. A similar program has been introduced in 1977 on the Eastern System with the arrival of new locomotives. The Commercial Section has been given a department status in the organization, and its sales promotion activ- ities have been successfully intensified. ENFE has made bilateral arrange- ments to purchase 33 diesel locomotives, which will completely dieselize its fleet by early 1979. The success of ENFE's rehabilitation and modernization program will depend upon (a) the continued full support of the Government; (b) the continued sound financial condition of ENFE; (c) the ability of ENFE's management to carry out its various time-phased action programs successfully; and (d) the fulfillment of ENFE's traffic forecast, which depends heavily on exports and imports and on world trade conditions. The forecasts in this report are the best estimated in the light of present conditions. iv. The proposed project covers the investments to be committed during the first two years (1977-1978) of ENFE's Investment Plan (1977-1981); it comprises the continuation of the rehabilitation programs of track, equip- ment and workshops and a program of technical assistance. All goods financed under the proposed loan would be acquired on the basis of international compe- titive bidding in accordance with Bank Guidelines on Procurement except for critical spare parts (US$2.6 million), which would be purchased from manufac- turers of existing equipment. v. ENFE's investments to be financed by the proposed Bank loan include the purchase of equipment and tools for the various workshops; spare parts and subassemblies for motive power and rolling stock; telecommunications equipment to complete the installation of the multiplex system; 301 freight cars; yard equipment to start the renewal of the Oruro and Santa Cruz marshalling yards; track materials, quarry equipment, ballast cars for track rehabilitation; rails, tools, equipment, and gang trolleys for track maintenance; a concrete tie plant for the Western System; earth-moving equipment; and finally, the continuation of the ongoing technical assistance program. This investment has a total estimated cost of US$52.7 million equivalent, including a foreign exchange component of US$32.9 million equivalent. vi. In addition to the above, the Bank loan includes the financing of the foreign exchange component of two Government undertakings: the updating of the 1969 National Transport Survey and a program of technical assistance for road maintenance. These two items have an estimated cost of US$3.0 million equivalent, including a foreign exchange component of US$2.1 million equivalent. Therefore, the total project amounts to US$55.7 million with a foreign exchange component of US$35.0 million equivalent. vii. ENFE's overall Investment Plan has an economic return of 18% and is well justified. With the recent dramatic improvement in the financial condition, ENFE's working and operating ratios were 79 and 96 for 1976 and are expected to improve to 73 and 91 by 1981. ENFE would, through its revenues,  - iii - cover all operating expenses, pay debt service charges and contribute part of the local cost of investment. This would further reduce the Government's contribution to ENFE. The financial targets are considered to be reasonable and attainable. viii. The project would provide a suitable basis for a Bank loan of US$35.0 million. The loan would be for a term of 20 years, including a grace period of four-and-one-half years.   BOLIVIA APPRAISAL OF A THIRD RAILWAY PROJECT 1. INTRODUCTION 1.01 The Five-Year (1977-1981) Investment Plan of the Bolivian National Railways (ENFE) amounts to a total of US$116.8 million, including a foreign exchange component of US$73.6 million. The investments contemplated for the first two years (1977-1978) amount to US$52.7 million, including a foreign exchange component of US$32.9 million. The Government of Bolivia and ENFE have asked the Bank for a loan of US$32.9 million equivalent to finance the foreign exchange component. 1.02 This would be the third Bank Group operation with ENFE. The first was an IDA credit (346-BO for US$8.0 million) in 1972, and the second was an IBRD loan (1121-BO for US$32.0 million 1/) in 1975. Details of these loans and other foreign assistance in the transport sector are given in Annex 1. The second five-year investment plan (1975-1979) has now been revised and extended to include the period 1980-1981. The revision includes (a) the continuation of the rehabilitation of ENFE's track, telecommunications, rolling stock and workshops; and (b) a program of technical assistance for specific tasks. 1.03 In addition to ENFE's Investment Plan, the project also includes provisions for updating the National Transport Survey completed in 1969 and technical assistance for road maintenance. The cost of these additions to the project is estimated at US$3.0 million, including a US$2.1 million equivalent foreign component. This US$2.1 million is included in the proposed loan, which therefore adds to a total of US$35.0 million. 1.04 ENFE has made arrangements, on a bilateral basis, to purchase 33 diesel electric locomotives from General Electric of Brazil and Mitsubishi of Japan. The delivery of these locomotives has started (eight were received in January 1977) and is expected to be completed by early 1979, at which time ENFE's locomotive fleet will be fully dieselized. The locomotives are financed by suppliers' credits, and the payments will be made by ENFE from its internal cash generation. 1.05 In the transport sector, apart from the railways, the Bank helped to finance a gas pipeline (Loan 635-BO, US$23.25 million) in 1971. This project has been completed successfully and the pipeline is now in service. A loan of US$25.0 million for an aviation development project is at an advanced stage of preparation, and a loan for a highway maintenance project is being considered. 1/ The amount was later reduced to US$28.7 million when ENFE secured bilateral financing for purchase of diesel locomotives.  - 2 - 1.06 This appraisal is based on (a) the five-year Investment Plan (1977- 1981) prepared by ENFE, with the assistance of SOFRERAIL (France); (b) infor- mation supplied by the Government of Bolivia; and (c) findings of an appraisal mission in October/November 1976 comprising Messrs. C. Buratti (Engineer), C-H. Mumme (Economist), N. Rasheed (Financial Analyst) and F. Dominguez (Engineer Consultant). The report has been prepared by them and has been edited by Miss V. Foster. 2. THE TRANSPORT SECTOR A. General 2 2.01 Bolivia has an area of 1.1 million km , which can be roughly divided into the barren highlands "Altiplano" in the western part of the country, where most of the country's population lives, the central valleys in the midwest, and the lowlands in the east and the north. The departments of Pando, Beni and Santa Cruz are in the latter area and represent more than half the territory of the country, but contain only a small part (19%) of the population. Because of topographical barriers and long distances, transportation's normal role of encouraging overall economic development through an interchange of production among regions is unusually difficult. The provision of adequate transporta- tion is further complicated by low traffic densities. The difficulties caused by topography and population distribution are reflected in high transport infrastructure costs, necessitating a careful analysis of the most appropriate modes of transportation and projects for investment. 2.02. In 1974, total freight movements in Bolivia amounted to about 5.5 billion ton-km. Of this, 75% was carried by pipeline, 16.3% by road, 7.0% by rail, 1.1% by waterways, and 0.6% by air (Table 1). B. Transport System (i) Railways 2.03 Except for petroleum and natural gas, the Bolivian economy relies primarily on the railway system to carry its external trade as well as a significant part of its domestic freight and passenger traffic. The system consists of about 3,400 km of meter gauge railway line (Map IBRD 11455R1). The only line not operated by ENFE is that from Machacamarca to Uncia (105 km), which is operated by COMIBOL, a Government-owned mining enterprise. The railways form two separate systems, the Western and the Eastern, the former carrying 60%, and the latter 40% of the total traffic. (a) The Western System was built between 1870 and 1920, largely in response to the need of the mining industry to transport its products to the Pacific ports. This system consists of over 2,100 km of railway, linking the main towns in the  - 3 - southwestern part of the country and providing access to the port of Matarani in Peru, to the ports of Arica and Antofagasta in Chile, and (via Villazon) to the Argentine ports. About 63% of the freight traffic on the Western System consists of export/ import traffic. (b) The Eastern System was built during the 1950's, consists of two major lines and is presently operating about 1,300 km. The Santa Cruz-Corumba line (643 km) connects with the Brazilian system, and the Santa Cruz-Yacuiba line (539 km) connects with the Argentine system. The railways are the only significant mode of surface transport in Eastern Bolivia, the region where most of the new exports (cotton, timber and sugar) originate. About 85% of the traffic on the Eastern System consists of export/import traffic. 2.04 The railway subsector is analyzed in detail in Chapter 3. (ii) Highways 2.05 The present road system consists of about 38,000 km, of which 3% (1,200 km) are paved, 17% (6,600 km) are gravel surfaced and the remainder, 80% (29,800 km), are unimproved earth roads. The most important part of the network is located in the highlands and valleys, where 84% of the population is concentrated in 34% of the territory. In contrast, the lowlands of the northern and eastern regions, which have twice the area of the other two regions, are serviced by a few low standard roads. The road network generally is laid out in the form of a "Y" with Oruro as center; the stem pointing to the south via Sucre, Potosi, Tarija and through Villazon and Bermejo into Argentina; the left arm stretching through La Paz into the Titicaca and Yungas regions; and the right arm leading through Cochabamba into the lowlands of Santa Cruz. (iii) Waterways 2.06 The river transport system is made up of an extensive network of inland waterways located in the eastern and northern parts of Bolivia, measuring about 1,600 km. Channel depths vary from 1.0 to 3.5 m, with seasonal variations of up to 9.0 m. The system consists of five main water- ways, as shown on Map IBRD 11455R1. These rivers represent the only avail- able surface transport mode in vast areas of the underpopulated northeastern part of the country. As such, they perform a vital function even though the quantities moved are relatively small. 2.07 Lake transport is limited to Lake Titicaca, the highest navigable lake in the world. Its primary function is that of an alternate transport corridor to the Pacific Ocean through the Peruvian lake port of Puno, and then by rail and road to the seaports of Matarani and Mollendo. In terms of ton-km of freight traffic, lake traffic is more important than river traffic (Table 1).  -4- (iv) Aviation 2.08 Air transport is a vital means of communication, despite its rela- tively high cost, and is likely to remain so for a long time due to the topography and low population density of the country. The areas in which the greatest potential for development of Bolivia could be assisted by improved air transport are northeast of the mountains and in the south. The Bank is considering a loan for infrastructure to assist in expansion and improvement of air service to these areas. About 30 airports are served by regular flights, mostly by the Government-owned Lloyd Aereo Boliviano (LAB), and some irregular flights for meat haulage. (v) Pipelines 2.09 The state oil company operates 2,462 km of oil pipelines and 754 km of gas pipelines. The oil pipelines allow access from the major production fields to the Pacific seaport of Arica and to the Argentine border. The Bank- financed natural gas pipeline (Loan 635-BO) conveys gas to Argentina. Depend- ing on the success of intensive exploration efforts now under way and the confirmation of identified reserves, significant new pipeline construction may be undertaken. C. Transport Planning and Coordination 2.10 Important issues related to transport planning and coordination in Bolivia need attention. As an example, Bolivia is likely to have to construct and improve a substantial number of roads. This program, which may well cost several hundred million dollars, must be carefully defined and evaluated against the alternatives offered by the other transport modes. The Government of Bolivia is considering the eventual construction of a highway between Santa Cruz and Corumba (Brazilian border), practically parallel to the existing rail- way between those points. The high cost of constructing such a highway (about US$125 million) and the possibility that this highway is unlikely to generate substantial traffic, but, rather might divert it from the railway, requires a careful economic study. Agreement was reached during negotiations that the Government will refrain from making investments for the construction of this highway before an adequate study demonstrating the economic justification has been carried out and the Bank has been given an opportunity to comment on it. 2.11 A National Transport Survey for Bolivia, financed by UNDP, was com- pleted in 1969, with the Bank acting as Executing Agency. It proposed a program for integrated transport development over the following ten years, and those projects which were justified in the Survey have mostly been started or are included in the 1976-1980 Development Plan (paras. 2.16 and 2.17). One of its main recommendations was that a Directorate of Planning and Coordination should be created. The Directorate was created and, for a time, was attached to the Ministry of Coordination and Planning, but is now in the Ministry of Transpor- tation, Communications and Civil Aviation (MTCCA). 2.12 For achieving better planning and coordination, the Bank, in 1972, assisted in the preparation of terms of reference for a UNDP-financed tech- nical assistance program to strengthen this Directorate. The main tasks of the program were to:  (a) review and evaluate existing transport information; identify areas where additional or more accurate information is required and install a system that would collect the minimum of necessary data; (b) review existing policies and regulation for inter-city transport of passengers and freight by all modes; determine the extent to which these policies and regulations are actually carried out; identify the economic and social objectives which these policies and regulations were designed to support; evaluate how efficient these policies and regulations have been in supporting these objectives; and (c) review the relation between charges in all transport modes and the cost to the economy incurred by each mode (with special emphasis on road users), and suggest all corrections necessary to assure adequate user charges. 2.13 This UNDP-financed program of technical assistance to the Directorate of Planning and Coordination, with ECLA acting as executing agency, was can- celled in 1976 due to lack of funds after only partial implementation (a con- sultant worked for a few weeks at MTCCA and assisted in the preparation of projects to be included in the National Five-Year Investment Plan, 1976-1980). 2.14 The gap in knowledge regarding' transport facilities and equipment, their condition, their age and their ability to meet expected demands is serious, especially for highways and waterways. Although many individual project studies have been undertaken, there has been no real coordination among them. The Government has decided that the Directorate of Planning and Coordination, with the help of the consultants, should update the National Transport Survey. The main objectives of this National Transport Survey would be to: (a) analyze and project the transport demand in relation to planned development of the economy; (b) review existing capacity and operations; (c) determine the role of each mode in relation to the demand; (d) recommend policies and operational improvements designed to make best use of existing and future capacities; (e) prepare a program of investments necessary to improve and expand capacities to meet projected demands; (f) strengthen the Directorate of Planning and Coordination and develop a new organization and staffing plan for it; (g) conduct the work in such a manner as to ensure that a maximum amount of working knowledge is imparted to the counterpart personnel, and assure that the organization of traffic counts  - 6 - and other data collection exercises will be undertaken in such a way that they can most easily be incorporated in the future routine work; and (h) indicate the method of implementation in such a way that it might serve as terms of reference for a subsequent two-year technical assistance to the Directorate of Planning and Coordination. 2.15 The Government has requested financing by the Bank. The arrange- ments proposed for preparing the National Transport Survey and the technical assistance contract for its implementation are outlined in paragraph 4.03. D. Development Plan 2.16 The Government's major objectives (except for pipelines, planned by the Ministries of Mines and Industry), for the next five years (1976-1980) can be summarized as follows: (a) continue the rehabilitation and modernization of the state railway; (b) extend and improve the road network to meet national and regional development related to high priority sectors in the economy; (c) modernize air transport through improvement and re-equipment of infrastructure, ensuring permanent availability of smaller airports, particularly in the north and northeast; (d) extend the river and lake fleet and improve port facilities and river navigation; and (e) achieve an efficient operation of each transport mode in such a way that costs are low and services satisfy the demand. 2.17 The present MTCCA plan calls for investment in transport, during 1976-1980, in projects already under execution totalling US$475 million, excluding pipelines; of this total, US$266 million is for highways, US$107 million is for railways, and US$102 million is for aviation. It does not, however, include capital investments for waterways, which are relatively minor. This may be compared to total public sector investment of US$2,436 million, or almost 20%. In addition, projects of US$439 million are under study, witlh an aviation share of US$111 million and the rest for highways. Productive sectors (industry, mining, hydrocarbons and agriculture) will use about 60% of the the public sector investment, and energy and public services will use the rest. About 62% of the transport investment is in foreign exchange and is likely to require external financing. Since the transporta- tion investments are large, and may even be excessive, continued sector planning and coordination are required to ensure that the projects under study are justified in their overall context and are well-timed. The summary and conclusions of the latest transport sector report for Bolivia are given in Annex 2.  - 7 - 3. THE BOLIVIAN NATIONAL RAILWAYS (ENFE) A. General 3.01 ENFE was founded in 1964 to take over the former British-owned Bolivian Railway Company (BRC) main trunk lines of the Western System and the Government-owned branch lines radiating from the BRC lines (about 2,100 km). In 1967, the Eastern lines were also transferred to ENFE (about 1,200 km). In 1974, as part of an agreement with Peru, ENFE took over the Guaqui-La Paz line (96 km). In March 1976, the Santa Cruz-Santa Rosa line (104 km), built by a Joint Commission of Argentina and Bolivia, was handed over to ENFE. The only rail connection between the Eastern and the Western Systems is via a 600-km detour through Argentina, over the Belgrano Railway (Map IBRD 11455R1). ENFE's freight and passenger densities are shown in Chart 1. B. Organization and Management 3.02 ENFE is governed by a Board of Directors chaired by the Minister of Transport, Communications and Civil Aviation. The other six members of the Board are representatives 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 decisions to the Board. Agreement was reached during nego- tiations of the first IDA Credit (346-BO) that amendments to the Enterprise Law governing ENFE would not be made without previous approval of the Association, and a clause to that effect was introduced into the Guarantee Agreement. The present organization of ENFE is given in Chart 2. 3.03 Until the end of 1974, ENFE went through a period of consolidation of the various railways into a single enterprise, of basic reorganization of management, of difficult financial problems resulting from low tariffs and inade- quate financial support from the Government, and of excessive union interference in the railways' personnel management. In January 1975, the Government decided to start a phase of active rehabilitation of ENFE: it appointed an energetic new General Manager and gave him unprecedented backing; reduced union partici- pation in the management of ENFE; and authorized a series of cost reductions such as the transfer of medical care to the Government and a program of staff reduction through attrition. 3.04 At the same time, the effects of the IDA Credit of US$8.0 million were beginning to be felt, and an investment program was prepared, which was partly financed by Bank Loan 1121-BO (1975, US$32.0 million, later reduced to US$28.7 million when ENFE bought 17 diesel locomotives from General Electric, Brazil, on a bilateral basis). With IDA and Bank financial assistance, spare parts, new rolling stock and track maintenance tools started to arrive, and the Viacha workshop began to operate. Under the guidance of the consultants, SOFRERAIL, railway operations began to improve. The availability of motive power reached 80% in 1976, the number of foreign cars rented was reduced and the utilization of passenger cars improved substantially.  - 8 - 3.05 While the Western System has achieved good progress in operations, progress on the Eastern System has lagged, particularly in track rehabili- tation, due to the lack of effectiveness of the Eastern Management. The Minister of Transport has submitted to the Bank a satisfactory plan of action for solving this management problem. C. Staff 3.06 Following Bank recommendations at the time of the Second Railway Project, ENFE has embarked upon a staff reduction program. The number of employees decreased from 6,401 in 1973 to 6,047 in 1976; ENFE has retired more than half of its permanent employees eligible for retirement and has a program for further reduction of over 300 employees between 1977 and 1981. By 1981, its total manpower will be reduced to 5,740, or 1.8 man per km, which is better than most railways in Latin America. Agreement was reached on these figures, which are incorporated in the Action Program (para 4.09), with the understanding that, as the staffs of the different departments are reallocated to meet ENFE's needs, some adjustment may become necessary. 3.07 The main problem regarding ENFE staff is not one of quantity, but of quality. The salary restrictions make it difficult for ENFE to retain its engineers and technicians, let alone to attract new ones. This aspect of the staff problem is further compounded by the acute shortage of skilled personnel in Bolivia. The Government is aware of these problems, and, after discussions with the Bank, it has authorized ENFE's General Manager to improve prevailing engineer and technician wages and to attract additional young engineers by offering them the possibility of a career in railways. Several plans are now under study in Bolivia concerning the training of skilled personnel. The Government is planning to collect a contribution of 1% of payroll from all Bolivian employers to finance various training centers through FOMO (National Manpower Development Service). Since ENFE will be contributing its part, it will be able to utilize FOMO facilities. Also, ENFE will be able to request specific training for its employees from FOMO. D. Railway Property 3.08 ENFE's present track and structures are in urgent need of repair. Deferred maintenance, combined with age in the western region--where the track is 60-70 years old--and tropical weather in the eastern region, call for an energetic and systematic track rehabilitation program during the next five years. ENFE's rehabilitation of part of its rolling stock, its purchase of new passenger and freight cars, and its complete dieselization in 1978-1979 will produce limited benefits unless the track is brought to a standard which will allow the new and rehabilitated equipment to operate safely at normal speeds. 3.09 A good start in this direction has been made in the western region where, in spite of the low capacity of the existing stone quarries, about 60 km of track have been completely rehabilitated and are now at the desired standard. With the expected arrival of new and more powerful stone crushers, ballast production should increase considerably to cope with all requirements  of track rehabilitation. In the eastern region, track rehabilitation is expected to be carried out by contract, and the Santa Cruz-Corumba line should be completely rehabilitated in about five years. 3.10 The supply of ties, which for several years was a bottleneck, has been resolved satisfactorily. Track materials and tools are now available, financed by IDA Credit 346-BO and by Bank Loan 1121-BO. Only 68 km of rails in the east remain to be replaced. Except for some sections of the Uyuni- Ollague line and of the Viacha-Charana line, where rails will have to be changed, rail welding for the rest of the system will extend rail life and reduce maintenance costs. A brief description of railway property is given in Annex 3. E. New and Uneconomic Lines 3.11 In the fall of 1976, the Argentine and Bolivian Governments agreed to discontinue the activities of the Argentine-Bolivian Joint Commission which planned to extend the Santa Cruz-Santa Rosa line up to Puerto Mamore and Trinidad in the north. The Joint Commission will be phased out in the next few months, when the line reaches Yapacani. From then on, all further extensions will be studied by consultants. During negotiations, agreement was reached on four points: (a) the Bank will be given an opportunity to comment on the selection of consultants and their terms of reference; (b) prior to any con- struction of the line beyond Yapacani, the Bank will be afforded an opportunity to review and comment on the economic justification; (c) a clause similar to the one in Loan 1121-BO will stipulate that the accounts of the operations on the line to Yapacani be kept separately and that ENFE be reimbursed by the Government for any losses incurred until the line's revenues cover operating costs and debt service charges; and (d) the incremental cost of upgrading the Santa Cruz-Yapacani lines to ENFE's minimum operational standards will be studied and, if justified, will be underwritten by the Government (Annex 4). 3.12 The ongoing feasibility study, by the Brazilian and Bolivian experts, for the interconnection of the Eastern and Western Systems, is expected to be ready by mid-1977. Agreement was reached with the Government during negotia- tions that investments for the interconnection will be made only after an ade- quate study demonstrating the economic justification has been done and the Bank has been given the opportunity to comment on it. With regard to unecon- omic lines, the Sucre-Tarabuco line has been closed and the Cochabamba-Aiquile line is under study (Annex 4). F. Operations 3.13 Although the performance of the diesel locomotive fleet has improved considerably, tractive power will remain a matter of concern until the proper general overhauls can be made on locomotives with more than 24,000 hours of service: this will be possible in 1977, when spare parts will start arriving. ENFE has resorted to bilateral financing for the purchase of the diesel loco- motives which it needs to eliminate steam power and to completely dieselize its operations. To meet these needs, it has already bought 17 diesel loco- motives from Brazil (para 3.04) for the Eastern System and has signed a  - 10 - contract with Mitsubishi of Japan for another 16 diesel locomotives for the Western System, to be delivered gradually from early 1977 to 1979. Eight locomotives arrived from Brazil in January 1977. 3.14 Under the guidance of the consultants, SOFRERAIL, railway opera- tions began to improve. The first train scheduling program, introduced on the Western System in 1971 and the Eastern System in 1973, lost most of its effectiveness with the motive power shortages which started in 1972, and with the 15-month interruption of the main line northwest of Oruro going toward La Paz due to heavy floods. A new updated program was inaugurated on April 1, 1976 on the Western System. The reopening to traffic of the line near Oruro, and the marked improvement in the availability of diesel power and of rehabili- tated and new rolling stock, have resulted in the better use of equipment (an average of 511 km/day for diesel locomotives in October 1976, 10 days turn- around time for freight cars), better regularity of services, and better obser- vation of time schedules. Selected operating statistics are given in Table 2. 3.15 With the arrival of 17 new diesel locomotives, two new ferrobuses and 18 new passenger cars, a new train scheduling program proposed by SOFRERAIL has been introduced on the Eastern System in 1977. ENFE will manage its new fleet of locomotives without the constraints involved in the use of foreign rented loco- motives operating in Bolivia with foreign crews and will be increasingly able to cope with the unsatisfied transport demand of the region. For this purpose, it is essential that the technical assistance program be retained in order to conti- nue the training of the Region's personnel and to give all possible support to management in solving the complex problems resulting from the dieselization of the traction and from the increasing demand for transportation. Continuation of the program is included in the project (para. 4.03). G. Commercial Policy 3.16 In 1973, with the help of its consultants, ENFE created a Commercial Division. This division has been upgraded to departmental level, and its manager is directly responsible to the General Manager. The present commer- cial policy is to relate the tariffs to the operating costs while attempting to remain competitive with other modes. Whenever there is a need to increase tariffs, ENFE submits the proposal to the Minister of Transport, who has the final authority to grant tariff increases. SOFRERAIL completed a detailed costing study in 1976, and the rates and fares are related to the costs: freight rates cover full costs on both systems. The passenger fares cover marginal costs fully on the Eastern System but only about 95% on the Western System. ENFE has, accordingly, obtained the Government's approval and raised the fares by 10% effective February 1977. On the other hand, the Commercial Department has intensified its sales promotion activities to attract more traffic: discounts for higher volume traffic were introduced as an incentive in late 1976, and the results are proving fruitful. ENFE has also started identifying new and potential customers, evaluating their needs and their future growth, so that railway policies can be adapted in such a way that more traffic is attracted to ENFE. ENFE considers that a well organized information system covering the transportation markets is a prerequisite to an aggresive policy of attracting an increasing share of the market demand. Technical assistance is expected to perform a fundamental role in setting up an infor- mation system which can cope with this target.  - LI - 4. THE INVESTMENT PLAN AND THE PROJECT A. The Plan 4.01 Between 1970 and 1975, a series of UNDP grants, totalling US$2.32 million, financed an extensive program of technical assistance by SOFRERAIL to ENFE. This program was designed to prepare a plan for ENFE's technical and financial rehabilitation; to help ENFE carry out a series of action programs; and to train ENFE's staff in modern engineering, management and commercial practices. 4.02 With the help of SOFRERAIL, ENFE has prepared a third Investment Plan covering the years 1977-1981. This plan has been reviewed and modified in agreement with the Bank. It is a compact and realistic package, wherein expenses in all sectors are well balanced. In striving for this internal balance, an effort was made to correct, as far as possible, the low priority which had been given, in the two previous loans, to track rehabilitation. Investments in each category have been reduced to a minimum level below which further reduction may harm the rehabilitation program. It was agreed during negotiations that the Government and ENFE will make no further major revision of the Investment Plan without consultation with the Bank. For this purpose, a major revision is considered to be a change of more than 20% in real terms in the cost of any item in the Investment Plan, the inclusion of new civil works costing more than US$1.0 million, or the procurement of equipment of a single type costing more than US$0.5 million in any given year. Annex 5 describes the main items of the 1977-1981 Investment Plan. Table 3 gives the details of the Plan; a summary is given on the next page. B. The Project and the Proposed Loan 4.03 The project consists of (a) investments included in ENFE's Five-Year Investment Plan and which are to be committed in 1977 and 1978 (paras. 4.04 and 4.05); and (b) the continuation of the ongoing program of technical assistance, mostly at the operational level (Annex 6). It includes the updating of the National Transport Survey and a two-year subsequent technical assistance for the implementation of the major policy recommendations to be made under the survey (Annex 7). Also included is the technical assistance for the highway mainte- nance (Annex 8). This latter technical assistance would be engaged to aid in the pilot maintenance program planning (as distinct from preparation of a possi- ble Bank-financed project), the development of equipment procurement action and planning of the enlarged training center program. The amounts for the National Transport Survey, subsequent technical assistance to the Directorate of Planning and Coordination, and the technical assistance for highway maintenance will be onlent by ENFE to MTCCA on terms and conditions satisfactory to the Bank. There is a possibility that UNDP may finance part of the updating of the survey. This study would then be carried out as a Bank-executed UNDP project. During negotiations, it was agreed that disbursement for the National Transport Survey will be subject to the Government assigning counterparts on a full-time basis for the duration of the survey. The Government also agreed to ensure that at  - 12 - ENFE's Investment Plan Summary, 1977-1981 in $b million in US$ million % of Total Local Foreign Total Local Foreign Total Expenditure 1. Way and Works 662.2 741.0 1,403.2 33.1 37.1 70.2 60.1 2. Rolling stock: freight cars - 287.3 287.3 - 14.3 14.3 12.2 passenger cars - 11.8 11.8 - 0.6 0.6 0.5 3. Spare parts - 55.4 55.4 - 2.8 2.8 2.4 4. Workshop Equipment 3.9 49.5 53.4 0.2 2.5 2.7 2.3 5. Technical Assistance 11.9 64.7 76.6 0.6 3.2 3.8 3.3 6. Contingencies Physical 33.9 12.1 46.0 1.7 0.6 2.3 2.0 Price 151.8 249.5 401.3 7.6 12.5 20.1 17.2 7. Grand Total 863.7 1,471.3 2,335.0 43.2 73.6 116.8 100.0 ieast five of these counterparts will remain in the Directorate of Planning and Coordination after the completion of the survey, during the implementa- tion phase and for an adequate period of time thereafter. The policy recom- mendations of the survey will be implemented by July 1, 1981. A detailed description of the project and of the items to be financed by the proposed loan is given in Table 4. The proposed Bank Loan (US$35.0 million) will finance 100% of the foreign exchange cost of the equipment, materials, and consulting services of the project. A summary of the project is given on the next page. 4.04 Included in way and works are (a) equipments and tools needed to accelerate the rehabilitation of the track; (b) some earth-moving equipment; (c) telecommunications equipment to complete the multiplex network; (d) quarry equipment to increase substantially the production of ballast and its distri- bution; (e) ballast cars; (f) concrete tie manufacturing plant; (g) equipment and materials for starting the modernization of marshalling yards and studies by consultants to solve existing problems at Oruro and Santa Cruz stations and yards; (h) labor content needed for rehabilitation of track; and (i) ties, cement and other minor items. 4.05 Maintenance and rehabilitation of rolling stock and motive power includes the provision of (a) labor, parts and repair units needed for locomo- tives, ferrobuses, freight and passenger cars; and (b) equipment and machine tools for the workshops.  - 13 - Project Summary, 1977-1978 in $b million in US$ million % of Total Local Foreign Total Local Foreign Total Expenditure 1. Way and Works 307.1 295.8 602.9 15.4 14.8 30.2 56 2. Freight Cars - 158.8 158.8 - 7.9 7.9 15 3. Spare Parts - 52.8 52.8 - 2.6 2.6 5 4. Workshop Equipment 3.9 39.0 42.9 0.2 2.0 2.2 4 5. Technical Assistance 5.3 28.4 33.7 0.3 1.4 1.7 3 6. Special Projects: a. National Trans- port Survey 11.7 30.0 41.7 0.5 1.5 2.0 3 b. Technical Assis- tance for Highway Maintenance 2.3 10.0 12.3 0.1 0.5 0.6 1 Sub-total 330.3 614.8 945.1 16.5 30.7 47.2 7. Contingencies Physical 16.5 5.9 22.4 0.8 0.3 1.1 2 Price 66.8 83.4 150.2 3.4 4.0 7.4 11 Sub-total 83.3 89.3 172.6 4.2 4.3 8.5 8. Grand Total 413.6 704.1 1,117.7 20.7 35.0 55.7 100 4.06 Technical assistance includes the services of experts, mostly at the operational level, to help implement the consultants' earlier recommenda- tions and to train ENFE's personnel in modern operational and administrative railway procedures. Through direct negotiations and in agreement with the Bank, ENFE has extended SOFRERAIL'S technical assistance until June 1977, with funds from Loan 1121-BO. Total man-months required for technical assistance are about 200 at an estimated total cost of US$1.7 million, with a foreign exchange component of US$1.4 million. The technical assistance is expected to continue through 1977 and in 1978. Draft terms of reference and a tentative bar chart for the technical assistance are given in Annex 6. 4.07 Technical assistance for the National Transport Survey and its major policy implementation require about 200 man-months at a total cost of US$2.0 million with a foreign exchange cost of US$1.5 million (Annex 7).  - 14 - Technical assistance for highway maintenance would require about 72 man-months at a total cost of US$0.6 million with a foreign exchange cost of US$0.5 million. 4.08 Cost estimates are based on March 1977 prices. Details of physical and price contingencies, which are consistent with Bank guidelines, are shown in Table 3. No retroactive financing is included in the loan. C. The Action Program 4.09 The causes for ENFE's slow start in implementing the first Action Program (e.g., the long lead time required for deliveries, the effects of the January 1974 floods, and the scarcity of financial and material reserves) have disappeared to a great extent, and positive results are appearing in several sectors. A more detailed review of the progress achieved appears in Annex 9. A revised Action Program (Annex 10), designed to continue, expand and improve the previous one, was agreed during negotiations, and will be carried out by ENFE with assistance of the consultants. D. Execution of the Project, Procurement and Disbursement 4.10 ENFE would execute the project with the specialized assistance of the consultants, except for the updating of the National Transport Survey and the Highway Maintenance, which would be executed by the Ministry of Transport, Communications and Civil Aviation. ENFE will carry out track rehabilitation on the Western System under force account while contractors under ENFE's supervision will carry out track rehabilitation on the Eastern System. The progress achieved by ENFE's staff and management in the execution of the first (IDA Credit 346-BO) and second (Bank Loan 1121-BO) projects indicates that ENFE is qualified to execute this project. 4.11 It was agreed during negotiations that contracts for goods estimated to cost less than the equivalent of US$50,000 but more than US$5,000 could be awarded after solicitation of quotations from at least three suppliers in Bank member countries and Switzerland. The aggregate value of purchases under this provision would not exceed the equivalent of US$500,000. Goods estimated to cost less than US$5,000 may be purchased under local procurement procedures. Except for this and for the critical spare parts which, as agreed by the Bank, would be procured on the basis of direct purchase from the original equipment manufacturers, all goods financed under the proposed loan would be procured by international competitive bidding in accordance with the Bank Guidelines on Procurement. Bolivia is a member of the Latin American Free Trade Association (ALALC), but preferential agreements are not applicable in the case of ENFE because it is exempt from duties on imported equipment. Local bidders 1/ would be granted a margin of preference by adding 15% (or the applicable customs duties, whichever is lower) to the CIF value of foreign bids. 4.12 As mentioned in paragraph 3.04, the diesel locomotives which have already been ordered by ENFE are excluded from the project. However, the related financing charges are included in the financial analysis. 1/ The likelihood of participation by local bidders is very small.  - 15 - 4.13 Disbursement of funds from the loan would be based on 100% of foreign expenditures for imported goods and equipment and for techllical assistance for the project. The loan would be disbursed over a period of about three years; a schedule showing the estimated rate of disbursement is given in Annex 11. Disbursement would be fully documented. E. Project Risks 4.14 The eminent success and sustained improvement of the railways in the past two years have been considered in this report. Indications are that ENFE and the Government are committed to the objectives of the project; however, there is a risk that the anticipated progress may not be fully achieved. In order to reduce the risk, several steps have been taken in the project, such as the Action Program, frequent consultation with the Bank and the provision of adequate technical assistance. Also in the economic evaluation (para. 5.11) and in the section on future prospects in the Finance chapter (para. 6.12), the impact of failure to meet the targets of the project is analyzed. 5. ECONOMIC EVALUATION A. General 5.01 This economic evaluation concentrates on ENFE's 1977-1981 Investment Plan. Quantifiable benefits are discussed in detail, and an indication is provided of non-quantified benefits which would result from the investments. The economic evaluation of the Western System is based on the assumption that there will be a continued flow of traffic on the Arica-Charana section (in Chile) of the Arica-La Paz line. It was agreed during negotiations that failure to keep the line in adequate operating condition will be an event of suspension of loan funds related to the Western System. The Chilean Railways has at times failed to maintain this section properly, but recently provided sufficient locomotives and initiated measures toward proper maintenance of the track. An official agreement is expected to be reached in May 1977 between the concerned parties. During negotiations, ENFE agreed that, if a satisfac- tory arrangement is not made by the time the loan is signed, it will provide the Bank with a supplemental letter stating that it will use its best efforts to reach such an agreement. 5.02 ENFE's Investment Plan is a coordinated program of rehabilitation and modernization designed to enable the railways to perform efficiently and to carry the traffic which has been forecast for the 1977-1981 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 road transport and partly in complete loss of traffic in areas where roads do not exist. 5.03 Since the Investment Plan covers all major track rehabilitation works to be carried out on the Western and Eastern Systems and the individual subprograms of the integrated Investment Plan are closely interrelated, full benefits can be realized only if the whole Investment Plan (1977-1981) is  - 16 - carried out. For this reason, the economic evaluation considers the Plan as a whole, separating the economic returns of freight and passenger investments on the Eastern and Western Systems of the railroad. Two alternatives were taken into account: (a) making no investment in the railway and (b) implementing the Investment Plan. In addition, track rehabilitation works, the benefits of which can be singled out, were analyzed separately for individual lines (paras. 5.07 and 5.11). The timing of the individual subprograms takes account of ENFE's capacity for executing them, as well as the future demand. B. Traffic 5.04 A traffic forecast up to 1981, assuming that the Investment Plan is carried out, was prepared by ENFE and SOFRERAIL and revised by the Bank (Tables 5 and 6). Freight traffic is expected to grow in ton-km at a rate of 3.7% on the Western System and 9.0% on the Eastern System, resulting in an overall growth of 6.0% per year. For passenger traffic, the projected annual growth in pass-km is 3.6% for the West and 10.0% for the East, showing an overall growth of 5.9% per year. The estimated growth rates seem reason- able and are in line with the Bank's projection of GDP growth, which is ex- pected to be in the 5-6% range during the remainder of the 1970's. Annex 12 explains the methodology and assumptions used in the traffic forecast and contains a detailed analysis of future traffic by major commodities. 5.05 In the absence of the Plan, rail traffic is expected to decrease steadily, reaching, in 1981, a level of 87% of projected freight traffic and 44% of projected passenger traffic on the Western System and a level of 84% for freight and 74% for passengers on the Eastern System. It is assumed that, if no investments were made, rail traffic will come to a stop on the Viacha- Charana line of the Western System in 1982 and on the Santa Cruz-Corumba line of the Eastern System in 1994 and that total rail traffic will come to a stop on the Western System in 1988 and on the Eastern System in 1997. C. Economic Benefits of the Plan 5.06 The economic evaluation is based on measuring the costs to the econ- omy in the event that the railroad Investment Plan is not implemented. The main benefits related to the Investment Plan as a whole for freight and passenger traffic are the avoidance of (a) higher railroad operating costs for traffic that would remain on the railroad; (b) higher costs of transporting by road the freight and passenger traffic diverted from railroads; and (c) lost traffic, where no alternate roads exist. Savings in long-run marginal rail costs arising from the Investment Plan are explained in Annex 13 and paragraph 6.10. Costs by road take into account vehicle operating costs without depre- ciation and interest, marginal road maintenance costs and investment in vehicles (Annexes 14, 15 and 16). No allowance is made for an increase in highway construction cost if the Plan is not implemented since, in general, no congestion exists on the routes competing with the rail. For traffic that is lost to the economy, the loss was measured by the average revenue per unit-km; this assumption is conservative since the value added to freight transported, mainly imports and exports, is higher than the revenues accrued to the mode of transport (Annex 17).  - 17 - 5.07 Track rehabilitation benefits consist of savings derived from (a) a reduction in track maintenance costs; (b) an increase in the useful life of sleepers and rail; (c) better equipment utilization by avoiding abnormally low speeds; and (d) avoidance of traffic diversions and loss of traffic. 5.08 Benefits not quantified in the evaluation are reduced accident costs, reduced inventory costs for goods in transit, reduced breakage and spoilage of cargo, and savings from elimination of railway closures due to bad weather. The evaluation performed is therefore conservative. D. Economic Returns for Freight and Passenger Traffic 5.09 The economic evaluation considers the economic costs of the Invest- ment Plan, including physical contingencies and the replacement costs during the period 1977 to 2001. An analysis of the Investment Plan, item by item, was made to distribute the costs between the Western and Eastern Systems and between freight and passenger traffic. Items for which direct allocations were not possible were assigned on the basis of operational and traffic charac- teristics. The evaluation assumes no further growth in rail traffic beyond 1981. 5.10 The economic returns were computed from the costs and quantified benefits described above over the project period. The economic returns for freight investments on the Western System are 17%, whereas passenger invest- ments could not be economically justified and have been eliminated from the plan. On the Eastern System, the economic returns are 19% for freight and 44% for passenger investments. The overall Investment Plan has an economic return of 18%. The Investment Plan is thus clearly justified. Sensitivity tests applied to the economic evaluation consider a 15% increase in costs and 25% decrease in benefits. The economic rate of return ranges between 15% and 28% for the cost increase hypothesis and between 12% and 14% for the benefit decrease hypothesis, thus indicating that the feasibility of the total Invest- ment Plan would remain within acceptable limits (Table 7). E. Individual Track Rehabilitation Works 5.11 The details of the evaluation of the proposed track rehabilitation works are given in Table 8; rates of return range from over 100% to 19%. Sensitivity tests applied to the economic evaluation consider a 15% increase in costs, a 25% decrease in benefits, and a two-year delay in the completion of the 1977-1978 project. The economic rate of return ranges between 63% and 17% for the cost increase hypothesis, between 44% and 14% for the benefit decrease hypothesis, and between 23% and 13% for the delay hypothesis, thus indicating that the feasibility of the total track rehabilitation program would remain within acceptable limits. 5.12 The present and future role of the railways in Bolivia is discussed in Annex 18. Particular attention is given to the probable effect of highway truck competition. Road transport is not likely to be competitive in the foreseeable future for moving bulky items in the east. In the west, the railways will remain the basic mode for the transport of foreign trade pro- vided that ENFE reaches satisfactory arrangements with the Chilean railways for adequate maintenance of the Arica-Charana section.  - 18 - 6. FINANCES A. Financial Position 6.01 From the time of its creation in 1964 until 1973, ENFE's financial position had been deteriorating continuously, with the exception of 1969; in that year, traffic and revenues increased by 17% over the previous year while expenses rose by only 5%, thus improving the working ratio from 109 in 1968 to 93. After 1969, however, the working ratio again started deteriorating and reached 122 in 1973, mainly due to high increases in staff costs, failure to raise tariffs, inadequate financial support from the Government, and the poor state of ENFE's plant. In order to save ENFE from a financial crisis, the Government increased its financial assistance considerably in 1973 and 1974 to enable ENFE to meet its operating deficits, outstanding debt service charges and the local investment requirements. Then, in January 1975, the Government granted ENFE substantial increases in freight rates with the objective of making it financially self-sufficient. As a result, the year 1975 was a turning point in the financial history of ENFE; for the first time, it generated net operating revenues of $b 67.0 million as against the net operating loss of $b 93.1 million in 1974. The working and operating ratios were 79 and 88, better than the appraisal targets of 85 and 96. However, in 1976, due to a traffic decline in the first six months caused by the miner strike and the Government imposition of 25% deposits upon Bolivian importers prior to imports, the financial results were not as good as in 1975, but were still close to the appraisal targets (the preliminary working and operating ratios are 79 and 96 against the targets of 85 and 95). Income and expense figures for 1973 through 1976 are given in Table 9. 6.02 In accordance with Section 5.04 of Loan Agreement 1121-BO, ENFE carried out a study of the revaluation of its fixed assets and incorporated the results in the 1976 balance sheet. However, the prices used for this revaluation were 1973 and early 1974 market prices, which are still quite low when compared to current prices. Therefore, in order to reflect realistic up-to-date values, a revision of revaluation is required, particularly for motive power and rolling stock. Further, ENFE should continue to revalue the fixed assets every two to three years depending on the magnitude of inflation and furnish to the Bank a full report prepared by the auditors on eachi such revaluation. ENFE agreed, during negotiations, to (a) revalue its fixed assets in terms of 1977 prices and to incorporate the results in the 1977 balance sheets; (b) thereafter revalue such assets at least once every three years; and (c) furnish to the Bank a full report on such revaluation prepared by the auditors. 6.03 The balance sheets for 1973 to 1976 are shown in Table 10. The liquid cash position has improved since 1973, and outstanding current obliga- tions have been considerably reduced. Most of the accounts receivable and payable that were outstanding for a long period have been cleared. The obsolete and slow-moving materials have now been segregated from regular stock and are being disposed of. Although the diesel locomotives and rolling stock have been increasing, the inventories are not expected to increase much further because of improved productivity in the recently rehabilitated work- shops and better warehousing procedures.  - 19 - 6.04 The cash flow statement, Table 11, indicates that the Government contributions had increased gradually, up to 1974, to $b 127.0 million. This, combined with the increased revenues, improved ENFE's working cash position since 1975. Consequently, the Government f nancial contributions to ENFE were reduced considerably and were mostly limited to equity contributions for the local component of the investment requirements. B. Tariff and Costs 6.05 ENFE increased freight rates, first by 68% on all commodities and then by another 52% on food commodities, effective January 1975. The tariff structure has been revised, and the rates are applied uniformly across the system, based on various class categories. Shippers are encouraged to use the maximum car load possible. The minimum limits of these rates are set to recover long run marginal costs. In spite of freight rates being higher than trucking rates on some routes, the high volume, low value, and long haul com- modities are usually transported by trains. Low gasoline prices are helping truckers to maintain low rates on some routes and to capture some of the rail- ways' internal traffic. However, shippers are willing to pay higher prices for reasons of security, reliability of service and safeguards against pilfer- age. With the present freight rates, ENFE is covering not only the long run marginal cost but also all of the fixed costs and the internal and external debt service charges. The average freight revenue per ton-km was $b 1.035 in 1975, while the average marginal cost was $b 0.411. A detailed discussion on freight costing is given in Annex 19. 6.06 The Commercial Department of ENFE has currently introduced an incentive program for all shippers, offering a tariff discount of 14% on car- load traffic of any commodity hauled up to 50,000 tons and 30% over 50,000 tons annually. There are many medium size shippers in the export and import business in Bolivia, and it is necessary to attract them also by giving higher discounts. At the Bank's recommendation, ENFE will, in 1977, intensify its sales promotion activities and contact the medium size shippers to determine if more traffic can be attracted to railways by offering higher discounts. This may result in a lowering of tariffs, but an increase in net revenues to ENFE. 6.07 Passenger fares have not been increased since January 1974 because of keen competition with buses on some routes, particularly between La Paz and Oruro and Cochabamba; bus fares are generally lower than railway fares. How- ever, the current situation indicates that, on the Eastern System, the occu- pancy ratio is high on passenger trains--in some cases 100% or more--because of the almost non-existence of bus service and the shortage of railway equip- ment. Similarly, on the Western System, the present occupancy ratio is between 60% and 80%, and the passengers tend to prefer trains because of reliability, comfort and reduced travel time. In addition, a detailed cost study, conducted by ENFE and consultants SOFRERAIL, indicated that the 1975 passenger revenues on the Western System did not quite cover the long run marginal costs (more details are discussed in Annex 19). The average passenger revenue per pass-km on the Western System was $b 0.24, while the marginal cost was $b 0.25 ($b 0.23 and $b 0.21 on the Eastern System).  - 20 - 6.08 The passenger trains and the rail car (ferrobus) services are pro- vided to poor and middle class people, and, additionally, a third type of service, through autocarriles, is provided to the poorest working class group, which has no alternative services for commuting to work locations. Therefore, only a modest increase in passenger fares to cover the marginal costs and to contribute toward the recovery of fixed costs is fully justified. The Ministers of Transport, Communication and Aviation and of Planning and Coordination, as well as ENFE, agreed, and raised passenger fares by an average of 10% in February 1977. C. Future Prospects 6.09 Based on the traffic forecasts discussed in Chapter 5 and the pro- posed Investment Plan, a forecast of operating revenues and expenses (in con- stant mid-1976 pesos) was prepared for the years 1977 through 1981 (Table 9). Other assumptions and explanatory notes are detailed in Annex 20. Also, it is intended to improve the railways' competitive position with regard to highway transport. 6.10 A summary of projected revenues and expenses is given below: 1977 1978 1979 1980 1981 --(in millions of mid-1976 Pesos)--- Operating Revenues 639 659 685 716 753 Working Expenses 482 485 487 496 512 Depreciation 104 110 115 122 127 Total Expenses 586 595 602 618 639 Net Operating Revenues 53 64 83 98 114 Working Ratio /1 76(78) 74(76) 71(75) 69(74) 68(73) Operating Ratio /1 92(95) 90(94) 88(93) 86(92) 85(91) Return on Net Fixed Assets (%) 1.3 1.3 1.6 1.8 2.1 /1 Figures in brackets are the targets shown in the Program of Action. See paragraph 6.12 for explanation. The above table shows that the total revenues will rise from $b 639 in 1977 to $b 753 in 1981, an increase of 18%, while the operating costs will rise from $b 586 in 1977 to $b 639 in 1981, an increase of 9%, thus improving ENFE's financial condition in real terms. The average freight revenue per ton-km is expected to remain more or less the same between 1977 and 1981 ($b 0.90 in 1977 and $b 0.89 in 1981), but the average freight marginal cost per ton-km is expected to decrease from $b 0.34 to $b 0.28 for the same period--a decrease of 17% in real terms. The cost decreases are mainly due to improved perfor- mance as a result of dieselization of locomotives, rehabilitation of workshops and rolling stock and better cost control by ENFE's management. The details of such cost reductions are discussed in Annex 20.  - 21 - 6.11 The working and operating ratios will continue improving from 76 and 92 in 1977 to 68 and 85 in 1981. The rates of return on net fixed assets (after revaluation) will gradually improve from 1.3% in 1977 to 2.1% in 1981. For a railway enterprise such as ENFE, the above ratios and rates of return are considered satisfactory because they (a) provide the real test of ENFE's performance in transferring the cost of railway service to the users based on sound commercial policies; (b) help to achieve further improvement in the cash flow of ENFE by generating adequate cash to meet most of its financial needs; and (c) decrease the financial burden on the national budget. The present tariff structure is adequate because it helps to further economic development in the country and enables Bolivian exporters to meet the prices in the international markets. Any further increase in the rate of return would necessitate a significant increase in tariffs (which are already high) in real terms; this is not desirable until the National Transport Survey is completed and the transport pricing policies are determined. Also, the low gasoline prices in Bolivia tend to increase intermodal competition, which may have an adverse effect on rail traffic. It would therefore be realistic to expect only the forecast goals incorporated in the working and operating ratios, but these goals should be treated as a minimum requirement. However, these goals are based on the expectation that the improved operating perform- ance of ENFE would reduce the railway operating costs by about 17% (para. 6.10). Should ENFE fail to accomplish such reductions, it should be prepared to increase the tariffs in real terms to meet the financial targets. For instance, if, in 1979, cost reductions achieved are only half the expected target, then ENFE would need to increase freight tariffs by 3% in real terms. It was agreed during negotiations that every action will be taken, including tariff increases, to meet the financial targets specified in the Program of Action (Annex 10). Agreement was also reached that these financial targets will be reviewed once the National Transport Survey is completed and the transport pricing policies are determined. 6.12 The forecast revenues and expenses were also calculated in terms of current pesos to assess the impact of inflation upon the financial position of ENFE and the need to increase tariffs to achieve financial targets. In this forecast, allowances were made for the time lapsed between the cost in- creases due to inflation and the action taken by ENFE to actually implement the adequate tariff increases, i.e., obtaining approval from the Government and issuing public notices. A time lag of four months is considered reason- able. These targets are shown in the Program of Action, Annex 10. During negotiations, therefore, it was agreed that ENFE would promptly propose, and the Government would promptly approve, tariff increases sufficient to offset any increased cost which may arise due to inflation or general wage awards. Prior to any general wage award, ENFE should seek Government approval for adequate tariff increases. Annual review of cost increases would also be made. A sensitivity analysis of the financial projections was carried out with reductions of 5% and 10% in the level of traffic and revenue. A 5% drop would reduce ENFE's earnings by $b 65 million over the project period and by $b 130 million over the plan period; a 10% drop would result in reductions of $b 172 million and $b 345 million respectively. The annual working and operating ratios would deteriorate by about 4% and 8%, and achievement of the agreed financial targets would be delayed by about one year.  - 22 - D. Financing Plan 6.13 A forecast cash flow and financing plan is given in Table 11 and is summarized in the following: 1977-1981 (mid 1976 $b million) Funds Required Investment: Proposed Project 1977-1978 867 30 Other Investments (1121-BO, bilateral purchases, and investments between 1979 to 1981) 1,414 48 Debt Service 604 21 Other 17 1 Total 2,902 100 Funds Available ENFE's Internal Generation of Funds 1,007 35 Proposed Bank Loan 552 19 Government Contribution 190 7 Other Foreign Loans /1 825 28 Bank Loan - 1121-BO 328 11 Total 2,902 100 /1 Financing has already been arranged by ENFE for $b 389.1 million for 1977- 1978 and has to be arranged for $b 436.1 million for 1979-1981. For reasons explained in paragraphs 5.02 and 5.03, the financing plan was prepared to include the plan period of 1977-1981. ENFE is expected to generate funds from its own operation to contribute 35% of the total funds required. The Government contribution is estimated to be only 7% of the total funds needed, while the proposed Bank Loan, other loans from international agencies and the balance of existing Bank Loan 1121-BO represent 58%. The financing of the foreign exchange component of the last three years of the Plan has not been arranged. The Bank will have an opportunity to discuss the matter fur- ther before such financing could be arranged. 6.14 The summary balance sheets of ENFE for 1977-1981 are shown in Table 10. The fixed assets have been adjusted to 1976 market prices. As mentioned in paragraph 6.02, ENFE intends to revise the values of fixed assets in terms of 1977 market prices and to incorporate the results into the 1977 balance sheet.  - 23 - 6.15 The debt/equity ratio changed considerably in 1976 because of revalua- tion of assets (52/48 in 1975, 18/82 in 1976). At the same time, the rate of return on net fixed assets also changed downward. Without revaluation, the rate of return will be 3.6% for 1977 (versus 1.3% with revaluation). The Government financial support to ENFE is estimated to be nil in 1977, to in- crease up to $b 72.0 million in 1980 and is then expected to decline to $b 14 million by 1981. In order to maintain its present sound financial condition, ENFE should be cautious in future borrowings. During negotiations, agreement was reached that ENFE will not incur any debt with a term of over one year without the Bank's agreement unless net cash generated from operations in the year when such debt is incurred is at least 1.5 times maximum debt service requirement. E. Accounts, Budget and Audit (i) Accounts 6.16 With the help of consultants SOFRERAIL, ENFE established a new and comprehensive code of accounts in 1974. The schedule of expenses is well designed for cost accounting purposes. The fixed assets of the Eastern and Western Systems have now been separated, and depreciation is properly charged to each system. ENFE has also attempted to mechanize the accounting procedures, but satisfactory progress has not yet been achieved because of the lack of adequate computer facilities. ENFE is seeking help from the Government for better computer services. The consulting services will be continued during 1978 to ensure satisfactory operation of the accounting system. (ii) Budgets 6.17 In October of each year, ENFE prepares and submits to the Ministry of Finance the financial needs for railway operations and the local cost of investments for the following year. The Government then adjusts these figures, if necessary, and incorporates them into the overall national budget. Because of the substantially improved financial condition of ENFE, the Government is obligated to contribute only a portion of the local component of the investment requirements. However, if ENFE experiences financial difficulties at any time, the Government should be prepared to provide support. During negotiations, agreement was reached that the Government will provide ENFE with addi- tional funds as shall be needed to carry out the project. (iii) Audit 6.18 External audit is carried out by the Audit Section of the Ministry of Finance; the Section has caught up with the backlog of audit reports for 1973 to 1975. The audit procedures and scope of work are satisfactory. Recently, ENFE has been attending to the accounting exceptions of the auditors and has been reducing inaccuracies, mainly in inventory accounting. The standard clause should be repeated in the Loan Document that ENFE submits to the Bank a copy of the auditors' report and its commentary within six months of the close of the fiscal year.  - 24 - 7. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations, agreements on the following were reached with the Government and ENFE: (a) Investments for the construction of the highway between Santa Cruz and Corumba to be made only after an adequate study demonstrating the economic justification has been carried out and the Bank has been given an opportunity to comment on it (para. 2.10); (b) The Bank to be given an opportunity to comment on the selection of consultants and their terms of reference for carrying out studies for extension of the Santa Cruz-Yapacani line (para. 3.11); (c) Prior to any construction of the line beyond Yapacani, the Bank to be afforded an opportunity to review and comment on the economic justification (para. 3.11); (d) Accounts of the operations on the line to Yapacani to be kept separately and ENFE to be reimbursed by the Government for any losses incurred until the line's revenues cover operating costs and debt service charges (para. 3.11); (e) The incremental cost of upgrading the Santa Cruz-Yapacani line to ENFE's minimum operational standards to be studied and, if justified, to be underwritten by the Government (para. 3.11); (f) Investments for the interconnection of the Eastern and Western Systems to be made only after an adequate study demonstrating the economic justification has been done and the Bank has been given the opportunity to comment on it (para. 3.12); (g) Further major revisions of the Investment Plan to be done in consultation with the Bank (para. 4.02); (h) Disbursement for the National Transport Survey to be subject to the Government assigning full-time counterparts during the survey. Agreement was reached that at least five of these counterparts will remain in the Directorate of Planning and Coordination after the completion of the survey, during the implementation phase and for an adequate period of time there- after. The policy recommendations of the survey will be implemented by July 1, 1981 (para. 4.03); (i) Revised Action Program, to be carried out by ENFE with assistance of the consultants (paras. 4.09 and 6.11);  - 25 - (j) Contracts for goods estimated to cost less than the equivalent of US$50,000 but more than US$5,000 could be awarded after solicitation of quotations from at least three suppliers in Bank member countries and Switzerland; the aggregate value of such purchases not to exceed the equivalent of US$500,000 (para. 4.11); (k) Failure to keep the Arica-Charana Section in adequate operating condition to be an event of suspension of loan funds related to the Western System, and ENFE to sign a supplemental letter if satisfactory arrangement is not made with Chilean Railways (para. 5.01); (1) ENFE to carry out a revision in the revaluation of fixed assets in terms of 1977 prices, to incorporate the results in the 1977 balance sheet, to continue revaluing fixed assets every two to three years and to furnish to the Bank a full report prepared by the auditors on each such revaluation (para. 6.02); (m) Financial targets to be reviewed after the National Transport Survey is completed and the transport policies are determined (para. 6.11); (n) ENFE to promptly propose, and the Government to promptly approve, tariff increases sufficient to offset any increased cost which may arise due to inflation or general wage awards (para. 6.12); (o) ENFE not to incur any debt with a term of over one year without the Bank's agreement unless net cash revenue in the year when such debt is incurred is at least 1.5 times the maximum debt service requirement (para. 6.15); and (p) The Government to provide ENFE with additional funds as shall be needed to carry out the project (para. 6.17). 7.02 The proposed project provides a suitable basis for a Bank loan of US$35.0 million equivalent to ENFE. The loan would be for a term of 20 years, including a grace period of four-and-one-half years. April 29, 1977   iRnJTVIA APPRAISAL OFA THMIRD RAILWAY PROJECT Total Freight Movement in Bolivia 1967 1974 Ton-Km % Ton-Km % X Sources 103 Subtotal Total 10 Subtotal Total Data for 1967 based or. the DMOY, ROAD TRANSPORT Study for the Ministerio de Trarns- portes y Comunicaciones. Data ;r Minerals 46 500 4.9 1.5 - _ 1974 came from the following Other Cargo 549 700 58.1 18.1 - _ sources: Total 596 200 63.0 19.6 896 464 65.1 16.3 Min. de Transportes y Total . ~~~~~~~~~~~~~~~~~~~~Cormunicaciones Estimate RAIL TRANSPORT Minerals .84 900 9.0 2.8 45 300 3.3 0.8 Other Cargo 208 700 22.1 6.9 342 700 24.9 6.2 ENFE Total 293 600 31.1 9.7 388 000 28.2 7.0 RIVER TRANSPORT 11 400 1.2 0.4 24 480 1.8 0X5 Min. de Transportes y Comunicaciones Estimate LAKE TPRUNSPORT 31 400 3.3 1.0 31 700 2.3 0.6 6 Min. de Transpcrtes y Communicaciones Estinate AIR TRANSPORT 13 300 1.4 0.4 35 378 2.6 .0.6 _ Subtotal 945 900 100.0 -31.1 1 376 022 100.0 25.0 PIPELINE TRANSPORT Crude Oil 1 923 000 - 63.1 3 747 000 - 68.2 yp Petroleum Products 176 000 - 5.8- 376 000 _ 6.8 PB Total 3 044 900 - 100.0 5 499 022 - 100.0 8verage growth rate 1967/1974, Source: IBRD Mission February 1977  TABLE 2 *1gA or A 701tR015 1 Ln73-1. 1 9 7 3 1 9 7 1 9 7 5 1 7 V 1 70701. v T * O5O.L 1 I r,o w E TOTAL .1. O l2 C8 Lbut" (W,) 2.101 1.222 3.323 2.101 1.222 3 S 23 2.087 1, 182 3,269 20Y 18 3261 Pas..ngs,l carried (units) 869.397 279.771 1.149.168 681.496 276.225 957.721 831.959 37.080 1.7i39,039 907 384 310 371 1,245 955 p555885509 tk (000) 182.584 87.371 269.955 149.405 98.852 248.257 189.575 120.039 309,614 240. 75s 25 993 S966 751 A-Mg.c Jotretey (km) 210 321 235 219 358 259 228 379 269 620 395 2 94 Flltared(Net 'on-) ilereib 1