Senegal - Third Railway Project

Report No. 1691a-SE Appraisal of FILE Copy Third Railway Project Senegal January 23, 1978 Western Africa Projects Department Ports, Railways, & Aviation Division 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 authorization.  CURRENCY EQUIVALENTS Currency Unit: CFA Francs (CFAF) US$1.00 - CFAF 245 CFAF 1 million - US$4,081 Fiscal Year July 1 - June 30 System of Weights and Measures: Metric 1 meter (m) 2 3.28 feet (ft) I square meter (I ) 10.8 square feet (sq ft) 1 cubic meter (m ) 35.3 cubic feet (cu ft) 1 kilometer (km) 2 0.620 mile (mi) 1 square kilometer (km ) 0.386 square mile (sq mi) 1 hectare (ha) 2.47 acres (ac) 1 metric ton (t) 2,204 pounds (lb) Abbreviations and Acronyms BOM - Bureau d'Organisation et Methodes CFM - Regie du Chemin de Fer du Mali CFS - Regie du Chemin de Fer du Senegal CVCEP - Commission de Verification des Comptes et de Controle des Etablissements Publics DOT - Directorate of Transport DPW - Directorate of Public Works DSP - Directorate of Studies and Programming MOF - Ministry of Finance MOP - Ministry of Planning MPWUT - Ministry of Public Works, Urbanism and Transport OFERMAT - Office Central des Chemins de Fer d'Outre Mer Service Technique et du Materiel ONCAD - Office National de Cooperation et d'Assistance au Developpement  FOR OFFICIAL USE ONLY SENEGAL APPRAISAL OF THIRD RAILWAY PROJECT Table of Contents Page No. SUIMMARY ... ................................................. i-v 1. INTRODUCTION ........................ 1 2. BACKGROUND ................................. 2 A. Economic Setting ................................. 2 B. The Transport System ...... ....................... 3 C. The Role and Prospects of the Railway ............ 4 D. Transport Planning and Coordination .............. 5 3. THE RAILWAY ........................................... 6 A. Organization and Management .................. .... 6 1. Structure ....... .................... . 6 2. Governmental Supervision and Control ........ 7 3. Organization ...... ................... . 7 4. Management .. ................................ 7 5. The Railway and the Trade Union ............. 8 6. Staff and Wages ...... ................. . 8 7. Budgeting, Accounting and Auditing .......... 9 8. Training .................................... 10 B. Railway Property ...... ........................... 10 C. Operations ........ ................................ 11 D. Traffic ........ .................................. 12 4. THE PROJECT ........................................... 14 A. Description and Cost Estimates ................... 14 B. Financing of the Project ......................... 18 C. Execution, Procurement and Disbursement .... ...... 18 This appraisal report was prepared by Messrs. P. Levy (financial analyst), H. Levy (economist), D. Stockmann (railway engineer) and G. Morra (training officer). 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 authorization.  -2- Page No. 5. ECONOMIC EVALUATION .......... ......................... 19 A. General ......................................... 19 B. Track Renewal Program ............................. 20 C. Dakar-Bel Air Marshalling Yard ... ................. 20 D. Spare Parts ....................................... 20 E. Track Maintenance Equipment ...... ................. 21 F. Sensitivity Analysis . ............................. 21 G. Project Risks ..................................... 22 6. FINANCIAL EVALUATION ................................... 23 A. Background ........................................ 23 B. Past Finances ..................................... 24 C. Future Situation .................................. 26 D. Risk Analysis ..................................... 30 7. AGREEMENTS REACHED AND RECOMMENDATION ..... ............. 31 CABLES 1. Fleet of Motive Power 2. Fleet of Rolling Stock 3. Summary of Operating Statistics 4. Motive Power Performance and Availability 5. Freight and Passenger Traffic - Actual 1971/72-1976/77; Forecast 1977/78-1981/82 6. Target and Conservative Freight Forecasts 1977/78-1981/82 7. Investment Plan 1978/79-1980/81 8. Schedule of Disbursement 9. Financing Plan 10. Income Account: 1965/66-1969/70 11. Income Account: 1970/71-1973/74 12. Balance Sheet: 1965-74 13. Income Account: 1974/75-1981/82 (best traffic assumption) 14. Income Account: 1977/78-1981/82 (target traffic assumption) 15. Income Account: 1977/78-1981/82 (conservative traffic assumption) 16. Balance Sheet: 1974/75-1981/82 17. Source and Application of Funds: 1974/75-1981/82 18. Fixed Assets and Depreciation 19. Price Indices  -3- ANNEXES 1. Terms of Reference for Consulting Services 2. Organization Chart 3. Description of Railway Property 4. Plan of Action 5. Transport Capacity 6. Freight Traffic Forecast 7. Passenger Traffic Forecast 8. Training Program 9. Investment Plan 10. Economic Evaluation MAPS IBRD 13063 - West Africa IBRD 13064 - Senegal   SENEGAL APPRAISAL OF A THIRD RAILWAY PROJECT SUMMARY i. In early 1975 the Government of Senegal and the Regie des Chemins de Fer du Senegal (CFS) asked the Bank to help finance an investment program designed to continue the physical rehabilitation of CFS infrastructure and equipment begun under two previous projects. However, in subsequent reviews of the railway's operational and financial circumstances in concert with the Bank, it became clear to both the Government and CFS that priority should be accorded to improving operating and traffic performance rather than to expand- ing physical plant and capacity. This led to the preparation of CFS's 1978/ 79-1980/81 investment plan which constitutes the project appraised in this report. The plan's main objective is to improve CFS organization, management, traffic and operating performance, and finances. Its principal components are, therefore, staff training and consulting services. Although these ele- ments of the Bank loan account for only about 20% of the total cost of the project, they supplement and support a very substantial technical assistance input by the French aid agency (Office Central des Chemins de Fer d'Outre Mer Service Technique et du Materiel--OFERMAT). In close cooperation with CFS and the Bank, OFERMAT has made major changes in the organizational structure of its technical assistance services including the temporary assumption of executive posts by expatriate technicians. The physical elements of the project are also designed to improve performance rather than increase capacity which is potentially sufficient to handle foreseeable traffic. They comprise track renewal work, the provision of track maintenance equipment, expansion of the Dakar-Bel Air marshalling yard, spare parts for motive power and rolling stock, and workshop equipment. The estimated cost of the proposed project is CFAF 3.5 billion (US$14.3 million equivalent), net of taxes, with physical and price contingencies of about CFAF 600 million (US$2.4 million equivalent); the foreign component is estimated at CFAF 2.3 billion (US$9.2 million equivalent). ii. While the two previous railway projects (together with parallel projects in Mali) have prevented a collapse of operations on the Mali/Senegal railway system, implementation has been disappointing. The first project was completed six years behind schedule due to: (a) problems with bidding proce- dures, (b) inexperience of CFS staff in mechanized track laying, and (c) fre- quent shortages in local funds. The scope of the second project had to be substantially changed to provide funds for urgently needed spare parts. The railway's operating performance has been equally disappointing. This project is proposed in spite of these shortcomings because the Governments of Senegal and Mali have demonstrated a sincere desire to remedy the underlying deficien- cies and have taken drastic remedial action to restore the efficiency of the railways. The Senegalese Government, in particular, has taken strong action to strengthen the railway's management and overcome trade union obstruc- tions. The components of the proposed project, with bilateral technical assistance, are specifically designed to support the Government's measures. However, even under the most optimistic assumptions, it will be some time before signs of recovery are evident.  - ii - iii. Senegal's transport system consists of: (a) a 1,034-km railway network; (b) a 13,300-km road network, 2,600 km of which are paved; (c) a deep-water port at Dakar and three secondary seaports; and (d) an inter- national airport at Dakar and a network of small airports. iv. In addition to its importance for international traffic (it is the cheapest transport mode for about 70% of Mali's imports and exports), the railway carries almost all the country's phosphate production and a part of the groundnut crop. International Mali traffic is regulated by a traffic and customs agreement between Governments and a convention between the railways. Following Bank advice, the two Governments agreed in March 1977 to suspend cumbersome customs procedures (introduced in January 1976) until a revised agreement on simplified procedures can be drafted in consultation with the Bank. v. Responsibility for transport planning and coordination is shared by the ministries of Public Works, Urbanism and Transport (MPWUT), and Planning (MOP). MPWUT executes the Government's transport policy, administers the national h:ighway system and regulates the various transport modes. MOP has overall responsibility for preparing the four-year investment plans. Market prices determine the distribution of general cargo traffic between road and rail. The allocations of the more significant volumes of phos- phates and groundnuts are determined by an agreement between CFS and the phosphate companies in the case of the former and from decisions of a Gov- ernment committee in the case of the latter. The proposed project includes a study aimed at optimizing the allocation of groundnut traffic between rail and road. vi. CFS was established in 1960 after the Dakar-Niger railway was partitioned between Mali and Senegal. It operates the Senegalese section of the international line from Dakar to Bamako and a few branch lines. It is a state-owned, public corporation under the authority of the Minister of MPW@UT and administered by a Board whose chairman is nominated by the Prime Minister. To reduce political interference affecting staff morale, bring an end to persistent obstructive actions by the trade unions and attract addi- tional traffic, the Government is considering setting up a mixed state and private company, with participation of major users of railway services, which could eventually merge with the Mali Railway. Such a possibility is under active discussion by the highest authorities of both countries. The proposed project includes consulting services to analyze the advantages and disadvan- tages of a merger and to assist in the implementation of such changes as may be agreed upon by the governments of Senegal and Mali and the Bank. vii. Under CFS's present organization, its management has been unable to coordinate the different departments' activities, improve discipline and respond to users' needs. Consequently CFS is being reorganized under a plan prepared by the Government's Bureau d'Organisation et Methodes. The reorgani- zation provides for five administrative and four technical departments each headed by a Director, who will report to the General Manager through an Assistant General Manager. The reorganization and the appointment of a new  - iii - General Manager and of a highly qualified and experienced expatriate railway engineer approved by the Bank for the position of assistant general manager were conditions of appraisal. These conditions were fully met. To make sure that future assistant general managers meet the required qualifications and experience, the Government and CFS have agreed that their appointment be made contingent upon Bank approval. All positions of director have been filled, some by French technical assistants until qualified nationals can be trained under the project. To minimize the obstructive action of the union, the Government has recently taken strong action against uncooperative union leaders. A new union committee has been selected which works in close coop- eration with the Government and the railway. Staff morale will also improve as a result of a recent decree providing for productivity linked bonuses for staff. viii. CFS has about 1,600 permanent and about 1,700 auxiliary staff. There is almost a complete lack of professional staff. Training has been generally poor because of the lack of training facilities and a shortage of instructors. The training component included in the project is designed to remedy this situation. ix. CFS budgeting and auditing procedures are adequate but the time- liness of audits needs to be improved. Its accounting will be satisfactory once a new computerized, analytic accounting system becomes operational later this year. x. Some of CFS infrastructure is in bad condition, including about 370 km of track, the Dakar-Bel Air marshalling yard (which has also reached capacity) and switches. In addition, locomotives are not properly maintained due to inefficient workshop organization and activity and lack of spare parts. All these weaknesses are reflected in CFS poor operating performance and are compounded by an inept operational management, poor staff training and ineffi- cient operations at the Dakar port railway terminal. The transport capacity attainable through expected progress in operating performance and use of the infrastructure improved under the project has been assessed and made the operational target of the project. A detailed plan of action agreed with the railway provides the means to achieve this target. xi. Under the best estimate traffic forecast (that most likely to be achieved), CFS freight traffic should reach 2.29 million tons and 4.53 mil- lion ton-km in 1981/82. This would represent an annual growth of 4.5% in both tonnage and in ton-km over the 1976/77 level. Main products transported are Mali international traffic, phosphates and groundnuts. The project will include measures to increase international and groundnut traffic, and to expand capacity to carry anticipated increases in phosphate production. Since operational efficiency is the key to traffic development, freight traffic could surpass the above best estimate and reach the level set as an attainable maximum (the target traffic) within the time-frame of this project, should CFS achieve the operational target. Domestic passenger traffic, however, is expected to continue declining following the trend of recent years.  - iv - xii. CFS will be responsible for the execution of the project, which will require extensive Bank supervision. Track renewal and rehabilitation will be performed by CFS own staff. Civil works of other project components will be awarded on the basis of bidding advertised locally. Track maintenance equipment and material will be purchased by international competitive bidding and international shopping. Spare parts for rolling stock will be purchased under international bidding except for critical parts which will be ordered from original suppliers. Consultants will be selected in agreement with and on terms and conditions acceptable to the Bank. xiii. The economic evaluation of the proposed investments yields a 22% rate of return for the whole project, and all individual components are economically jiustified even under low traffic and cost overrun assumptions utilized for sensitivity analysis purposes. Benefits from the project will include reduced maintenance and operating costs of track and rolling stock, increased utilization of existing locomotives and increased capacity for phosphate trafEic. xiv. Despite large subsidies from the Government, CFS financial posi- tion has deteriorated to an unacceptable level. This has been caused by inadequate traffic performance and tariff-setting policies over the past 10 years. The Government has agreed to strengthen CFS finances by waiving about CFAF 2.7 billion that CFS owes the Government. However, even with pro- jected traffic and tariff increases, CFS financial position could not be fully restored before 1985 under the best estimate traffic forecast or by 1982 if the attainable target level of traffic were achieved. The Government and CFS have agreed undler the proposed project to include the revaluation of fixed assets in an inventory to be made by OFERMAT, to show the revalued value of fixed assets in a supplementary statement, and to charge the accounts of the year immediate]y following completion of the inventory with depreciation provisions reflecting the replacement value of the fixed assets. They also agreed to (a) make additional revaluations as may be appropriate in consulta- tion with the Bank; (b) achieve working ratios not exceeding 87% in 1977/78, 83% in 1978/79, 81% in 1979/80, 79% in 1980/81 and 78% in 1981/82; (c) provide CES with funds necessary to restore its working capital; and (d) discuss draft arLnual budgets with the Bank prior to submitting them to the CFS board for its approval. xv. Despite the numerous measures already taken and planned, the main financial risk under the proposed project remains a possible shortfall in CES cash generation resulting from (a) CFS possible failure to achieve fore- cast traffic (b) working costs exceeding forecasts and (c) higher than fore- cast project costs. Therefore a sensitivity analysis of financial forecasts was conducted under the following assumptions: (a) traffic levels following the conservative forecast (i.e. a level below the best traffic forecast); (b) 10% increase in working expenditures; and (c) 10% increase in the cost of the project. The analysis showed that simultaneous materialization of all three assumptions would result in a cumulated CFAF 7.8 billion (US$32 million) shortage over 1977/78-1981/82. As tariff increases assumed in the main  analysis are already high and close to what traffic can bear, it has been agreed that these shortages, should they materialize, would be overcome by a combination of additional Government subsidies and borrowing, in agreement with the Bank. xvi. The proposed project, with conditions as stipulated, is suitable for a Bank Loan of US$11 million to CFS with the guarantee of the Government of Senegal.   SENEGAL APPRAISAL OF A THIRD RAILWAY PROJECT 1. INTRODUCTION 1.01 In early 1975 the Government of Senegal and the Regie des Chemins de Fer du Senegal (CFS) asked the Bank to help finance a project designed to continue the rehabilitation of CFS infrastructure and equipment begun under two previous projects. Because of the extremely poor operational performance of CFS, which was adversely affecting its finances, the Bank initiated discussions with the Government which led to the conclusion that the project should be directed primarily toward improving CFS management and operations, and consequently its finances. A project was conceived, composed of technical assistance, training and consulting services, complemented by the minimum required physical component. To ensure that the Government was fully in agreement with the Bank's views, formal appraisal was delayed until the Government took action on the following measures, essential to achieving these objectives: (i) preparing a reorganization plan, (ii) reinforcing the authority of the general manager, and (iii) appointing a new general manager and a new assistant general manager. These measures were carried out by early 1977 with the full cooperation of OFERMAT, and the appraisal mission took place in February 1977. The staff training and consulting service components account for about 20% of total project cost. The physical component comprises track renewal work, the provision of track maintenance equipment and material, workshop equipment, expansion of the Dakar-Bel Air marshalling yard, and spare parts for motive power and rolling stock. The cost of the proposed project is estimated at CFAF 3.5 billion (US$14.3 million equivalent) net of taxes and including physical and price contingencies, with a local component of about CFAF 1.2 billion (US$5 million equivalent). The proposed US$11.0 million Bank Loan would finance 77% of total cost, including 100% of foreign cost and 35% of local cost. The railway would provide the remaining 65% of local cost. 1.02 This would be the third railway project in Senegal since the country became independent in 1960. The first (Credit 96-SE, US$9.0 million, 1966) was fully disbursed in February 1974. Disbursements under the second (Credit 314-SE, US$3.2 million/Loan 835-SE, US$6.4 million, 1972) should be completed by the end of 1978. Prior to independence, what was to become the Senegal Railway benefited in part from a US$7.5 million Bank loan (Loan 100-FR) to the Office Central des Chemins de Fer, a French Government agency managing railways in francophone Africa. 1.03 Physical implementation of the two previous railway projects has been disappointing. The first project was completed six years behind schedule due to (a) the Government's and railway's lack of understanding of Association bidding procedure, (b) the railway staff's lack of experience in mechanized track laying, and (c) frequent shortages of local funds. Since spare parts for idle locomotives and track maintenance equipment were urgently needed,  - 2 - tlhe track renewal component of the second project was reduced from 175 km to 28 km and the funds so released were diverted to spare-part purchases. B,ecause of delays in freight car modernization and rehabilitation of the Thies workshop, the project is expected to be completed by end-1978 about three yeiars behind schedule. The railway's operating performance during implementation of the two previous projects has been even more dis appointing than implementation of their physical components. 1.04 CFS was once part of the Dakar-Niger Railway (DN) which operated under a single management until 1960 when DN was dissolved. Its assets were split between CFS, 62%, and the Regie du Chemin de Fer du Mali (CFM), 38%. Since the two railways basically operate one system, parallel Bank Group Operations have been made to each to produce coordinated results. Mali was granted Credit 95-MLI (US$9.1 million, 1967) parallel to Credit 96-SE and Credit 384-MLI (US$6.7 million, 1973) parallel to Loan 835-SE/Credit 314-SE. A US$10.5 million Credit to Mali (Credit 713-MLI, May 1977) has been onlent to the Mali Railway. The Mali Railway's performance in implementing the previous projects and meeting operational and financial objectives has been slightly better than that of CFS. 1.05 Despite the inadequate performance of both railways, the previous projects helpecl prevent the total collapse of operations on the Dakar-Bamako line. The Governments of both countries have demonstrated over the past two years a sincere desire to remedy the underlying deficiencies by taking drastic remedial action to restore the efficiency of the railways. In particular, the Senegalese Government has taken strong action designed to strengthen the railway's management and overcome obstructive actions of the trade unions. FuLrther Bank group assistance to the two railways, including the proposed project, would provide for continuation of the physical rehabilitation of the line and, more importantly, for technical assistance to supplement measures already being taken by the governments and railways to improve their operating efficiency and financial performance. Progress, however, will be slow. 1.06 This appraisal report is based on information supplied by the Government and CFS and the findings of an appraisal mission in February 1977 comprising Messrs. P. Levy (financial analyst), H. Levy (economist), G. Morra (training officer) and D. Stockmann (railway engineer). 2. BACKGROUND A. Economic Setting 2 2.01 Senegal covers an area of about 196,000 km , most of which is located in Sudano-Sahelian Africa. Its population is about 5.0 million and grows at an annual rate of 2.7%. About 70% of the labor force is engaged in rural activities, mainly agriculture. 2.02 Per capita GNP in 1976 was about US$390. In the interior, the main- stay of the economy is cultivating millet and raising cattle for domestic consumption and cultivating groundnuts for export. Dakar, a city of about  - 3 - 1 million inhabitants, is the economic and political capital. Some minor industries, mainly groundnut oil plants and cotton processing plants exist in other cities. The main mining activity is phosphate rock, which is extracted from a site about 100 km east of Dakar. 2.03 Economic development was slow between independence (1960) and 1974, first because of the loss of Dakar's political and economic influence as the capital of French West Africa, later because of unfavorable weather condi- tions, with several serious droughts between 1967 and 1973. Rainfall was satisfactory in 1974 and 1975, and world market prices for groundnuts and phosphates, the country's two main export commodities, reached record high levels in those years. World prices for these commodities declined sharply in 1976, but have increased somewhat in 1977 and are expected to continue rising, although at a slower pace. B. The Transport System 2.04 The transport system consists of: (i) a 1,034 km railway, (ii) a 13,300 km road network, including 2,600 paved and 3,300 km all-weather roads, (iii) one deep-water, protected port at Dakar (the only one with such character- istics in the Sahel zone) and three secondary seaports; and (iv) an inter- national airport at Dakar, which is an important stop-over on transatlantic air routes, and a network of small airports. 2.05 Senegal's roads are concentrated in the western regions: popula- tion and economic activity are centered in the Cap Vert peninsula and in the groundnut basin, the latter covering the zones around Diourbel, Thies and south and east of Sine Saloum. Road links with the east are limited to a few low-standard connections. One of them, running parallel to the railway line, is partially paved and will be fully paved from Dakar to Tambacoumba in 1978. Many of the paved roads were built before independence; most are more than 15 years old and underdesigned for present traffic loads. A major reason for road deterioration is truck overloading above the allowed maximum single-axle weight of 10 tons, particularly by trucks carrying phosphates from Taiba and Thies to Dakar. Weighing scales purchased under the Second Project (Credit 366-SE, US$8 million, 1973) are being installed to enforce axle-load limits. The Third Highway Project (Loan 1222-SE, US$15 million, 1976) focuses on pavement strengthening and highway maintenance. 2.06 Senegal's port and waterway system consists of major international port facilities at Dakar, supplemented by secondary ports at St. Louis, Kaolack and Ziguinchor. Cargo through Dakar doubled in the last ten years and now totals about 6 million tons per annum. Major traffic includes petro- leum (for the national refinery and for the port's bunkering services), international traffic for Mali and Mauritania, and phosphates. The port's financial performance has improved in recent years, due primarily to addi- tional traffic temporarily generated by the closure of the Suez Canal and the implementation of tariff increases. The Senegal, Saloum and Casamance Rivers are navigable during most of the year, but traffic volumes are modest and declining due to substitution by road transport.  C. The Role and Prospects of the Railway 2.07 The railway system consists of a main line from Dakar to the Mali border, a major branch connecting Dakar with St. Louis, and other minor branches. The railway is the only land connection with Dakar for most of eastern Senegal and Mali, and provides Mali with its cheapest route to the sea for its foreign trade. The Senegal-Mali railway route is cheaper than the alternative Ivory Coast routes for about 70% of Mali international traffic 1/; for Malian imports, the cost differential between the Dakar and the Abidjan routes ranges from CFAF 3,600/ton for cement to CFAF 10,150/ton for petroleum products. However, the Senegal and Mali railways have not carried the volume of international traffic that the cost differential would suggest as adequate. From 1972 to 1975 Mali international traffic grew from 204,000 to 252,000 tons via the Dakar route, but from 84,000 tons to 240,000 tons via the Abidjan routes. 2.08 The main obstacles to international traffic on the Dakar-Bamako line are operationaL difficulties on the Senegal Railway line, slow main-line oaperations in Mtali, and insufficient coordination between the two railways. In the paralle:L railway project in Mali, the Government and CFM agreed to take institutional and technical measures to enable the railway to regain traffic of bulk commodities such as petroleum, fertilizers and cement which have been diverted to Abidjan at an unnecessarily high cost. Thle present project will inicrease Senegal Railway's efficiency allowing it to carry out its part in this effort. 2. 09 The CFS carries most of the country's phosphate production, about 1.5 million toil/year (but only over about 100 km between the two phosphate miLnes and Dakar port), and a part of the groundnut traffic. While the short- haul phosphate and groundnut traffic is vital to the railway's financial v:iability, the transport of Mali international traffic is its main justifi- cation. The recent deterioration of CFS efficiency and quality of service has caused substantial diversion of Mali traffic to Ivory Coast routes and a decrease in groundnut and other domestic traffic. This has weakened the railway's financial performance, forcing the Government to subsidize the ra,ilway. If eff'iciency improves, the railway should continue to be the most economic alterrLative. The institution-building, managerial, training and physical components of the proposed project are designed to allow CFS opera- tions to become more efficient. Failure by CFS to meet these expectations would seriously jeopardize its role in international traffic, worsen its financial performance and threaten its existence. 2.10 International traffic through Senegal is carried by an international pcol of wagons allocated by CFS and CFM and is regulated by an agreement be- twreen the Governments of Senegal and Mali providing for tax-free movement of goods between the countries. In early 1976, to cut dcwn on smuggling, the two gcvernments created a complicated system of customs procedure that resulted in long delays in loading operations and border formalities, hampering inter- national traffic. In March 1977, the two governments agreed with the Bank 1/ See appraisal report of Mali Third Railway Project (Report No. 1355-MLI, May 2, 1977).  - 5 - to suspend the new system. Under Credit 713-MLI the Mali Government committed itself to consult with the Bank before putting a revised system in operation; the Government of Senegal has made a similar commitment under the proposed project. To protect the line from possible political interference, any substantial interruption in international traffic between Senegal and Mali for any reason other than technical or other reasons beyond the Governments' control will be considered a default under the proposed Loan. D. Transport Planning and Coordination 2.11 The responsibility for transport planning and coordination is shared by several ministries and organizations, including the Ministry of Planning (MOP), the Ministry of Public Works, Urbanism and Transport (MPWUT), and the Ministry of Finance (MOF). MOP has overall responsibility for preparing the four-year development plans. MPWUT executes Government transport policy mainly through two directorates: the Directorate of Public Works (DPW), which administers the national highway system, and the Directorate of Transport (DOT), which regulates and controls the transport modes. The DOT director chairs the Transport Coordination Committee (TCC), comprised of representa- tives of the various modes and their main users. A third directorate, Studies and Programming (DSP), was created under the Third Highway Project and is re- sponsible for transport investment. The DSP, now fully staffed, should help substantially in improving the quality of transport planning. MOF determines the amounts to be invested in each mode, establishes the structure and level of taxes affecting transport and keeps a tight financial control over the rail- way and the port; a priori financial control of the railway was suppressed in 1975, giving CFS greater management freedom. 2.12 Most domestic traffic is allocated to CFS through special arrange- ments. Phosphate traffic is subject to long-term agreements between the railway and the two mines at Taiba and Thies. Rail tariffs for Taiba phos- phate are substantially lower than road tariffs, and the company uses the railway as much as possible. Road and rail tariffs are very similar for the smaller-volume, shorter-haul Thies phosphate traffic. The railway is studying a lower tariff for Thies phosphate to compete with trucks. Groundnut traffic is allocated by the TCC; transport tariffs are set by the Office National de Cooperation et d'Assistance au Developpement (ONCAD) and are nearly the same for road and rail. Due to CFS's inadequate operating perfor- mance and the lack of cooperation between ONCAD and CFS, the latter has not carried as much groundnut traffic as it could despite efforts made during the First and the Second Railway Projects to increase the railway's share through mandatory allocations set by TCC. As a result, despite lower rail costs for medium and long hauls, much of this traffic is carried by trucks. ONCAD's reorganization, being considered by the Government, would likely help remedy this situation. A study of groundnut transport from production centers to the oil processing plants and of rationalizing the allocation between rail and road is included under the proposed project (para. 4.07).  3. THE RAILWAY A. Organization and Management 1. Structure 3.01 CFS is a state-owned, public corporation. It is regulated by a presidential decree of February 1976 replacing the original October 1967 decree. The main objective of the new decree was to expand the railway's managerial and financial autonomy by freeing it from cumbersome a priori financial control of the Centre des Etablissements Publics, a department of the Ministry of Finance (paras 3.12 - 3.14). CFS is under the authority of the Minister of Public Works, Urbanism and Transport. It is administered by a board of 23 imembers, including a chairman, nominated by the Prime Minister, eighteen representatives of ministries or governmental agencies, two represen- tatives of the trucking industry and three representatives of the railway union. The Board is responsible for administration except financial planning and commitments which require specific approval of MFWUT and MOF. Except for major investment decisions and financial planning, the Board can delegate its powers to a Management Council, headed by the chairman of the Board and comprised of representatives of MPWUT and MOF and members selected by the Board. The Management Council reports its decisions to the Board. 3.02 Under the present set-up the railway is highly sensitive to outside pressure, main:Ly through its union. In addition, employees consider themselves as civil servants and have little motivation to improve their performance. A new corporate and ownership structure would have the advantage of not only aittracting additional traffic but also lessening this outside pressure. Thie Government and the Bank have, therefore, discussed changing the railway's administrative structure and even its ownership. Different options have been considered; for the present the most practical would be setting up a mixed company owned -jointly by the Government and public and private customers, e.g. O0NCAD, the phosphate and possibly iron ore companies, and international shipping companies like SOCOPAO-SENEGAL. This railway company could ultimately merge with the CFM to simplify organization, administration and operations of the two railway systems. The highest authorities of Senegal and Mali are in favor of this mlerger. The Government and the Bank have agreed that the proposed projec:t would include consultants' services to review the advantages and disadvantages of such a change. Draft terms of reference for these services are giLven in Annex 1. After agreement with the Bank on the final objectives and terms of reference of the study, the Senegalese Government and railway will have to agree with the Malian Government and railway on items affecting both countries. Both governments and railways would have to agree in consultation with the Bank on how to implement consultants' recommendations. This procedure has been agreed by all parties.  2. Governmental Supervision and Control 3.03 A "Commissaire du Gouvernement" appointed by decree is in charge of supervising and controlling the railway on behalf of the Government with regard to (a) implementation of legal and statutory regulations, (b) recruit- ment and termination of staff, (c) implementation of financial and accounting procedures and planning, and (d) control of recurrent and capital expenses (which is carried out a posteriori). The Commissaire, under changes to occur as a result of the Para-Public Sector Technical Assistance Project, recently approved by the Board, will be part of the staff of the Financial Control of the Presidency (FCP) which will be in charge of the strategic control of the entire para-public sector. The Association will provide FCP with technical assistance under the above project. 3. Organization 3.04 CFS is being reorganized under a plan prepared by the "Bureau d'Organisation et Methodes" (BOM) at the Government's request and in consul- tation with the Bank. BOM, an official Government agency attached to the office of the President, provides training and consulting services. The new organization shown in Annex 2, consists of five administrative depart- ments (General Administration, Economic and Financial Planning, Accounting, General Inspection and Marketing) and four technical departments (Transport, Fixed Installations, Rolling Stock, Stores). Each department is under a director assisted by a deputy director. Administrative departments report to the general manager through the secretary general and technical depart- ments, through the assistant general manager. 4. Management 3.05 The general manager is appointed by the President. He appoints managerial and supervisory staff and is responsible for the operational and financial management of the railway. He may approve contracts up to CFAF 10 million (US$40,000 equivalent). Since promulgation of the February 1976 law and of two July 1976 decrees reinforcing staff discipline, the general manager enjoys adequate managerial freedom. This freedom and the availability of a fast and reliable flow of information once the reorganization is in effect are expected to allow him to perform his duties more efficiently. The assistant General Manager is appointed by the Minister of PWUT after Board approval. While the general manager deals with policy making and planning, the assistant general manager is in charge of day to day operations. The latter function requires a strong technical background with considerable experience. To ensure that future assistant general managers meet the required qualifications and experience, the Government and CFS have agreed that their appointment will be contingent upon Bank approval. 3.06 In June 1976 the Government and the Bank agreed that appraisal would be contingent on implementation of a set of measures aimed at reorganizing and strengthening CFS management. In compliance with this agreement the Govern- ment (a) had BOM complete the new reorganization plan; (b) issued two decrees  reinforcing the authority of the general manager; (c) appointed a new general manager; and (d) appointed an expatriate technical assistant as assistant gen- eral manager. Since appraisal, the railway has filled all department director and deputy director positions (by foreign specialists in cases where qualified nationals are not available) and has appointed a new head of the railway's training division. The Bank was consulted and approved the selection of this staff. 3.07 French technical aid will continue to finance technical assistance to CFS through OFERMAT. The efficiency of the OFERMIAT team has been substan- tially increased by (a) reorganizing the team, (b) putting most of the 28 French technical assistants back into executive positions, and (c) replacing unqualified technical assistants by qualified ones carefully selected by 01ERMAT in consultation with the Bank. In addition OFERMAT is providing aLmost cost-free short-term experts to assist CFS with specific managerial, technical, financial, operational and training problems. 3.08 Gradual replacement of technical assistants with Senegalese requires that the Government assign qualified professionals to the railway who will receive adequate vocational training. The Government and CFS produced a plan for recruitment: of qualified nationals. This plan, which lists measures aimed at: attracting and retaining candidates and includes a timetable for its imple- mentation, has been reviewed by the Bank and found satisfactory. The Govern- ment and CFS will review and update the plan annually in consultation with the Bank. 5. The Railway and the Trade Union 3.09 The uLncooperative attitude of the railway union has long been a major obstacle to staff motivation and productivity. After the union initiated an illegal strike in June 1977, obstructive union leaders were dismissed. A new union committee selected in October 1977 opened a construc- tive dialogue with the Government and the railway. This dialogue should be facilitated by the implementation of a recent decree allowing for productiv- ity-linked bonuses for the public corporations staff. The Government, under the proposed project, has committed itself and the railway to (a) cooperate closely with the Union for achieving smooth implementation of the ongoing railway reorganization and improving staff productivity, and (b) pay produc- tivity bonuses to staff. 6. Staff and Wages 3.10 The following table shows the number of staff, productivity and staff costs at appraisal of the two previous and the proposed projects:  -9- 1st project 2nd project 3rd project 1964/65 1970/71 1976/77 Technical assistance 63 44 28 Permanent staff 1,892 1,907 1,580 Auxiliary staff 2,261 1,481 1,721 Total 4,216 3,432 3,327 Traffic units: total (million) 1/ 569 567 549 per employee (units) 135,000 165,000 165,000 Staff costs: total (CFAF million) 1,626 1,812 2,554 per employee (CFAF) 386,000 528,000 768,000 % of staff expenses to total working expenses 67 76 71 1/ Ton-km + pass-km. Although CFS reduced its staff by 18% between 1964/65 and 1970/71 and by another 3% between 1970/71 and 1976/77, it was unable to meet its commitment under the plan of action of the Second Railway Project, which stipulated that the proportion of staff costs to total working expenses be reduced to 64% by 1976/77. In fact, this proportion is expected to reach 71% in 1976/77 because inflation and railway union pressure have pushed up wages. The Government and CFS have agreed under the proposed project to reduce staff costs to 64% of total working expenses by 1981/82, a level considered attainable because of the expected effect of cooperation between the union and the railway and because of the expected increase in productivity as a result of the project. 7. Budgeting, Accounting and Auditing 3.11 Under CFS present organization, the accounting department prepares annual capital and recurrent budgets which are reviewed by the management controller prior to being submitted to the Commissaire de Gouvernement and the Board. Under the new organization, preparation of budgets will be the responsibility of the Budgeting Control Division. To become effective the budget must be endorsed by the Board and approved by the Ministers of Trans- port and Finance. 3.12 CFS was granted financial autonomy under Law 74-58 of November 26, 1974, effective July 1, 1975. In addition to releasing the CFS from a priori control of the Centre des Etablissements Publics, the law provides that the CFS will keep its own accounts instead of having them done by the Central Accounting Agency (ACC) of the Ministry of Finance. As of July 1, 1977 CFS own accounting and computing departments are fully in charge of the accounts, using a new accounting plan. 3.13 This plan, based on one prepared by the consulting firm SOFRERAIL under a Bank-financed study included in the Second Railway Project, includes general and analytic and cost accounting. The CFS accounting department is headed by an Agent Comptable Principal who reports to the general manager  - 10 - through the secretary general. His deputy is one of the two French technical assistants who prepared the plan. The accounting and computing staffs are generally competent. 3.14 By law, the Government's Commission de Verification des Comptes et de Controle des Etablissements Publics (CVCEP) is responsible for the audit of CFS accounts. However, the Commission is under-staffed and consequently unable to comply with the Bank's annual auditing requirements. Agreement has been reached with the Government and CFS on the scope, form and timing of future audit reports to be submitted no later than six months after the end of each fiscal year. After a comprehensive audit of the CFS accounts from 1970/71 through 1974/75, CVCEP concluded that it urgently needs a comprehen- sive updated inventory of its fixed assets. This inventory will be carried out shortly by OFERMAT. 8. Training 3.15 Little progress has been made by CFS in implementing training pro- grams. Despite the recruitment of a training adviser from OFERMAT in 1975, training activities are still at a standstill, partly because of the adviser's inexperience in this field and partly because of lack of training facilities and equipment, poor work relations between the Training Division (TD) and the operating departments, and a shortage of instructors. Notwithstanding the general emphasLs on training in their terms of reference, the training actually carried out by the technical assistants in the operating departments has been minimal due to concentration on their other duties or their lack of training experience. The training component included in the proposed project will imnprove the quality of CFS staff by establishing training facilities, providing adlditional expatriate instructors and training equipment, adding new programs for skilled laborers and low-level supervisors, and providing training on-the- job and abroad for high-level managerial and mid-level supervisory staff. A highly qualified French instructor financed under the French technical aid program was appointed head of the Training Division in October 1977. He is in charge of refining and coordinating CFS extensive training programs. B. Railway Property 3.16 The meter-gauge CFS is 1,034 km long with only 70 km of double track between Dakar and Thies. On the international line to Mali, 271 km of track was renewed uncder the two previous projects; the remaining 373 km of track is in poor condition. The capacity of the Dakar-Bel Air marshalling yard is not sufficient to handle the forecast phosphate traffic. Signaling and telecom- munication equipment are adequate for present traffic except in the Dakar area. The completely dieselized motive power fleet consists of 33 line locomotives, 28 shunters and 9 railcars. Five old line locomotives will be scrapped during 1977/78, and three new line locomotives were supplied in 1977 under CCCE financing. CFS has allocated 28 passenger coaches to international traffic and 98 coaches including 28 trailers to national traffic. The wagon fleet consists of 887 wagons for commercial traffic of which 202 are allocated to international traffic; 716 are owned by CFS and 171 by private companies.  - 11 - About 65% of CFS fleet is more than 25 years old; 75 new wagons ordered undesr CCCE financing modernized the fleet in late 1977. The workshop at Thies is adequately equipped. Tables 1 and 2 and Annex 3 give details of railway track, equipment, motive power and rolling stock. C. Operations 3.17 Inefficient management, lack of staff motivation and discipline, and low training standards are the main reasons behind the railway's poor traffic performance. Table 3 summarizes available traffic and operating statistics from 1970/71 to 1975/76, showing that CFS under-utilizes its motive power and rolling stock because of poor availability and inadequate operation planning. The statistics for 1976/77 continue to reflect a de- teriorating trend, because the changes in organization and personnel were not made until late in the 1976/77 fiscal year (April 1977). 3.18 To improve the quality and efficiency of CFS operations, CFS and the Bank have agreed upon a plan of action with specified targets (Annex 4). The plan will permit CFS to optimize availability and utilization of railway equipment in order to carry target traffic (para. 3.21). Achievement of this traffic would require a low 2% per year improvement in CFS operational performance during the next four years. This will necessitate improvements in fleet availability and utilization, which in turn will require immediate and substantial improvement in workshop efficiency and traffic patterns. 3.19 An assessment of CFS attainable capacity for freight transport, using expected improvements, is presented in Annex 5. Based on the assessed capacity, on origin-destination and seasonal variations of traffic, and on shippers' service needs, CFS prepared transportation plans acceptable to the Bank to increase its traffic of main commodities. These plans estimate the required number of trains, types of locomotives and number of wagons. Existing timetables have been revised accordingly. CFS has appointed supervisors responsible for optimizing the transport of each of the major commodities. 3.20 CFS has examined the pattern of its passenger traffic. In accord- ance with forecasts (para. 3.29) it has allocated the limited fleet of pas- senger cars and railcars to the most profitable long-distance passenger traffic and has restructured passenger timetables accordingly. 3.21 The availability of main-line locomotives (Table 4) decreased steadily from a high of 61% in 1970/71 to a low of nearly 49% in 1974/75. The low average availability stems mainly from the poor performance achieved by five, 22-year old locomotives, which will be scrapped during 1977/78, and the four ten-year-old CC2400 locomotives, which had in 1975/76 an availability of only 44%. CFS will increase its efforts to improve the availability of motive power and rolling stock. Spare parts and three new locomotives, financed under the Second Railway Project and French aid respectively, and additional spare parts provided for under the proposed project will contribute to increasing locomotive availability. In line with the plan of action  - 12 - CFS prepared schedules for preventive maintenance for all locomotives and railcars and appointed a supervisor responsible for achieving the target availability. The target availability of the locomotive fleet is 66% by 1978/79. 3.22 Low mileage per available locomotive (Table 4) is mainly explained by inadequate traffic planning. In addition, a high number of derailments, speed restrictions on sections with light and old rails, slow marshalling yard operations and locomotive failures hinder train operations. The renewal of 60 km of track, the installation of new switches, the improvement of the Dakar- Bel Air marshalling yard, the training program and the operational study for the entire Dakar - Bamako line included in the Third Mali Railway Project will contribute to improving utilization. CFS has set up a plan to optimize locomotive and railcar utilization and a priority list for replacement of locomotives an,d for cancellation of trains in case of locomotive failures. To suipervise wagon turn-around times more effectively, CFS has improved its information system to warn stations, loading points and the head office of unduly long waits of wagons. 3.23 As outlined in the plan of action, CFS has agreed to prepare through- out the project period monthly reports to be sent to the Bank on freight and passenger traffic performance, execution of transport plans, and availability and utilization of equipment, detailing problems encountered and remedial actions taken. D. Traffic Freight Traffic 3.24 As a result of the railway's inability to use equipment efficiently, demand has exceeded traffic for the last ten years. The traffic CFS was unable to carry has been diverted to competitors offering comparable costs and services. However, the railway has also lost access to transport of even larger volumes of commodities for which it enjoys a major cost advantage. The main freight items carried by CFS are: (a) international traffic, 250,000-300,000 tons annually, consisting of (i) Malian imports: petroleum products (about 35,000 tons/year), salt (25,000 tons/year) and foodstuffs (60,000 tons/year); (ii) Malian exports: groundnut products (about 30,000 tons/year) and cotton and cotton products (about 10,000 tons/year); and (iii) ot:her Mali exports and imports; (b) phosphates (about 1.4 million tons/year); (c) groundnuts (about 100,000 tons/year). 3.25 Table 5 shows traffic from 1971/72 to 1976/77 and the best estimate forecast for the period 1976/77 to 1981/82; details are given in Annex 6. The best estimate is used in the main analysis of the economic and financial evaluation. Alternative forecasts, one "conservative" based on the his- torical growth of traffic and constrained by limited railway capacity and a "target" forecast representing the maximum traffic that could be carried out by CFS under optimum railway capacity and marketing performance, are presented in Table 6. Under the best estimate forecast, total freight traffic should  - 13 - reach 2.29 million tons and 453 million ton-km in 1981/82, representing an annual growth rate of 4.5% in tonnage and ton-km based on the 1976-77 level. The annual growth rate in tons (similar rates in ton-km) during the period 1976/77-1981/82 by main traffic category, would be: 5.2% in international traffic, 4.8% in phosphates and 5% in groundnuts; general cargo will decline. Most of the expected growth in international traffic will consist of petroleum products, which are expected to climb from 44,000 tons in 1975/76 to 75,000 tons in 1981/82. This increase will result from three measures taken in the Mali Third Railway Project: provision of 18 new tank wagons; finalization of long-term agreements between the oil companies, CFS and CFM for the transport of petroleum products; and the recent agreement between the Sene- galese Government and the oil companies to load petroleum products for Mali at a single depot instead of three. During the last four months of 1976/77, the international oil traffic to Mali reached an average of 5,000 tons per month. Mali exports also increased slightly during the fiscal year 1976/77. 3.26 Phosphate traffic increased steadily until 1975/76 when production fell sharply due to the slump in the price for phosphate. Recovery of the phosphate market started in 1977, and Taiba production is expected to reach 1.6-1.7 million tons by 1980. The Lam-Lam mine at Thies is also expected to increase production. Since 1972 the railway has not been able to carry all phosphate produced due to poor locomotive availability, delays in terminal operations because of a lack of shunting equipment, and occasional bottlenecks at the Dakar-Bel Air marshalling yard. As a result, during the period 1972-76, 1.04 million tons were diverted to road transport at substantially higher costs. CFS should be able to carry all future phosphate traffic because of (a) the increased capacity from the new locomotives received in 1977 and spare parts provided under the proposed project, (b) the proposed improvements to the Dakar-Bel Air marshalling yard, and (c) the recent finalization of an agreement regulating CFS and Taiba's responsibilities in terminal operations for phosphate traffic. 3.27 Rail groundnut traffic has decreased from about 250,000 tons in the mid-sixties to about 100,000 tons, despite Government commitments to allocate 400,000 tons/year to CFS under the First Railway Project and 250,000 tons by 1975/76 under the Second Railway Project. The traffic shortfall was due to poor coordination between CFS and ONCAD, and poor utilization of motive power and rolling stock. In view of the past experience, only modest increases in this traffic are foreseen in the best estimate forecast. A comprehensive study of the costs and problems of evacuating the groundnut crop is included under the proposed project (para. 4.07). Given CFS future transport capacity and cost advantages, the study is likely to recommend an increase in CFS share of this traffic. 3.28 The railway enjoys a distinct cost and tariff advantage over competitors for phosphates and most Mali international traffic. However, there is only limited scope for increasing tariffs, because excessive tariff increases could: a) diminish the competitiveness of Senegalese phosphates  - 14 - since world market prices have not yet fully recovered to pre-slump levels, and b) reduce or eliminate CFS competitive position for international traffic where the tariff differential with the Ivory Coast routes is small (para. 6.09). Since the tariffs for groundnuts are nearly the same for rail and road, raising tariffs would result in increased competition from trucks. Passenger Traffic 3.29 Rail passenger traffic reached 3.8 million passengers (295 million pass-krn) in 1966/67, constituting 25% of the total operating revenues. Traf- fic decreased steadily in the last 10 years, and in 1975/76 it reached 1.8 million passengers (158 million pass-km), representing about 20% of revenues. The main drop took place in short-distance traffic with origin or destination in Dakar. In the section Dakar-Thies, passenger volume dropped by more than 50% from 1971/72 to 1974/75. The main reason for the decline in passenger traffic is the increase in highway competition, which offers more frequent service and greater speed. In the sections near the Mali border where there are no roads, rail passenger traffic has remained relatively stable. The passenger forecast (Table 5 and Annex 7) foresees a gradual decrease from 1.7 million passengers in 1976/77 to 1.3 million passengers in 1981/82. Interna- tional passenger traffic, having grown at a good pace in the last years, is expected to continue this trend and to increase at a 5.5% average annual rate between 1975 and 1981. 4. THE PROJECT A. Description and Cost Estimates 4.01 CFS and the Bank have agreed on a 1978/79 - 1980/81 investment plan. T'ie proposed project covers this plan which includes the following: (a) Tracic renewal - CFAF 1,077 million (US$4.40 million); (b) Traclc maintenance equipment and material- CFAF 405 million (US$L.65 million); (c) Marshalling yard and telecommunications improvements in Dakar area - CFAF 254 million (US$1.04 million); (d) Spare parts for motive power and rolling stock and workshop equipment - CFAF 608 million (US$2.48 million); (e) Training - CFAF 417 million (US$1.70 million); (f) Consulting services - CFAF 133 million (US$0.54 million); and (g) Contingencies - CFAF 601 million (US$2.45 million).  - 15 - The estimated total cost of the project is CFAF 3.45 billion (US$14.26 million equivalent) net of taxes and duties, with a foreign exchange component of CFAF 2.26 billion (US$9.23 million) (65%). Additional details are given in Table 7 and Annex 9. As in the two previous projects, the Government has agreed that CFS will be exempted from taxes and duties levied on imported goods financed under the project. 4.02 Material for track renewal on part of the international line to the Mali border (644 km) was financed under the two previous railway projects. Track was renewed from Dakar up to kilometer 271. Due to cost overruns the laying of an additional 102 km was deleted from the Second Project although rails had been delivered. Most of these rails will be used in the proposed project to renew 60 km of track and the rest for the rehabilitation and the extension of the Dakar-Bel Air marshalling yard and for annual track renewal. The project also includes equipment required for this track renewal. A condition of disbursement of Bank funds for this component will be the rail- way's improving track renewed (but poorly laid) under the Second Railway Project to official CFS track-maintenance standards. 4.03 During the past four years, worn-out switches and inadequate track maintenance have caused numerous derailments. The project provides financing for 20 switches, gang cars and other track maintenance equipment. 4.04 Operations in the Dakar area are hampered by limited capacity and poor maintenance of the main Dakar-Bel Air marshalling yard, which handles vital phosphate and groundnut traffic. Furthermore, operations are often interrupted by derailments caused by worn-out switches and slowed by inade- quate telecommunication facilities. The proposed project includes an addi- tional track at the marshalling yard, track rehabilitation, telecommunication equipment and eight switches. 4.05 The availability of motive power and rolling stock has decreased because of a lack of spare parts and because of inefficient workshop opera- tions. To increase the availability of the existing fleet, the project pro- vides funds for the purchase of spare parts. CFS has prepared detailed lists of spare parts for all locomotives and railcars and has appointed a supervisor responsible for updating the lists and checking on their timely delivery. To improve maintenance of rolling stock at the Thies workshops, urgently needed tools and equipment will also be purchased under the proposed project. 4.06 The three-year training program to be financed under the proposed project will supplement and support a very substantial technical assistance input financed by French technical aid and implemented by an OFERMAT team of 28 experts. It aims at improving the standard of railway operations, mainte- nance and safety by training and re-training about 300 laborers and selected middle and high level managers. Since the training program was formulated before the new training advisor was hired, the program may be amended in consultation with the Bank as implementation progresses. The proposed program  - 16 - (Annex 8) includes: (a) establishment of a new training center at Thies, (b) training equipment and materials, (c) training of ten to twelve Senegalese technicians in Thies and abroad to become instructors; (d) recruitment of training advisers and expatriate instructors, and (e) the training of selected middle and high-level management personnel in Thies and abroad. For (e), six to eight new engineers will be recruited who, after at least one year's ser- vice with CFS, will receive intensive training to enable them to take over from French technical assistants in high management positions. In addition, the Government and CFS have agreed to make available experienced personnel for training as instructors and to insure that a sufficient number of person- nel is released from individual departments for training. 4.07 The primary objective of the proposed project is to improve CFS efficiency in carrying Mali international and national bulk traffic. The main factors impeding efficiency have been weakness in top management and an inadequate organizational structure. The project provides funds for consult- ing services for: (a) a study to determine the optimal structure and owner- ship of CFS (about 50 man-months); and (b) a contribution toward a Government- sponsored study of groundnut transport to determine the least-cost transport mode and its effect on railway traffic with recommendations for improving terminal operations and the distribution system. Draft terms of reference for the consulting services, including a timetable for implementation, are given in Annex 1. The Government and CFS have agreed to provide the Bank with a copy of the groundnut study, to inform the Bank of those recommendations it has approved, and to implement those recommendations affecting railway traffic and operations in consultation with the Bank. They have further agreed to implement the recommendations of the organization study, in agreement with the Government of Mali and the Mali Railway and in consultation with the Bank. The timing for implementing the recommendations of both studies will be agreed upon with the :Bank. 4.08 Cost estimates for track renewal civil works, track maintenance material and equipment, and switches are based on prices received from CFS and suppliers. Cost for locomotive spare parts and telecommunication equip- mient was estimated by CFS on recent quotations and updated to 1977 prices. Cost calculations for consultant services were based on a yearly average of US$100,000 per man-year, based on recent costs for similar services in the rtegion. Physical contingencies have been provided at 10% of local cost of track renewal works. Price contingencies have been provided at 9% of civil works and 7.5% of equipment for 1977-79, and 8% and 7% respectively for 1980 and 1981. The overall average price contingency is 15%. Detailed cost esti- mates are given in Table 7 and summarized below:  - 17 - % of Foreign Proposed Local Foreign Total Local Foreign Total Exchange Loan -----CFAF Million---- -----US$ Million ----- (US$ Million) Track renewal 60 km 702 375 1,077 2.87 1.53 4.40 35 2.538 Track maintenance equipment and - 405 405 - 1.65 1.65 100 1.653 material Improvements in Dakar area 100 154 254 0.41 0.63 1.04 61 0.771 Spare parts for motive power and rolling stock and workshop equipment - 608 608 - 2.48 2.48 100 2.483 Training 102 315 417 0.41 1.29 1.70 76 1.431 Consulting services - 133 133 - 0.54 0.54 100 0.543 TOTAL 904 1,990 2,894 3.69 8.12 11.81 69 9.419 Contingencies Physical /a 80 - 80 0.33 - 0.33 0 0.111 Prices 247 274 521 1.01 1.11 2.12 52 1.470 GRAND TOTAL 1,231 2,264 3,495 5.03 9.23 14.26 65 11.000 /a 10% on local track works.  - 18 - B. Financing of the Project 4.09 The project will be financed by CFS and the Bank. The financing plan is given in Table 9. Under this plan the Bank will finance 100% of foreign costs and 35% of local costs. CFS will finance 65% of local costs. The Government has agreed that, in case of any shortfall in funds, iit will provide the amounts necessary or secure alternative financing to assure full implementation of the project. C,. Execution:, Procurement and Disbursement 4.10 Trackc renewal work on the international line and track work at the Dakar-Bel Air rnarshalling yard will be carried out by force account, since CFS possesses the necessary equipment and because the work has to be done under traffic conditions. Civil works contracts for construction of a shop at the marshalling yard and for a training center at Thies are too small to at:tract foreign firms; thus they will be awarded by competitive bidding in accordance with the local procedures acceptable to the Bank. The same proce- dures will be followed for the purchase of trucks and workshop equipment, and material for the training center. Small items of track tools and workshop machinery costing less than US$10,000 individually will be procured through competitive bidding in accordance with local procedures and by international and local shopping as appropriate. Critical spare parts for motive power and rolling stock will be purchased by obtaining quotations from established manufacturers aLnd by direct negotiations with orginal suppliers. All other equipment and goods covered under the Loan will be procured following interna- tional competitive bidding procedures under Bank guidelines. It is estimated that out of the Loan amount, approximately US$4.3 million will be covered by ICB procedures. Detailed procurement procedures item by item are given in Annex 9, Table 1. The consultants and instructors, providing technical assistance and training courses respectively, will be selected in agreement with and on terms and conditions acceptable to the Bank. 4.11 Disbursement of the Bank contribution to the study on groundnut transport, to be undertaken by SONED, the state-owned consulting firm, will be ma,de in accordance with an agreement between the railway and SONED acceptable to the Bank. 4.12 The proceeds of the Loan will be disbursed as follows: (a) Track renewal (60 km) 100% of foreign cost and 35% of local cost (b) Track maintenance equipment and material 100% of foreign cost (c) Improvements in Dakar area 100% of foreign and 35% of local cost  - 19 - (d) Spare parts for motive power and rolling stock and workshop equipment 100% of foreign cost (e) Training 100% of foreign cost and 35% of local cost (f) Contribution to groundnut 75% of total expenditures study (g) Consulting services 100% of foreign cost The estimated annual rate of disbursement for the total amount of the invest- ment plan and the estimated quarterly rate of disbursement of the Bank loan are given in Table 8, page 2. Disbursements from the loan account will be fully documented except for force account expenditures, which will be made on progress statements certified by the technical director of CFS. The project is expected to be implemented according to the schedule given in Annex 9, Table 2. 5. ECONOMIC EVALUATION A. General 5.01 The railway's performance in the past years has been poor, and traffic has stagnated despite available demand. The railway has the basic in- frastructure and rolling stock to meet present and expected traffic but both need to be rehabilitated. The task of rehabilitation is the main objective of the project's physical investments. These investments will prevent a drop in operating efficiency and capacity, thereby avoiding corresponding increases in operating costs. Only one component of the proposed project, the improve- ment of Dakar-Bel Air marshalling yard, is designed to increase capacity. This is solely for phosphates, for which a steady growth in production is foreseen. A parallel railway project in Mali (Credit 713-MLI) provides financing for rehabilitating and expanding the Mali Railway's capacity. 5.02 Despite the railway's inefficiency, it is still the cheapest transport mode for Mali international traffic and Senegalese phosphate and groundnut traffic carried over longer distances. However, the railway faces increasing competition from road transport for groudnuts and from the Ivory Coast routes for international traffic; increased diversion of this latter traffic may threaten the viability of the Dakar-Bamako line. To improve CFS efficiency to successfully meet competition, the project includes a substantial technical assistance and training component in addition to physical investments. 5.03 All main physical components of the proposed project have been evaluated separately, and a single return has also been determined for the  - 20 - whole project., A sensitivity analysis to test the change in main parameters on the rate of return has been undertaken for all project components. Details of the economic analysis are presented in Annex 10. B. Track Renewal Program 5.04 Under the proposed project 60 km of old rails will be renewed with aLvailable heavy rails. On the total 368-km section equipped with old rails, CFS needs to re-lay some 8 km of track yearly with used rails where broken rails require immediate replacement. CFS is running out of used rails for t.his purpose aLnd those which will be obtained from the section to be renewed will be used in the emergency re-laying program. 5.05 Because of the deteriorated condition of the track laid with light rails, the number of derailments is increasing, and will continue to grow even more quickly if the track is not renewed. The main benefit of the track renewal investment is the avoidance of the economic costs of an increasing number of derailments; an additional benefit is a reduction in labor required for track maintenance. On the basis of these two benefits, the economic rate of return for this investment is 13%, which is acceptable. At the pace of 30 km/year, track renewal of the whole light-rail section could be completed by CFS force account in about 10 years. The rate of return for the track renewal investment would be substantially higher than estimated if the risks of traf- fic stoppages or line closures which could occur in case of postponement of the works were taken into account. C. Dakar-Bel Air Marshalling Yard 5.06 The capacity of the marshalling yard (about 1.5 million tons/year) is not sufficient to handle forecast phosphate traffic; already it is becoming increasingly difficult for CFS to handle all phosphate traffic, particularly during the groundnut season, when the yard is congested. Under the proposed project, one more track will be built bringing yard capacity for phosphates up to 2.8 million tons/year. Due to a combination of low locomotive availability and capacity constraints at the marshalling yard, there has been a diversion of phosphates to road every year since 1972, with a high of 311,000 tons in 1974. Diversion of phosphates to road can only be made at a substantial iacrease in transport costs; in the case of Taiba phosphate, the difference in economic costs between road and rail is estimated at CFAF 683/ton. In addition, h,savy phosphates trucks are generally overloaded and cause serious damages to roads. On the basis of transport cost savings from avoided diversion to road transport and under the prudent assumption that phosphate production would only last until 1985, the proposed investment yields a high economic return of 39%. D. Spare Parts 5.07 The 'Lack of spare parts has resulted in a low level of locomotive availability, and this has been a major reason preventing CFS from carrying available traff-ic demand. The proposed investment is intended to help remedy  - 21 - this situation. The economic evaluation of the purchase of spare parts is divided into two parts: first, the rate of return of the investment is cal-- culated with respect to a do-nothing situation; second, a cost comparison is made between the proposed investment and an alternative investment in new locomotives to determine whether the purchase of spare parts is the least-cost solution to increasing CFS carrying capacity. In the rate of return analysis, it is assumed that without the spare parts there would be a drop in locomotive availability, reducing CFS transport capacity and causing traffic to divert to other modes at higher economic costs. The analysis quantifies only the increase in availability of locomotives carrying phosphates and international traffic, the two major traffic categories, and therefore benefits from the investment are somewhat underestimated. Considering the cost differential between rail and the competing modes, the analysis assumes that in the do-nothing case priority would be given to phosphates over international traffic. The economic rate of return, based on the avoided costs of traffic diversion, would be 57%. The return is over 100% if it were assumed that CFS would carry all available Mali traffic, and that lack of motive power would result in diversion of phosphates rather than international traffic. 5.08 The alternative of purchasing spare parts or investing in new locomotives can be weighed by comparing net present investment and operating costs under each of these two alternatives. The assessment of investments in new locomotives is based on horsepower required to equal the increased availability of existing locomotives allowed by the spare parts. The analysis shows that the savings generated by purchasing spare parts instead of new locomotives, at a 12% discount rate, are equivalent to over CFAF 200 million in 1977 prices. The purchase of spare parts is, therefore, the best investment alternative. E. Track Maintenance Equipment 5.09 This component consists of 20 switches, 8 gang-cars and other minor track maintenance items. Worn-out switches, which are about 60 years old and cause derailments at crossings and stations, will be replaced. The gang-cars will replace equipment which is about 15 years old and can no longer render adequate service. Each of CFS eight maintenance districts will receive a new gang-car. Without new gang-cars it would be impossible to mobilize maintenance staff and equipment, track maintenance would be severely hampered, regular maintenance could not be carried out and rails would quickly deteriorate. Evaluating the benefits of the proposed investment in track maintenance in terms of (a) cost savings from derailments avoided by the new switches and (b) increase in the service life of rails, the rate of return for this component is 26%, which is satisfactory. F. Sensitivity Analysis 5.10 All the above components of the project have been separately sub- jected to sensitivity analysis under the following assumptions: (a) freight traffic. increase according to the conservative projection instead of the best estimate; (b) investment costs 10% higher than estimated; (c) the simul- taneous occurrence of (a) and (b). The results of the sensitivity analysis are satisfactory, as shown below:  - 22 - Rates of Return (%) Conser- Conservative Best vative Higher estimate estimate estimate invest. traffic and higher traffic traffic cost invest. cost Track renewal 13% 12% 12% 11% Dakar-Bel Air marshalling yard 39% 18% 35% 16% Spare parts 57% 57% 49% 49% Track maintenance equipment 26% 24% 24% 23% All the project's components are economically justified. The return for the whole project is 22%, including the costs of training and consulting services. With the combination of the two sensitivity assumptions, lower traffic and higher investment costs, the return would drop to 17%, which is satisfac- tory. G. Project Risks 5.11 Physical implementation of the project is relatively straightforward; the traffic and operating targets on which the project's return is calculated, have been set conservatively following the experience of the earlier projects. Failure to proceed with the project would result in a major deterioration of the track, cause diversion of international traffic and phosphates to more expensive alternatives, and interrupt a major management and training program already set in motion during project preparation. Therefore, the risks of not proceeding with the project appear greater than the risks of difficulties in physical and institutional implementation and of a shortfall in operating performance. 5.12 The main risk in the physical implementation of the proposed project is the possible shortage of local funds. This has hampered execution of the two previous projects. As this project is based on very conservative traffic assumptions, it is likely that the railway will achieve cash revenues above those forecast. However, if these revenues are not forthcoming, the Govern- ment has agreed to cover any shortages in funds. 5.13 Therie is a risk that the new railway organization and its staffing will not bring about the desired operational improvements. To mitigate this risk, the Bank approved the new organization and the selection of the staff. Tlne Bank will follow the performance of the organization and staff through close supervision of the project, which will provide the opportunity to generate additional changes as required.  - 23 - 6. FINANCIAL EVALUATION A. Background 6.01 CFS low productivity and resulting poor traffic performance and late implementation of necessary tariff increases have led to a gradual deterioration of its financial situation. This has obliged the Government to provide CFS with large subsidies over the past years to keep it solvent. The object of this financial analysis is to examine the extent to which an improvement in CFS's operating performance, which is the primary objective of the proposed project, will allow it to meet its financial commitments. The analysis shows'that even if CFS were to achieve the target traffic and pro- ductivity levels, it would still need substantial Government assistance (to compensate for an anticipated shortfall in funds) to cover its debt service and its share in the cost of the project during its implementation and would not reach financial equilibrium until 1982. 6.02 Although CFS new accounting procedures, which include cost account- ing, are not yet operational, available information shows that under June 1977 tariffs: (a) the revenues from most national traffic, namely phosphate and groundnuts, cover full operating costs of the service provided and generate a profit; (b) international traffic revenues cover variable costs and make some contribution to fixed costs; and (c) passenger revenues fall far short of covering even variable costs. Passenger traffic is responsible for most of CFS net operating losses. Imple- mentation of the agreed plan for rationalizing passenger services will reduce this loss significantly. A large increase in passenger tariffs is not practic- able because passenger services are utilized by the poorest classes of Senegal's and Mali's population, and freight tariffs are constrained by competition (para. 3.28). Therefore the only practical approach to improvement involves a substantial increase in operational efficiency coupled with an increase in freight traffic leading to lower unit operating costs. Successful implemen- tation of the plan of action, an important part of the proposed project, will help CFS to meet this indispensable objective. However progress will be slow because CFS operations and consequently its traffic performance can only be improved gradually. Dependence on Government subsidies for several more years is unavoidable. 6.03 The financial tables (10 to 18) have been prepared in current CFA francs under inflation assumptions shown in Table 19 in order to assess  - 24 - realistically CFS liquidity position during implementation of the proposed project. Table 13, showing the breakdown of operating revenue and working expenses under the best estimate traffic assumption, is in both constant and current CFA francs. All proposed targets are based on current prices. B. Past ancd Present Finances 6.04 Tables 10 to 12 show CFS income statements and balance sheets from 1965/66 through 1973/74 i.e. during implementation of the First Rail- way Project. The total net operating loss from July 1, 1965 to June 30, 1974 was about CFAF 1.6 billion or 7% of the total gross revenue. Although CFS received CFAF 6.5 billion in external funds during the above period (an increase in loan capital of CFAF 3.9 billion, plus grants of CFAF 2.6 billion), its net assets increased by only CFAF 4.4 billion showing a loss in its own funds of CFAF 2.1 billion. 6.05 The following table summarizes CFS income statement, balance sheet and sources and application of funds for 1974/75 through 1976/77.  - 25 - (CFAF Million) Fiscal year ending June 30 1975 1976 1977-Close Estimate INCOME ACCOUNT Operating revenue 2972 3366 3795 Working costs 3517 3383 3625 Depreciation 291 365 345 Net operating revenue (loss) (836) (382) (179) Interest charges (46) (71) (85) Provisions and exceptional (1378) 1/ (115) (43) revenue (loss) Net revenue (loss) (2260) (568) (303) Government subsidy against operating loss 300 300 300 Net book profit (1960) (268) (3) BALANCE SHEET Net current assets (57) (1403) (1820) Net fixed assets 14868 15308 15977 Total assets 14811 13905 14157 Financed from Loan capital 5893 7423 7678 Equity equivalent 7238 6482 6479 TOTAL LIABILITIES 13131 13905 14157 CUMULATED SOURCE AND APPLICATION OF FUNDS SOURCE Cumulated Cash generated from operations (567) (869) 123 (1313) Loans (except Government) 1041 608 373 2022 TOTAL SOURCE 474 (261) 496 709 APPLICATIONS Investments 636 1266 1014 2916 Debt service 61 719 199 979 Increase (decrease) in working capital 774 639 1396 2809 Subsidies and loans from Government 300 900 900 2100 1/ Rectifications on previous years accounts resulting from corrections after the 1974-75 audit of CFS accounts. The main items were (a) a write-off of obsolete store items (CFAF 460 million); (b) a reserve for-questionable debts (CFAF 250 million); and (c) CFS overdue con- tributions to the Government's pension fund (CFAF 1680 million).  - 26 - 6.06 The tables show that (a) CFS suffered a cumulative operating loss of CFAF 1397 million (US$5.7 million equivalent) during 1975-77; (b) CFS current liabilities surpassed its current assets by CFAF 1.8 billion (US$7.4 million equivalent) by June 30, 1977; (c) the debt-to-equity ratio reached an unsatisfactory 54/66 level by the same date; and (d) the Government pro- vided CFAF 2.1 billion (US$8.6 million equivalent) to help CFS pay its work- ing expenses, its share in investments and debt service. The only positive element in CFS disappointing financial results was the progressive decrease in the net operating losses from CFAF 836 million in 1974/75 to CFAF 180 mil- lion in 1976/77. 6.07 To make up for this unfavorable financial situation, the Government has restructured CFS balance sheet as of June 30, 1977 by converting into equity about CFAF 2.1 billion CFS long term debt to it and a short-term 1976 treasury advance of CFAF 600 million. As a result of this conversion, the CFS balance s'heet as of June 30, 1977 is as follows: CFAF million Niet current assets (1220) Loan capital 6165 Nest fixed assets 15977 Equity equivalent 8592 Total assets 14757 Total liabilities 14757 The deficit in working capital has been reduced by CFAF 600 million, and the debt-to-equity ratio reached an acceptable 42/58 level. C. Future Situation Income Account 6.08 CFS forecast income account from 1977/78 through 1981/82 under the best estimate traffic assumption is given in Table 13 and summarized below: Current CFAF Million F:iscal year ending June 30 1978 1979 1980 1981 1982 Operating revenue 4890 5568 6289 7081 7997 Working costs 4270 4782 5301 5960 6639 Cash generated from operations 620 786 988 1121 1358 Depreciation 455 529 712 805 766 Net operating revenue (loss) 165 257 276 316 592 Interest charges 314 362 420 448 457 Net profit (loss) (149) (105) (144) (132) (135) Government subsidies 300 638 690 665 603 Bcok profit 151 533 546 533 738 REatios Wcrking 87 86 84 84 83  - 27 - 6.09 Operating revenues include selective tariff increases implemented in late 1976/77 and early 1977/78. These increases were calculated to generate revenues 30% higher in 1977/78 than those that would have been generated using February 1977 tariffs. Additional selective tariff increases will be made each year through 1981/82 to produce annual increases of 10% above those generated by previous year's tariffs. This program compensates for inflation pressures and yields a slight additional margin of increases. Higher tariff increases would threaten the ability of CFS to compete successfully with the Ivory Coast routes for international traffic and with road transport for national traffic, at a time when CFS is making a major effort to increase efficiency and attract traffic. 6.10 Personnel expenses as a percentage of working expenses progres- sively decrease from 71% in 1976/77 to 64% in 1981/82. Personnel expenses have been calculated under the following assumptions: (a) staff will decrease slightly in line with staff productivity forecast and (b) salary increases will be restricted to the inflation rate except for 5% annual promotion increases and bonuses. Under the above revenue and working expense assump- tions, CFS working ratio would decrease from 87% to 83% during the period under review. 6.11 Depreciation allowances are detailed in Table 18. For the period under analysis, they have been calculated basically on historic values of fixed assets and, although underestimating actual values, are substantially higher than allowances made in earlier years. Consequently, CFS fixed assets should be revalued. Senegalese law, however, does not permit entering such a revaluation into the accounts because the resulting increase in deprecia- tion allowances would adversely affect the basis for calculating income tax. To circumvent this the Government and the railway have agreed under the pro- posed project to (a) include the revaluation of fixed assets in the forth- coming inventory under the proposed project to be carried out by OFERMAT, (b) show the revalued value of fixed assets in a supplementary statement, and (c) charge the accounts of the year immediately following completion of the inventory with depreciation provisions reflecting the replacement value of the fixed assets. The latter provisions will be entered into the accounts under two separate items, one showing the depreciation based on the historic value of the fixed assets and the other showing the additional provision. CFS will periodically review its fixed assets in consultation with the Government the Bank and, if required, undertake appropriate revaluation. Due to the low depreciation provisions, the above table shows increasing net operating reve- nues for each year resulting in a rate of return on non-revalued fixed assets improving from 1% in 1977/78 to 3% in 1981/82. An increased depreciation pro- vision resulting from the revaluation of fixed assets will adversely affect net operating revenues and consequently increase net losses shown in the above table after interest payments. Sources and Applications of Funds 6.12 Assuming revenues and expenses shown in the above forecast income account materialize, CFS projected sources and applications of cumulated ftnds from 1977/78 through 1981/82 will be as follows (details are in Table 17):  - 28 - CFAF Million Source Applications Cash generated from operations 4873 Investments and renewals 8143 blobilization of loans and credits for investments 4733 Debt service 3548 Subsidies for investments 760 Increase in working capital 1541 10366 13232 Subsidies provided by Government 2866 13232 Balance Sheet 6.13 CFS consolidated balance sheet resulting from the above analysis under the best estimate traffic assumption is given in Table 16 and summarized below. CFAF Million As of June 30th 1978 1979 1980 1981 1982 Assets Net current assets (1021) (879) (679) (379) 321 Net fixed assets 17122 18584 19403 19610 20853 Total assets 16101 17705 18724 19231 21174 Liabilities Long term debt 6598 7699 8172 8146 9351 Equity equivalent 9503 10006 10552 11085 11823 Total liabilities 16101 17705 18724 19231 21174 Ratios Current 0.4 0.5 0.7 0.9 1.1 Debt-to-equity 41/59 43/57 44/56 42/58 44/56 The table shows that CFS current assets position and working capital should progressively recover from their unsatisfactory 1977/78 level. It would, however, be far. from reaching the desirable level which, on the basis of the Bank's assessment of CFS needs, would have to cover all of the fol- lowing:  - 29 - 1/6 of annual staff costs (2 months), 50% of annual expenses for materials excluding fuel and lubricants 25% of annual expenses for charges, and 25% of interest and loan repayments due the following year. The Government has given assurance that it will commit itself to provide CFS working capital with appropriate funds if CFS were not to reach the above estimated level by its own cash generation by June 30, 1982. The table also shows that the debt-to-equity ratio will remain acceptable after restructur- ing CFS balance sheet as of June 30, 1977. However, in order to control CFS borrowing, CFS has agreed to consult with the Bank before incurring any long term debt in addition to that related to the project unless its net cash revenue for the fiscal year or the twelve consecutive months immediately before the date of incurrence, whichever is greater, is 1.5 times the maximum debt service requirements of any succeeding year on all debts of CFS including the debt to be incurred. Financial Targets 6.14 The decree establishing CFS requires the Government to subsidize the railway's losses. Under the best traffic assumption used in calculating the above table this subsidy would reach a cumulative total of about CFAF 2.9 million in 1976/77 through 1981/82 to make up for CFS forecast shortage in funds for financing its debt service and its share in investments. Table 14 shows that the railway's cash generated from operations could increase by CFAF 1.6 billion if it were to achieve the target traffic, thereby decreas- ing Government's subsidies by an equal amount. Under the target traffic CFS working ratio would decrease from 87% to 78%, and the rate of return on non- revalued fixed assets would improve from 1% to 6% in 1977/78 through 1981/82. The latter ratio is meaningless because the impact on depreciation provisions of the revaluation of fixed assets is not known; therefore the working ratio, should be used to determine CFS revenue targets. This working ratio should be based on the target traffic in line with the objectives of the plan of action. The best estimate traffic which assumes some slippage in fulfilling the plan of action would yield the following working ratios: 87% in 1977/78, 86% in 1978/79, 84% in 1979/80 and 1980/81, and 83% in 1981/82. Full achieve- ment of the plan of action and of the relevant target traffic forecasts would improve the above working ratios to the following level: 87% in 1977/78, 83% in 1978/79, 81% in 1979/80, 79% in 1980/81 and 78% in 1981/82. The Government and CFS have agreed to the latter ratios. 6.15 If CFS were to achieve the target traffic, its balance sheet as of June 30, 1982 would be summarized as follows:  - 30 - CFAF Million Assets Liabilities Net current assets 1,940 Long-term debt 9,351 Net fixed assets 20,853 Equity equivalent 13,442 22,793 22,793 The current ratio would reach 1.7 and the debt to equity ratio 41/59 instead of 1.1 and 44/56 respectively under the balance sheet resulting from the best traffic assumption. 6.16 Due to the railway's anticipated difficult financial situation, agreement has 'been reached between CFS, the Government and the Bank that, during each year of the project, CFS will discuss with the Bank (by March 15 at the latest) the estimated financial results for the current year and the draft budget for the next year. This will enable the Bank to offer comments on the budget lbefore CFS presents it to its Board and Government for approval. It was also agreed that, if necessary, the Government and CFS will promptly agree with the Bank on remedial action. D. Risk Analysis 6.17 Despite all precautions provided under the proposed project there is a risk that CFS may fail to meet even the best estimate traffic forecast. This would adversely affect CFS financial performance and consequently its cash generation. Another possible risk is that working costs surpass appraisal forecasts in case the Government and CFS were unable to limit salary increases and/or the cost of materials, mainly imported spare parts. A third risk would consist of an increase in the cost of the proposed project beyond present estimates. The occurence of any of the above risks would increase CFS needs for cash. As stated previously, an increase in tariffs beyond those used in the main analysis would have an adverse affect on CFS traffic and consequently worsen the situation. The Government has therefore agreed to provide funds or secure alternative funds through additional borrowing in case of a shortfall in CFS cash generation. A combination of both options would likely be required and agreement has been reached that this would have to be worked out in consultation wiLth the Bank. 6.18 A sensitivity analysis of financial forecasts was conducted to test the impact: of the occurence of the above risks on CFS financial posi- tiLon. The following were assumed: (a) traffic at levels used for the con- servative traffiic assumption; (b) 10% increase in working expenditure; and (c) a 10% increase in the cost of the project. Table 15 shows a breakdown oi' revenues ancd working expenses under the conservative traffic assumption. 6.19 The f'ollowing table summarizes sources and applications of CFS cumulated funds from 1977/78 through 1981/82 should all three sensitivity assumptions materialize simultaneously, which is unlikely.  - 31 - CFAF Million Source Applications Cash generated from operations 231 Investments and renewals 8760 Loans and grants for investments 5493 Debt Service 3548 Total source 5724 Minimal increases in working capital 1220 Subsidies to be provided by Government under main analysis 2866 Total applications 13528 Shortage of funds 4938 13528 6.20 Assuming that the above shortage in funds could be borrowed at an interest rate of 8% and reimbursable in 20 years including 5 years of grace, 8% CFS's debt service would increase by about CFAF 60 million p.a. starting in 1982/83. 7. AGREEMENTS REACHED AND RECOMENDATION 7.01 The following principal items were discussed and agreed upon with the Government and/or CFS: (a) appointment of assistant general managers will be con- tingent upon Bank's approval of their qualifications and experience (para 3.05); (b) a plan and timetable for replacing technical assis- tants with Senegalese; the plans and timetables will be reviewed and updated annually in consultation with the Bank (para. 3.08); (c) CFS and the Government will cooperate closely with the railway union and pay productivity bonuses to the staff (para. 3.09); (d) during the project period, CFS will prepare monthly reports to be sent to the Bank for review on freight and passenger traffic performance, execution of transport plans, and availability and utilization of equipment, detailing the problems encountered and remedial actions taken (para. 3.23);  - 32 - (e) the Government will (i) provide the Bank with a copy of the groundnut study, (ii) inform it of those recommendations it has approved, and (iii) consult with the Bank prior to implementing railway-related recommendations (paras. 3.27 and 4.07); (f) the Government and CFS will make available experienced personnel for training as instructors and insure that a sufficient number of personnel is released from individual departments for training (para. 4.06); (g) the Government and CFS will implement the recommendations of the organization study, in consultation with the Bank and in agreement with Mali Government and Mali Railway (para. 4.07); (h) the Government will, in case of any shortfall in funds, provide the amounts necessary or secure alternative financing to assure full implementation of the project (paras. 4.09 and 5.12); (i) the Government will provide CFS working capital with appropriate funds if CFS does reach the agreed estimated level by its own cash generation by June 30, 1982 (para. 6.13 and 6.17); (j) CFS will consult with the Bank before incurring any addi- tional long-term debts unless its net cash revenue for the fiscal year or the twelve months prior to the date of incurrence be 1.5 times the maximum debt service require- mients of any succeeding year on all debts of CFS, includ- ing the debt to be incurred (para. 6.13); (k) CFS will take necessary measures to achieve working ratios not exceeding 87% in 1977/78 in 83% in 1978/79, 81% in 1979/80, 79% in 1980/81 and 78% in 1981/82 (para. 6.14) and; (1) during each year of the project and the five following years, CFS will discuss its estimated financing results for the current year and draft budget for the following year with the Bank no later than March 15 and, if neces- sary, CFS and the Bank will promptly agree on remedial actions (para. 6.16). 7.02 A condition of disbursement of Loan Funds allocated for the track-renewal program is that CFS improves the track renewed under the Second Railway Project to official CFS track-maintenance standards (para. 4.02).  - 33 - 7.03 Disbursement of the Bank contribution to the study on the trans- port of groundnuts to be undertaken by SONED will be made in accordance with an agreement between the railway and SONED acceptable to the Bank (para 4.11). 7.04 The proposed project is suitable for a Loan of US$11 million to CFS with the guarantee of the Government of Senegal. The Loan would be for a term of 20 years, including 5 years of grace, with interest at 7.45% per annum. January 1978   SENEGAL THIRD RAILWAY PROJECT Fleet of Motive Power (as of February 1977) Yearly km without Manu- Year of Max.Load km/loco. engine Availability Axle load Max. speed 1. LOCOMOTIVES Hvse HP Number facturer _elivery hauled(tons) 75/76 failure (75/76) (O) I'eb. 77 (tons) (km/h) 1.1 Line Locomotives BB 100 610 2- Alsthom 49 600 7,400 1230 0 12.5 70 BR 500 740 83/" 55/56 650 49,130 6140 50 12.8 85 BB 500 740 ~~3/130 7 BB 600 800 3- 57/60 600 11,900 3970 33 13.0 70 BBllOO 1,050 10 " 59/63/65 900 51,000 6380 50 15.0 70 BB12004/ 1,100 6 72/73 900 66,050 5080 100 13.5 70 BB1600- 1,500 3 " 77 1,200 - - - - - CC2400 1,950 4 " 67 1,800 44,700 4060 50 15.0 70/90 Total 365/ 55 1.2 Shunting Locomotives AA 10 150 17- V/BDR 56 250 13,380 n.a. 65 11.0 28 AA 50 420 6 Moyse 69/71 500 9,710 n.a. 50 13.0 55 AA 50- 420 2 77 500 - - - - BB 60 300 3 Alsthom 53 350 20,180 n.a. 33 08.5 70 Total 28 58 2. Railcars Z 130 550 6-/ de Dietrich 58/62 90 67,960 8500 67 07.5 80 Z 120 550 5 Soule 70 90 63,000 21000 40 11.4 90 Total 11 45 1/ To be scrapped 1977/78 4/ Ordered, supply expected mid-1977. 2/ One to be scrapped 1977. 5/ One to be scrapped 1977. 3/ Two to be scrapped 1977/78;third one will be allocated to shunting services. 6/ Two to be scrapped 1977. a December 1977  SENEGAL THIRD RAILWAY PROJECT Fleet of Rolling Stock (as of February 1977) Total Capacity Age (Years) Allocated to Number Seats/tons/m3 0-25 over 25 Owner Inter. Traffic 1. Passenger Cars International Traffic 26 962 26 CFS 26 National Traffic 44 2,240 44 Luggage Vans 17 - 2 15 Trailers 28 1,913 23 5 Service Cars 9 - 9 Total 124 5,115 25 99 26 2. Freight Cars 2.1 CFS-Owned Cars"/ Covered Box Cars 478 13,395 190 288 CFS 156 Open Cars 166 4,205 55 111 " 28 Flat Cars 54 1,360 6 48 " 13 Tank Cars 18 413 - 18 " 8 Total 716 18,960 tons 251 465 202 413 m3 2.2 Privately-Owned Cars Hopper Cars 95 4,437 95 - TAIBA - 32 1,316 12 20 PECHINEY - Tank Cars 5 220 5 - TAIBA - 3 123 3 - PECHINEY - 32 1,315 26 6 CAT 32 2 80 2 - MOBIL - 1 25 - 1 BP Refrigerator Cars 1 13 1 - SOBOA _ Total 171 5,766 tons 144 27 32 X 1,763 m3 2.3 Service Cars 232 - - 232 CFS 1/ Additional seventy-five cars are ordered under CCE-financing (10 tank cars, 15 open cars and 50 covered good cars).  S E N E G A L THIRD RAILWAY PROJECT Summary of Operating Statistics 1971/72 1972/73 1973/74 1974/75 1975/76 I. .NIE TIC Route-km 1,034 1,034 1,034 1,034 1,034 II. TRAFFIC Passenger numbers (000) 2,759 2,449 2,284 1,882 1,850 Passenger-kn: (million) 241 227 219 193 186 Average journey (km) 87 92 96 103 101 Freight tons (000) 1,910 1,906 1,887 1,886 1,606 Freight ton-km (million) 341 353 383 359 330 Average haul (km) 179 185 203 190 20.5 Traffic units (ton-km plus pass- kin) (million) 582 580 602 552 516 III. TRAFFIC DENSITY Passenger-km per route-km (000) 233 220 212 187 180 Freight net ton-km per route-km (000) 1,847 1,843 1,825 1,824 1,553 IV. OPERATIONS Train-km - passenger trains (000) 1,942 1,822 1,780 1,362 1,382 - phosphate trains (000) 259 270 271 293 233 - other freight trains (000) 630 976 713 678 721 - total (000) 2,831 3,068 2,764 2,333 2,336 Notive power -km -locomotive (000) 1,926 1,799 1,733 1,510 1,761 -railcars (000) 1,275 1,117 1,031 783 718 -total (000) 3,201 2,916 2,764 2,293 2,479 Number of locomintivas and rolling stock - mainline locomotives 27 30 33 33 33 - shunters 26 26 26 26 26 - railcars 11 11 11 11 11 - trailers 28 28 28 28 28 - coaches 96 96 96 96 96 - wagons 716 716 716 716 716 Availability (%) - mainline locomotives 55.6 58.7 54.5 49.4 50.3 - shunters 79.9 75.4 67.1 64.5 66.9 - railcars 63.9 56.8 51.1 48.0 41.0 - trailers n.a. n.a. n.a. n.a. n.a. - coaches n.a. n.a. n.a. n.a. n.a. - wagons n.a. n.a. n.a. n.a. n.a. Average journey per day in service (Icm) - mainline locomotives 305 263 245 279 293 - railcars 465 463 443 416 421 - wagons 60 65 87 n.a. n.a. Average load of wagons (tons) - phosphate traffic 46 46 46 47 47 - other freight traffic 22 29 24 24 25 Number of wagons loaded - phosphate traffic 30,423 31,312 31,100 31,391 25,412 - other freight traffic 21,315 20,350 18,573 17,587 15,852 - total traffic 51,738 51,662 49,673 48,978 41,264 Wagon turnaround time (days) - phosphate traffic: Taiba (112 km) 0.3 n.a. 0.8 n.a. 0.4 Lam-Lam (87 km) 0.6 n.a. 0.6 n.a. 1.8 - national traffic - - n.a. - - - international traffic - - n.a. - 221 - petroleum traffic - - n.a. - 151/ Accidents Number of breakdowns - locomotives 293 305 361 293 243 - railcars 69 49 47 44 61 V. OPERATING EFFICIENCY Passenger-km per train/railcar-km 124 125 123 142 135 Freight net ton-km per train-km 384 283 389 369 346 Freight net ton-km per freight-car available (000) n.a. n.a. n.a. n.a. n.a. Locomotive km per mainline locomotive available 113,800 79,600 81,000 88,400 76,300 Railcar km per railcar available 188,700 188,900 186,800 152,000 163,000 Ton-km per locomotive horsepower available 20,055 20,250 21,347 21,316 19,663 Tons per locomotive horsepower available 112 109 105 112 96 Gross ton-km to net ton-km (freight traffic only) n.a. n.a. n.a. n.a. n.a. 1/ CFS estimates. May 1977  SENEGAL THIRD RAILWAY PROJECT MOTIVE POWER PERFORMANCE AND AVAILABILITY AVAILABILITY (%) YEARLY KM PER LOCOMOTIVE IN STOCK 70/71 71/72 72/73 73/74 74/75 75/76 70/71 71/72 72/73 73/74 74/75 75/76 1. Locomotives 1.1 Line locomotive BB 100 42.3 44.1 14.1 18.5 1.0 22.5 113900 61350 16650 5870 561 7400 BB 500 65.1 55.0 58.1 52.3 35.8 43.8 77180' 57270 52930 40750 36400 49130 BB 600 62.8 47.1 35.2 33.0 51.7 23.3 60020 52750 40200 18700 26800 11900 BB1100 59.8 61.1 60.8 61.4 52.6 54.3 71450 73150 69200 64400 49700 51000 BB1200 - - 81.1 71.2 78.1 78.8 - - 46200 86100 98827 66050 CC2400 65.3 55.4 60.9 50.5 43.8 44.7 70000 72000 55200 49200 49600 44700 Average 61.2 55.6 58.7 54.5 49.4 50.3 - - - - - - 1.2 Shunting locomotive AA 10 93.8 90.2 82.5 71.5 66.3 77.0 17730 17170 13870 12830 13660 13380 AA 50 97.8 72.5 69.5 48.4 76.8 42.0 8640 14760 18880 8200 5530 9710 BB 60 98.2 36.4 47.3 80.0 30.1 60.0 24890 8344 11190 16100 13270 20180 2. Railcars Z 130 61.5 61.6 62.1 51.7 44.3 34.8 16200 104300 87590 78480 63360 67960 Z 120 86.0 66.7 50.5 50.5 52.5 48.5 169400 138800 119600 111970 84500 63000 BREAK-DOWNS /LOCOMOTIVE LOCOMOTIVE KM/BREAK-DOWN 70/71 71/72 72/73 73/74 74/75 75/76 70/71 71/72 72/73 73/74 74/75 75/76 1. Locomotives 1.1 Line locomotive BB 100 15 20 7 13 0 6 7590 3070 2380 450 561 1230 BB 500 10 9 11 9 9 8 7720 6360 4810 4530 4400 6140 BB 600 18 15 14 15 9 3 3330 3520 2870 1250 2980 3970 BB1100 11 11 10 9 9 8 6500 6650 6920 7160 5520 6380 BB1200 - - 13 12 13 13 - - 3550 7180 7600 5080 CC2400 16 14 15 13 11 11 4380 5140 3680 3780 4510 4060 Average 13 12 12 11 9 9 6276 5808 4973 5285 5112 5342 1.2 Shunting AA 10 H locomotive AA 50 n.a. n.a. m BB 60 4 2. Railcars Z 130 9 7 5 7 5 8 12690 14900 17500 11200 12600 8500 Z 120 1 5 4 1 2 3 169400 27760 29900 l11000 42300 21000 May 1977  SENEGAL _MIRD RAILWAY PROJECT FREIGHT AND PASSENGER TRAFFIC: ACTUAL 1971/72-1976/77 AND FORECAST 1977/78-1981/82 A C T U A L F 0 R E C A S T 1971/72 1972/73 1973/74 1974/75 1975/76 1976/772/ 1977/78 1978/79 1979/80 1980/81 1981/82 ton/ ton-km./ ton/ ton-km/ ton/ ton-kn/ ton/ Lon-km/ ton/ ton-km/ ton/ tan-km/ ton/ tot-km/ ton/ ton-km ton/ ton-km/ ton/ ton-km/ ton/ ton-ka/ pass pass-km pass pass-km pass pass-km pass pass-km pass pass-km kin) pass pass-km pass pass-km pass pass-km pass pass-km paso pass-km pess pass-km (000) (mill.) (000) (mill.) (000) (mill.) (000) (.ill.) (000) (mill.) (000) (mill ) (000) (m(000) (000) (-ill.) (000) (mill.) (000) (mill.) (000) (mill.) FREIGHT 11 INTERNATIONAL TRAFFIC 705 129 230 139 303 190 251 156 263 166.6 269 173 295 190 318 204 332 213 341 219 345 222 Exp-ots (Mali imports) 142 80 163 101 251 158 205 128 166 102.7 642 177 114 199 128 209 134 218 140 226 145 230 148 Imports (Mali exports) 63 41 67 38 52 32 46 28 97 63.9 642 92 59 96 62 109 70 114 73 115 74 115 74 NATIONAL TRAFFIC 1,705 212 1.676 214 1,584 193 1,635 203 1,343 163.0 1,570 191 1,586 192 1,641 198 1_767 220 1_833 217 1950 231 Phosphates - Txiba 1,277 143 1,331 149 1,291 144 1,383 155 1,086 121.4 112 1,300 146 1,300 146 1,3 150 1,450 162 1,500 168 1,600 179 Phosphates - Thi64 143 12 128 11 139 12 86 7 110 10.0 91 110 10 125 11 140 13 155 14 170 15 180 16 Oroundnuts 107 24 71 18 50 12 76 20 105 21.5 205 110 23 116 24 121 25 127 26 133 27 140 29 Other 178 33 146 36 104 25 90 21 42 10.1 240 50 12 45 11 40 10 35 8 30 7 30 7 TOTAL FREIGNT TRAFFIC 1,910 341 1906 353 1,887 383 1.886 359 1.606 329.6 t.839 364 1.081 382 1.959 6102 2,099 423 2,174 436 2295 453 _ PASSENGERY National 2,715 220 2,398 202 2,217 186 1,829 166 1,791 158 88 1,700 153 1,600 146 1,500 138 1,400 130 1,350 127 1,300 124 Internati-nal 44 21 51 25 67 33 53 27 51 28 50n 64 32 67 34 71 36 75 38 79 40 81 41 TOTAL PASSENGER TRAFFIC 2.759 241 2,449 227 2.284 219 1,882 193 1,850 186 1,764 185 1,667 180 1.571 174 1,475 168 1.429 167 1,381 165 3/ This is "best estimate" fErecast. Conservative and target forecasts are shown is Table t 2J Estimate based os 6 months. Sourc: Senegal Railsays and Bank estimates. Juns 1977  SENEGAL THIRD RAILWAY PROJECT TARGET AND CONSERVATIVE FREIGHT TRAFFIC FORECASTS 1977/78-1981/82 1977/78 1978/79 1979/80 1980/81 1981/82 ton ton-km ton ton-km ton ton-km ton ton-km ton ton-km (000) (mill.) (000) (mill.) (000) (mill.) (000) (mill.) (000) (mill.) TARGET FORECAST International traffic 295 190 333 214 362 232 371 238 375 241 Exports (Mali imports) 199 128 224 144 248 159 256 164 260 167 Imports (Mali exports) 96 62 109 70 114 73 115 74 115 74 National traffic 1:;586 192 1,761 212 1,907 229 2,083 249 2,230 265 Phosphates - Taiba 1,300 146 1,400 157 1,500 168 1,600 179 1,700 190 Phosphates - Thies 125 11 180 16 205 19 260 24 300 27 Groundnuts 116 24 141 29 167 34 193 39 200 41 Other 45 11 40 10 35 8 30 7 30 7 TOTAL TARGET FORECAST 1,881 382 2,094 426 2,269 461 2,454 487 2,605 506 CONSERVATIVE FORECAST International traffic 265 171 286 184 299 192 270 173 301 194 Exports (Mali imports) 179 115 188 121 196 126 183 117 197 127 Imports (Mali exports) 86 56 98 63 103 66 87 56 104 67 National traffic 1,570 190 1,615 194 1,650 196 1,680 197 1,790 212 Phosphates - Taiba 1,300 146 1,340 150 1,370 153 1,435 161 1,500 168 Phosphates - Thies 120 11 130 12 140 13 130 12 150 14 Groundnuts 105 22 105 22 105 22 85 17 110 23 Other 45 11 40 10 35 8 30 7 30 7 X TOTAL CONSERVATIVE FORECAST 1,835 361 1,901 378 1,949 388 1,9501/ 3701/ 2,091 406 a (D 1/ Traffic constrained by lack of transport capacity, according to conservative capacity forecast (Annex 5 ). June 1977  S E N E G A L THIRD RAILWAY PROJECT Tnvestment Plan 1978/9 - 1980/8I Exchange Rate US$1.00 - 245 CFAF