Zambia - Third Railway Project

Document of The World Bank FILE orV& FOR OFFICIAL USE ONLY Report No. 2541-ZA ZAMBIA THIRD RAILWAY PROJECT STAFF APPRAISAL REPORT November 26, 1979 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 = Kwacha K 1.00 = US$1.30 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) 2 0.62 miles (mi) 1 square kilometer (km ) = 0.386 square miles (sq mi) 1 metric ton (ton) = 2,204 pounds (lb) GLOSSARY OE' ABBREVIATI[ONS AfDB - African Development Bank CIDA - Canadian International Development Agency CTC - Centralized Traffic Control EEC - European Economic Community GDP - Gross Domestic Product: KfW - Kreditanstalt fur Wiecderaufbau MPTC - Ministry of Power, Transport and Communications NTC - National Transport Corporation ODA - Overseas Development Administration OPEC - Organization of Petroleum Exporting Countries SIDA - Swedish International Development Authority SNCZ - Societe Nationale des Chemins de Fer Zairois TAZARA - Tanzania-Zambia Railwa,y Authority zImco - Zambia Industrial and Mining Corporation Limited ZR - Zambia Railways ZTRS - Zambia-Tanzania Road Services c.i.f. - cost, insurance, freight lb/yd - pounds per yard GOVERNMENT OF ZAMBIA AND ZAMBIA RAILWAYS FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ZAMBIA THIRD RAILWAY PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. * I. THE TRANSPORT SECTOR .................................... 1 A. Economic and Geographic Background .... ............. 1 B. The Transport System ............................... 1 C. Zambia's Foreign Trade Routes ...................... 3 D. Transport Policy and Planning. 5 E. Past Bank Group Projects in the Sector. 6 II. ZAMBIA RAILWAYS (ZR) .................................... 6 A. Introduction. 6 B. Organization, Management and Staff. 7 C. Training. 8 D. Track .........;... 11 'E. Signalling and Telecommunications .14 F. Motive Power and Rolling Stock .15 G. Workshops and Depots .17 H. Operations .17 I. Past and Present Traffic .18 J. Budget, Accounts, Audit and Insurance .19 III. THE PROJECT .21 A. Scope of the Project ..21 B. Details of the Project ..22 C. Cost Estimates ..24 D. Financing and Procurement . .26 E. Disbursements ..27 F. Project Execution, Environment and Employment 27 G. Operational Targets ..28 IV. ECONOMIC EVALUATION .30 A. Forecast of Future Traffic .30 B. Project Benefits and Economic Return .32 C. Risk and Sensitivity Analysis .35 This report has been prepared by Messrs. Parthasarathi (Senior Economist), R. Masthagen (Railway Engineer), B. Rollins (Senior Financial Analyst), and W. Jackson (Consultant), on the basis of their findings during an Appraisal Mission in Zambia in January-February 1979. Mr. Delvoie (Financial Analyst/Economist) participated in completing it. 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.  Table of Contents (Continued) Page No. V. FINANCIAL EVALUATION .................................... 40 A. Past Financial Performance ..... .................... 40 B. Financial Forecasts ................................ 45 C. Projected Income Statement ..... .................... 46 D. Projected Cash Flow ................................ 48 E. Financial Risk ..................................... 48 F. Projected Balance Sheets ..... ...................... 50 G. Future Financial Objectives ..... ................... 50 H. Impact of Inflation on ZR's Finances ............ ... 53 I. Financial Internal Rate of Return ............... ... 56 VI. RECOMMENDATIONS ......................................... 59 ANNEX 1 Past Bank Group Financed Transport Projects in Zambia ... 60 ANNEX 2 Related Documents and Data Available in Project File .... 62 Map No. IBRD 14252 Map No. IBRD 14253  I. THE TRANSPORT SECTOR A. Economic and Geographic Background 1.01 Zambia is a land-locked country in the southern half of Africa, depending for its international surface routes on its neighbors -- Tanzania, Malawi, Mopambique, Rhodesia, Botswana, Angola and Zaire. With an area of 750,000 km , the country consists of a high plateau ranging in elevation from 1,000 m to 1,500 m, intersected by the valleys of the Zambezi River and its tributaries. It has2a population of 5.2 million and a population density of only seven per km . Per capita income is US$480 equivalent. 1.02 The dominant feature of the Zambian economy is the mineral wealth in the northern (Copperbelt) region, with its reserves of copper ore. The mining of copper ore and its processing into copper, with cobalt as a byproduct, constitute the country's most important economic activity. Both the copper and cobalt produced are almost entirely exported. The mineral industry accounted for about 25% of GDP and, with refining, for over 90% of export earnings in 1976. 1.03 Since exports and imports each constitute around 40% of GDP, the country is particularly dependent on its transport network and its access to seaports through neighboring countries. To maintain current levels of eco- nomic activity, about 2.5 million tons of goods (including petroleum and petroleum products) must move in and out of the country each year. As a natural corollary, considerable emphasis is placed on external trade routes in transport investments. B. The Transport System 1.04 The transport system within Zambia comprises approximately 35,000 km of roads, 2,000 km of railways, 150 airports and a 1,700-km oil pipeline from Dar es Salaam to Ndola in the copper-producing areas. Traditionally, railways carried the bulk of Zambia's external trade, but because of recent political developments resulting in the interruption of external railway connections in Rhodesia and Angola, a significant proportion of trade has recently been carried by road transport through Tanzania, Malawi and, more recently, Mozambique. The internal transport system has mainly developed along the line-of-rail, since this area contains most of the important mining and industrial activities in the country and nearly all of the urban centers. In recent years, however, greater emphasis has been given to pro- vinces away from the line-of-rail, and in particular to providing paved road access to the principal towns in these provinces.  -2- Railways 1.05 Zambia has two railways operated by two different entities. Zambia Railways (ZR) extends from Victoria Falls Bridge on the Rhodesian border to the Copperbelt area in the north where it links up, via Zaire, with the Benguela Railway to the Angolan port of Lobito. The Tanzania-Zambia Railway (TAZARA) links up with ZR at Kapiri Mposhi and extends to the port of Dar es Salaam in Tanzania. Details of ZR are given in Chapter II. Tanzania-Zambia Railway 1.06 TAZARA is jointly owned by the Governments of Zambia and Tanzania. Its construction, financed by a Chinese loan of about US$400 million, started in 1970 and service began in October of 1975. The Railway extends 1,850 km from Dar es Salaam to Kapiri Mposhi in Zambia where it connects with ZR. Its route length in Zambia is 880 km. 1.07 With its 1,818 wagons and 85 locomotives, TAZARA's planned annual capacity was one million net tons in each direction. Due to operational problems which arose after Chinese experts began leaving in 1977, the effec- tive capacity is less than half of that planned. In 1978, TAZARA's export traffic was 609,000 tons and import traffic 304,000 tons. The most urgent operational problem is the poor availability of motive power due at least in part to lack of trained personnel for maintenance work and lack of foreign exchange to purchase needed spare parts. The track in certain portions of central Tanzania has been adversely affected by heavy rains earlier this year due to poor soil conditions. Chinese experts have recently returned to assist TAZARA, on both locomotive maintenance and track, and it is expected that its capacity will improve. Roads and Road Transport 1.08 Zambia has about 35,000 km of roads, of which 19,000 km are primary and secondary roads under the responsibility of the Roads Department of the Ministry of Public Works and 16,000 km are tertiary roads administered by Rural Councils. Of the former, 4,600 km are asphalt-paved, 7,600 km are all-weather gravel, and the remainder earth. 1.09 The total vehicle fleet in the country numbers about 160,000 growing about 9% p.a. and comprising 59% automobiles, 18% light commercial vehicles, 11% trucks and the rest other vehicles. About 40% of the trucks are operated by the Zambian Government-owned National Transport Corporation (NTC) and the Zambia-Tanzania Road Services (ZTRS) jointly owned by the Governments of Zambia and Tanzania and by Italian private interests. ZTRS operates on the Dar es Salaam route and Contract Haulage, a subsidiary of NTC, mainly on the Beira (Mozambique) route. United Bus Company, a subsidiary of NTC, owns 75% of the buses and 25% of the taxis in the country. Air Transport 1.10 There are 150 airports and airfields in Zambia, 52 of which are Government owned. Lusaka International Airport handles all international traffic. The national air transport company, Zambia Airways Corporation,  - 3 - established in 1967, has received assistance from Alitalia and, more recently, from Aer Lingus, under management contracts. Operating with three Boeings 707's, one Boeing 737, and four Hawker Siddley 748's, the airline's traffic in 1976 included 77,000 international passengers, 167,000 domestic passengers, and 21,000 tons of international freight. Pipeline 1.11 A 1,700-km pipeline, completed in 1968 and jointly owned and operated by the Tanzanian and Zambian Governments, carries all of Zambia's crude oil imports, amounting to 850,000 tons annually and a further 50,000 tons for Zaire. C. Zambia's Foreign Trade Routes 1.12 Before Rhodesia's Unilateral Declaration of Independence in 1965, practically all of Zambia's external trade passed through Rhodesia and the port of Beira in Mozambique. Since then, Zambia began gradually to reduce its dependence on this route. Even so, in 1972, just before the Zambian- Rhodesian border closure in early 1973, almost two-thirds of Zambia's external trade used this route, as can be seen from the following table: Zambia's Foreign Trade by Routes ('000 tons) 1970 1971 1972 1973 1974 1975 1976 1977 1978 Lobito/Zaire-Rail 305 445 314 807 947 566 135* 132* 98* Dar-Road 501 516 412 484 590 660 571 337 226 Dar-Rail 0 0 0 0 0 115 675 937 913 Mombasa-Road 0 0 0 113 172 24 34 4 0 Mozambique-via Malawi Road/Rail 24 38 46 150 135 195 119 59 71 Mozambique-via Malawi-Road 0 0 0 0 0 40 93 9 33 South Africa-via Rhodesia Rail 1,691 1,438 1,331 40 0 0 0 0 136 Air and Other 8 9 8 78 62 61 30 65 52 TOTAL 2,529 2,446 2,111 1,672 1,906 1,661 1,657 1,543 1,529 * Exports to Zaire.  1.13 Since 1973 until mid-1975 the rail route via Zaire to Lobito in Angola became the most important export/import route. With the opening of TAZARA at that time, which coincided with the closure of the Angola-Zaire border, the Dar road and rail routes became the most important. However, as these routes were unable, for a variety of reasons, to move the goods in and out of Dar efficiently and speedily, Dar port has gradually become con- gested, with congestion starting on shore with accumulatiDn of unloaded goods which hampered ship loading and unloading operations. This has gradually spread to ships with long delays at berth resulting from low productivity and consequent further delays to ships in obtaining berthing space. 1.14 Although efforts are being made to find solutions to Dar port's problems, it must be emphasized that a permanent solution will call for sustained efforts to improve the TAZARA operations and maintenance. TAZARA's major problems are: (i) the long turnaround time of wagons (35 to 45 days) cutting the effective capacity of available wagons to about one-half of that planned, and (ii) the low availability of locomotives due to design, mainte- nance and spare parts problems. Recently, the Chinese ha-ve sent 800 techni- cians back to Tanzania to help improve maintenance and operations. But spare parts for maintenance continue to be a problem due to the foreign exchange problems of Tanzania and Zambia and their consequent inability to make prompt payments for them. 1.15 There is another route to the sea at present for Zambia's export/ import traffic -- to South Africa Ports via Rhodesia and Botswana, which Zambia shares with Zaire -- which can relieve some of the pressure on the Dar route. Other routes that may be considered for the long run are: (i) Lobito in Angola via the Benguela Railway. As already explained, this route has been closed for over three years. A EEC rehabilitation project to reopen this route is presently under discussion, and financing for the most urgent investments has been arranged. However the security situation is still a major problem and is likely to hamper normal operations for quite some time. (ii) Matadi via Zaire: This route through Zaire, which was closed during the 1978 unrest in Shaba province, is now used to the full by Zaire which is planning to improve its capacity to handle a greater proportion of its own export/import traffic. (iii) The Mozambique Road Route (bypassing Rhodesia): The direct road link to Mozambique is expensive and possible only in the dry season until an all-weather road now under construc- tion is completed. Th-i is several years away. (iv) The Malawi Route: ,hi- involves an expensive road haul and transshipment to rail and suffers from ineffective telecommunication artd current deficiencies of the Mozambican transport network. (v) Namibian Route: Tfhe Zambian Government is explorirng the possibility of building a rail link along the Caprivi Strip to Walvis Bay. Without considering the political problems in the area, it may require ten years for completion.  - 5 - 1.16 Thus, in practice, Zambia has only two routes to the sea open at present for its copper exports as well as imports - the Dar es Salaam route served by both rail and road and the southern rail route. Of these, the Dar es Salaam rail route is the cheaper, K 71 per ton for copper exports, compared with K 140 by road to Dar es Salaam and K 112 on the southern rail route. If and when it is available, the Lobito route will be marginally cheaper at K 69 per ton. (All these comparison exclude port charges and ocean freight charges). Unfortunately, since the capacity available to Zambia on the routes open to it is inadequate to meet its needs for essential exports and imports, cost is not a prime consideration, as its objective is to use to the maximum whatever route is open to it. D. Transport Policy and Planning Policy 1.17 The Zambian Government does not have a well-developed policy for the transport sector as a whole. It has so far confined itself to developing ad hoc measures to deal with specific problems as and when necessary. 1