Ecuador - Railway Repair Project

R E S T R I C T E D Report No. P-146 FILE CO'PY This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPM-ENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE ,DIRECTORS on a PROPOSED LOAN to the REPUBLIC OF ECUADOR for a REPAIR PROGRAM FOR THE STATE RAILWAYS October 23, 1957  REST=ICTED I!IT71TP. TIONIL liNK FOR RECONSTRUCTION .ND DEVELOPVIENT REPORT I ND RECOilTIENDlTIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to the REPUBLIC OF ECU DOR for a REPJIR PROGRIY- FOR THE ST[TE Rl.ILWJ3YS October 23 1957  MI7RX'l_AJTIONAL BAJTK FOR RECCNSTRUCTION AND DEVELOPMENT REPORT AND PRCOiliF.DATIONS OF THE PRESIDENT TO THE EXECUTI VE DIRECTORS ONT i PROPOSED LOAN TO T HE RRPUBLIC OF ECU!ADO.R FOR A REPAIR PROGR)M FOR THE STATE RAUJWA1S 1. I submit herewith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to q6OO,OOO to the Republic of Ecuador to finance the importation of spare parts, tools and other eouipment and materlals to be used by the Empresa de Ferrocarriles del Estado (State Railwiqs) on a repair program for the Quito-Duran Railway. PART I - HISTORICAL 2. The possibility of the Bank assisting in financing a railway rehabilitation program was discussed with representatives of the Ecuadorian Government as early as 1953. In view of the unsatisfactory condition of the railways at that tine, the Ecuadorian Government was informed that the Bank could not do so until steps had been taken to improve the financial position of the railways and to ensure their efficient operation. 3. The Bank sugrested that a consultant be employed to prepare a report on the railways with recommendations for corrective action and offered to pay half of the cost of the consultant. The Ecuadorian Government accepted this suggestion and Francis G. Hoskins, a railway expert, was retained for this purpose. His report produced in January 1955 made the following major recommiendations: (a) that a suitably qualified person be appointed to act as General Mlanager with adequate powers to carry out a reorganization and to make recommendations for a rehabilitation program; (b) that the administration of the Railway Authority be reorganized and in particular a new Accounting Department be created; (c) that the number of personnel be drastically reduced over a period of four years; and (d) that a program of repairs and replacements be put into effect immediately.  - 2 - 4. The previous administration did not attempt to carry out the recommendations of the Hoskins' report. flcwever, the new Government which took office in September 1956 undertook to carry out these recommendations and, as a first step, asked the Bank to assist it in finding a candidate to serve as General Manager of the railways. A candidate put forward by the Bank, Mr. George F. NvocGowan, was appointed General Nianager of the railways in May 1957. 5. To enable iMlr. NicGowan to operate more effectively, a Charter creating an autonomous Railway Authority was drawn up by the Government wxrith the advice of Mr. MlcGowan and enacted into law by Congress. The Governient appointed as head of the new Railway Authority, General Astudillo w10o had proved effective in reorganizing the Customs Services of the Port of Guayaquil. The new Railway Authority has already taken several constructive steps, the most important of which has been to reduce excessive personnel by dismissing 1,200 employees, or about one quarter o- the total employed. 6, The Railway Authority is now preparing a rehabilitation program. However, it has informed us that this program iwill not be ready for at least a year and, in the meantime, it needs funds to purchase spare parts, equbr.-lent and materials so that the railways can continue to operate during the coming year on a basic minimum schedule. A loan to cover these purchases was requ)ested by the Government. TWo members of the Bank's staff visited Ecuador to check on the need for these parts and materials. Negotiations started in Wasnington on October 22 at which the Ecuadorian Government was represented by Ambassador Chiriboga. 7. This would be the Bank's fifth loan in Ecuador and would bring the Bank's total lending there to `33.6 million. PART II - DESCRIPTION OF THE PROPOSED LOAN 8. The proposed loan would finance the foreign exchange cost of parts, tools and other equipment and materials to be purchased and used by the Railw,ay Authority for repairs to the Duran-Quito Railway. 9. The loan would have the following characteristics: Borrower: Republic of Ecuador Amount: The equivalent in various currencies of 3600,000. Term: The loan would be for a period of four years and amortized by semi-annual instalments from Nlay 1, 1959 to November 1, 1961. Interest Rate: % per annum, including 1% commission. Commitment Charge: 3/L of 1% per annum.  -3- PART III - INSTRUMENTS Legal Instruments and Legal Authority 10. Attached is a draft Loan Agreement (No. 1). It follows the Bankts general Loan Agreements with Ecuador in all imoortant respects. In Section 5.o8, the Government undertakes to make sucre funds available to the Railway Authority for the operation and maintenance of the Duran-Quito section of the railway, should the Railway Authorityts own funds prove inadequate for this purnose. Section 7.01 (c) makes it a condition of affectiveness that arrangements satisfactory to the Bank shouldhave been worked out between the Government and the Railway Authority for the purchase and use of the goods by the Railway Authority. Section 8.03 provides that applications for iithdrawals from the loan account shall be signed jointly by the hinister of Public WTorks and the General Manager of the Railways. PP RP IV - APPRAISAL AND JUSTIFICATION OF THE PROPOSED LOAN 11. As indicated in paragraph , the Railway Authority operating under a new charter and new management is now preparing a rehabilitation pro- gramn, which it intends in due course to request the Bank to finance. The restoration of the railway to an efficient and financially sound operation would. have a high priority in Ecuadorts economic develoDment. If the program when prepared is satisfactory it should prove suitable for financing by the Bank, provided Ecuador's creditworthiness remains adequate. 12. As stated in paragraph 6, the Railway Authority will need a year or more in which to prepare the rehabilitation program and reorganize its administration. In the meantime, due to lack of funls and ineffective maintenance, the condition of the railway has seriousl- deteriorated until it is now in a dangerous condition. Over half of the locomotives are constantly out of service due to lacl of spare parts and repair shop facilities. The same is true of freight cars, which are becoming unservice- able at a faster rate than the over-strained repair facilities of the rail- way can handle. 13. The Railway Authority fears that if spare parts, equipment and materials are not acquired very soon, it will be unable to prevent a com- plete break down of railwaly facilities, which would have very serious consequences for the economy. The goods to be financed by the proposed loan are based cn recoTmmendations made by the General Manager of the Railway Authority, on whose judgement we are relying to a large extent, and are only s8uuh items as are considered by hm Xv be ne(;c9sary to restore a minimum service on a reliable basis on the Duraii-Quito section of the railway during the year or so required to prerare the rehabilitation program.  i4. Oil products required by the Sierra are brought from the coast by rail tanlker car, pumped up the steepest gradient of the mountain through a pipeline operated by the Railway Authority and then transported in the Sierra by rail tanker car. Eight additional tank cars and some repair parts for this pipeline are considered essential to enable the railway to transport adequate supplies of oil to the Sierra. 15. A small part of the proposed loan would be used to finance the foreign exchange cost of (a) an accountant team to carry out an immediate audit and to initiate improvements in the accounting system; and (b) a specialist to assist the Railway Authonrty in improving methods used by the stores and purchasing departments. Prospects of Fulfillment of Obligations 16. The new Railway Authority is at present reorganizing its finances but would not at present be a satisfactory borrower. Accordingly, the proposed loan would be made to the Government of Ecuador. The term would be our -ears and it should be well Twithin the ability of the Goverrment. to servi_- this loan from annual appropriations in its budget. Ecuador should be able to provide the foreign exchange needed to service the proDosed loan in addition to that required for its other external obligations. Economic Situation 17. A Report on the Current Economic Position and ProsoDects of Ecuador (R57-64) was distributed to the Executive Directors on July 29. The economic situation against Which this proposed loan can be considered is set out inr paragraphs 20 through 23 of' my Report and Recomnme:dations dated September 10, 1957 (R57-81) on the loan to the Government of Ecuador for Highway IIaintenance and Construction. PART V - CO1KPLIANCE WITH ARTICLES OF AGREEM'ENT 18. The Report of the Corunittee provided for in Article III Section 4 (iii) of the Articles of Agreement of the Bank is attached (No. 2). 19. I am satisfied that the proposed loan will cormply with the Articles of Agreement of the Bank. PART VI - RECONIMKENATIONS 20. I recommend that the Bank make a loan in various currencies equivalent to $600,000 to the Republic of Ecuador for a term of four years with interest, including commission of per annum and on such other terms as are specified in the form of the Loan Agreement and that the Executive Directors adopt a resolution to the effect in the form attached (No. 3). Eugene R. Black President Washington, D.C. October 23, 1957