Mexico - Third Railway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5777 PROJECT PERFORMANCE AUDIT REPORT MEXICO THIRD RAILWAY PROJECT 4LOAN 1232-ME) June 28, 1985 Operations Evaluation Department This documesot has resutrcted distribtlem sad asy be used by recipients ely in the peroruauance of their elcl dies. Its cemats ma met odelrwise be disclosed without Wedd Rank atisorhdRom. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MEXICO THIRD RAILWAY PROJECT (LOAN 1232-ME) TABLE OF CONTENTS Page No. Preface ...................................... Basic Data Sheet.................................................. ii Highlights ........................................................ iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND.............................................. 1 II. PROJECT IMPLEMENTATION...... .................. ........ 3 III. PROJECT RESULTS ................... ... ... . ...... 6 IV. CONCLUSIONS...... ............ ....................... 15 Tables i. Estimated vs. Actual Implementation and Costs of Major Items in the Investment Plan.................... 16 2. Estimated vs. Actual Investment Plan...o...o............ 17 3. Forecasted vs. Actual Traffic.....o........0........... 18 4. Locomotive Availability and Productivity....... ....... 19 5. N de M's Financial Results......o...................... 20 6. Forecasted vs. Actual Economic Results.................. 21 7. Status of N de M's Locomotive Stock..........o.......... 22 Annexes 1. Government and N de M's Comments (English)............ 23 2. Government and N de M's Comments (Spanish).............. 28 PROJECT COMPLETION REPORT I. Introduction.o.... ...... . ..... ............. ... ... 35 II. Project Preparation and Appraisal.o................... 36 III. Project Implementation and Costs..............0....... 38 IV. Traffic and Operations...... ... ...... ...... ........... 44 V.- Financial Performance.... ..... ....0................... 48 VI. Institutional Performance and Development...o............ 54 VIIE. Economic Reevaluation..o............. ................... 58 VIII. Role of the Bank ....................... .......... 61 IX. Conclusions.. ............. ..................... ......... 63 This document has a restricted distribution and may be used by recipients only in the performance of their ofmcial duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (cont'd.) Page No. Tables 1. Major Project Changes and Revised List of Goods......... 65 2. Physical Completion of Project Components............... 66 3a. Project Costs (Mex$Millions)........................... 67 3b. Project Costs (US$ Millions)............................ 68 4. Disbursement Schedule................................... 69 5. Appraisal Forecast and Actual Freight Traffic, 1974-1980.....o................... 70 6. Selected Operating Statistics (1976-1980)............... 71 7. Execution of Plan of Action (1976-1980).........o...... 72 8. Schedule of Authorized Tariff Increases (1975-1982)..... 73 9. Income Account: 1976-1980 - Revenues, Expenses, Net Los........................ .. 74 10. Summary Balance Sheet - Estimated and Actual 1975-1981.. 75 11. Cash Flow and Financing Plan 1976-1981 (Estimated, Revised and Actual)..................... ........... 76 Map IBRD 17334 (PCR) Mexico Third Railway Project PROJECT PERFORMANCE AUDIT REPORT MEXICO THIRD RAILWAY PROJECT (LOAN 1232-ME) PREFACE The following is a Project Performance Audit Report (PPAR) on the Third Railway Project in Mexico for which a loan (1232-ME; US$100 million) was made in March 1976 to assist the Mexican National Railways (N de M) in financing a two year tranche (1976-1977) of a five year Investment Plan (1975-1979). However, shortly after loan approval, in mid 1976, the outgoing administration introduced a drastic macro-economic stablization program which was followed in late 1976 by another austerity program enacted by the incoming administration. Both programs profoundly affected the project which had to be redefined and restructured. The new arrangement involved a con- siderable reduction in the Investment Plan, and the loan, instead of assist- ing in financing just two years of the Plan was extended to cover it through- out its life. The loan was fully disbursed and the account was closed in March 1982. This report consists of a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the Latin America and Caribbean Regional Office (LAC) based on a completion report submitted by the Borrower. The PPAM is based on a review of the President's and the Appraisal Reports, the Minutes of the Board of Executive Directors' Meeting at which the project was approved, the PCR, Bank records and files, a field visit by an OED consul- tant, and interviews with Bank staff familiar with the project. The coopera- tion of the Mexican Government and N de M in particular, is gratefully acknowledged. Based on the information reviewed and on the field visit, the audit agrees with the PCR that the project contributed to meeting Mexico's trans- port needs. However, the audit raises methodological and other questions concerning the extent of improvements achieved by the project and the economic rate of return estimated in the PCR. This and other asperts are developed in detail in the PPAM and are summarized and contrasted with the PCR's views in the following Highlights. The draft audit report was sent to the Government and the Borrower for their comments; their views are attached as an Annex to the PPAM. PROJECT PERFORMANCE AUDIT REPORT MEXICO THIRD RAILWAY PROJECT (LOAN 1232-ME) BASIC DATA SHEET Appraisal Actual or Item Estimate Reestimate Total Project Cost (US$ million) 576.1 835.50 la overrun () - 22 Loan Amount (US$ million) - 100.00 Disbursed - 99.97 Cancelled - 0.03 Repaid to June 30, 1984 - 9.95 Outstanding to June 30, 1984 - 71.16 /c Project Completion Date 12/78 12/82 Proportion Completed by Expected Date (Z) 100 14 Proportion of Time Overrun (%) - 157 Economic Rate of Return (%) 17 15 /d Cumulative Estimated and Actual Disbursements FY76 FY77 FY78 FY79 FY80 FY81 FY82 Estimate 4.1 41.8 84.6 100.0 - - - Actual 0.4 4.9 12.3 29.0 51.1 98.5 100.0 Actual/Estimate (Z) 9 12 14 79 82 98 100 OTHER PROJECT DATA Original Item Plan Actual First Mention in Files - 01/74 Government's Application - 02/75 Appraisal - 04/75 Negotiations - 02/76 Board Approval - 03/76 Loan Agreement Date - 04/76 Effectiveness Date - 06/76 Closing Date - 06/79 Borrower Ferrocarriles Nacionales de Mexico (N de M) Executing Agency Ferrocarriles Nacionales de Mexico (N de M) Fiscal Year of Borrower January 1 - December 31 Follow-on Project Fourth Railway Project Loan Number 1929-ME Amount (US$ million) 150.0 Loan Agreement Date 02/81 MISSION DATA Month/ No. of No. of Man- Date of Item Year Weeks /e Persons Weeks Reprt Identification 01/75 02/75 Preparation 02/75 02/75 Preappraisal 03/75 2.0 2 4.0 04/75 Appraisal 04/75 2.0 4 8.0 03/76 Post-Appraisal 03/75 2.0 4 8.0 11/75 Supervision I 04/76 1.5 1 1.5 04/76 Supervision II 11/76 2.0 2 4.0 11/76 Supervision III 05/77 1.0 2 2.0 05/77 Supervision IV 09/77 2.0 3 6.0 10/77 Supervision V 01/78 0.5 1 0.5 03/78 Supervision VI 04/78 1.5 2 3.0 06/78 Supervision VII 09/78 2.0 2 4.0 12/78 Supervision VIII 04/79 1.5 2 3.0 05/79 Supervision IX 10/79 2.0 2 4.0 11/79 Supervision X 02/80 2.5 2 5.0 03/80 Supervision XI 04/81 2.0 2 4.0 05/81 Supervision XII 08/81 2.0 2 4.0 09/81 Supervision XIII 04/82 2.0 2 4.0 05/82 CURRENCY EXCHANGE RATES Name of Currency (Abbreviation) Mexican Peso (Mex$) Appraisal Year Average (1975) US$1.0 - Mex$ 12.50 Intervening Years Average (1976-81) US$1.0 = Mex$ 21.00 Completion Year Average (1982) US$1.0 - Mex$ 55.00 /a Figure is not comparable to appraisal estimate as original project covered only two years of a five year investment plan whereas as implemented project assisted in financing a full five year 1976-80 Investment Plan. /b Compared with the estimated cost of the revised project as agreed in .January 1979. The overrun is 122% compared with the appraisal estimate; however, it is not strictly correct to compare the project as implemented with the project as appraised. /c Includes a negative exchange adjustment of US$19.16 million. /d PCR's estimate. The audit considers that the rate should be somewhat lower; however, lacking the information and resources to produce an estimate the audit has accepted the PCR's. /e Estimated time devoted to project. Many missions included other projects, particularly the later ones included preparation and supervision of the Fourth Railway Project (Loan 1929-ME, February 1981). - iv - PROJECT PERFCrKANCE AUDIT REPORT MEKICO THIRD RAILWAY PROJECT (LOAN 1232-*E) HIGHLIGTS The purpose of the loan was to assist the Government-owned Ferrocarriles Nacionales de Mexico (N de X) in implementing a two-year tranche (1976-77) of a five year Investment Plan (1975-79). However, shortly after loan approval the outgoing administration enacted a drastic public spending control program which was followed by another tougher program introduced by the new incoming administration. The controls on spending made it necessary to cut the Investment Plan by about half just a year after loan approval. To adjust to the changed conditions the Bank and the Government agreed to redefine the project and make it cover part of the costs of the full new Investment Plan (1976-80) instead of just two years of it (PPAM, para. 5). The new Investment Plan, as the old, was aimed at increasing the railway's capacity while at the same time maintaining its comparatively low working costs; this, coupled with tariff increases and improvements in the operating efficiency, was expected to recuperate substantially the financial viability of N de M (PPAM, paras. 2 and 3). The audit concludes that although the project's physical achievements were considerably less than expected in the original plan and well below the targets of the revised plan (except for the number of locomotives purchased), on balance, the project met the objectives of increasing the railway's capacity and maintaining its working costs (although not its total costs) relatively low (PPAM, para. 20). However, the project failed to assist in bringing about a significant reduction of the railway's financial losses and to consistently increase its operating efficiency. In fact, in some areas, particularly locomotive and rolling stock availability and use, efficiency decreased during the project period. While efficiency in the use of capital decreased during the project period efficiency in the use of labor improved and a comprehensive manpower plan was prepared which has helped the railway in subsequent years (PPAM, paras. 20 and 27). The size and timing of the project do not appear to have been the most felicitous, the first because the likely future macro-economic environ- ment in which the project was to be implemented was not fully taken into account when the project was designed, and the second because the project was prepared and agreed on with an outgoing administration and the incoming administration had a different economic strategy that made it necessary to redefine and refinance the Investment Plan. In the opinion of the audit the project was framed in too optimistic forecasts of the future and therefore too large. In retrospect, it appears that in this case it would have been preferable to design a more modest project befitting the transitional period between two administrations (PPAM, para. 18). - v - The audit concludes that a tight watch should have been kept on the financial aspects of the railway and a close surveillance maintained on the sources of financing used by N de M. As it turned out, during the project period a larger than expected use was made of foreign sources of financing to cover operating deficits, in particular, which compounded rather than alleviated the railway's financial troubles (PPAM, para. 20). While the PCR concluded that the project had a rate of return similar to the appraisal estimate, the audit es .mates, based on methodological reasons and on a cursory comparison of .0jectives sought and achievements reached that the rate of return of the project is likely to have been somewhat overestimated in the PCR (PPAM, paras. 23 to 33). The Government and N de M agree in general with the conclusions of the audit; however, they suggest that the Bank's responsibility for the results should be taken into account. In particular they point out that both the original Investment Program and its subsequent rearrangement were discussed with and approved by the Bank (PPAM, Annex, General Comments, paras. 2 and 3). The project was followed by another Bank-assisted operation in 1980, which continued the programs that were left incomplete by the reductions in the Investment Plan. That project is nearing completion. PROJECT PERFORMANCE AUDIT MED'.t INDUM MEXICO THIRD RAILWAY PROJZCT (LOAN 1232-ME) I. BACKGROUND 1. The Bank's association with Mexico's railway sector started in 1954 with Loan 103-ME (US$61.0 million) which was made for the rehabilitation and modernization of the Ferrocarril del Pacifico. A second loan (825-ME, US$75.0 million) was made in 1972 to help finance the 1972-73 Investment Plan of the National Railways of Mexico (Ferrocarriles Nacionales de Mexico, N de H), the largest of the four state-owned railways in the country. That project was aimed at improving the operational performance and financial viability of N de H. However, despite generally meeting or exceeding its operational targets, the project did not succeed in improving N de M's finan- cial condition. By 1977 when the project was completed, N de M's operating deficits were nearly four times higher than the level projected at appraisal mostly on account of lower and slower than expected tariff increases, but also due to faster and larger operating expense increases, particularly staff costs. 2. The Third Railway Project was prepared during 1975, shortly before the end of the Administration's six-year tenure. There were five missions from identification to post-appraisal in the nine months prior to project approval in March 1976. The new and old projects overlapped by nearly one and a half years, which may have been beneficial as the Third Project merely continued to assist N de M in achieving the same objectives as the Second Project had sought. As in earlier projects, investments were mainly for the acquisition of rolling stock and motive power, to rehabilitate track and bridges, to build up the telecommunications network, and to improve yards, stations and other facilities; all this was expected to bring down costs and allow the railway to carry more efficiently an increasing volume of freight. 3. However, the project's main objective was to improve the financial viability of the railway. This was to be achieved by increasing tariffs periodically and adjusting them to cover variable costs and, wherever possible, fixed costs, and by reducing operating costs, particularly staff expenses. Implementation of the project was expected to improve the railway's operating efficiency and its decision-making processes, and enhance its coordination with the Secretariat of Communications and Transport, the Ministry in charge of railways. 4. The original Bank loan was to help finance a two year tranche (1976-77) of N de M's Five Year (1975-79) Investment Plan, which included among other items: a) the acquisition of 299 new diesel locomotives, 15,300 freight cars, 30 mail vans and 180 passenger coaches; -2- b) track renewal, rehabilitation and realignments, and bridge strengthening; c) installation of a VHF/UHF telecommunications system, a CTC system, and an operations control system; d) construction of marshalling yard extensions, workshops, depots, and other buildings; e) the studying of secondary and branch lines, and specific services and the subsequent closure of lines and services found uneconomic; and f) technical assistance to prepare a corporate plan, and design the operations control system, and to help implement the civil works, and install the telecommunications network. 5. Although the internal consistency of the Investment Plan had been carefully reviewed and the project was structured accordingly, the economic situation in Mexico at the time was turbulent. Just before the end of its tenure, the Administration introduced a drastic stabilization plan which was aimed at containing the balance of payments deficits, reducing public sector expenditures and stimulating private capital formation. The new incoming Administration reduced public expenditures even more drastically. Two devRluations were decreed in the second half of 1976, and inflationary pressures followed. As a result, toward the end of 1977 the Bank and N de M had to redefine and reschedule the project. The railway's total Investment Plan was scaled down from US$1,402 million for the period 1975 to 1979 to US$687 million over a new Plan period which extended from 1976 to 1980, and the project, which was originally to cover just two years of the old Plan was made to extend over the whole period of the new Plan. 6. Together with this shift, significant changes were introduced to the content of the Investment Plan (PPAM, Table 1): a) track renewal works were reduced but track rehabilitation was increased; yet the procurement of materials needed to complete the rehabilitation (ballast and sleepers) was cut back by an average of 75%, and the purchase of equipment needed to do the work was reduced also; b) the number of bridges to be renewed under the Plan was reduced from 557 to 403; c) the number of locomotives to be purchased was reduced from 299 to 196, although total expenditure for them was increased by over 12% in real terms, as unit costs were increased (from US$245,000 to US$632,000) not only because of higher prices but also because larger, more powerful locomotives would be purchased; - 3 - d) signalling and telecommunications investments were more than doubled, as the previous plan to use the SCT's telecommunications system was dropped and replaced by the construction of an independent communications network for the railway. 7. The revised Investment Plan was not formally appraised by the Bank despite the significant changes introduced to it; only formal changes were introduced to the Loan Agreement to make the project coincide with the full length of the new Plan. These changes were officially ratified by the Bank in January 1979. II. PROJECT IMPLEMENTATION 8. As described in the PCR (para. 3.04 and Table 2), the project was generally implemented in accordance with the schedule of the revised Plan. However, some delays occurred particularly in the installation of the telecommunications network which was completed in 1982, more than two years after the Investment Plan had drawn to q close. 9. Final project costs increased about 22Z, from the US$687.3 million that the revised Plan was to cost to US$835.5 million (PPAM, Table 2). There were two main reasons for the cost overrun: (i) the UHF/VHF communications system cost 2.5 times more than had been estimated (US$77.3 million vs. US$31.3 million), and (ii) a drastic increase in the number, size and price of the locomotives purchased (PPAM' Table 1): Total No. of US$ per Expenditure Locos Loco US$ million Appraisal 299 391,000 116.9 Revised 196 632,000 123.9 Actual 351 681,000 239.1 10. Because of the magnitude of the expenditures in locomotives and rolling stock (about 62% of investments) and their key importance to the operation and finances of the railway, the issue is, in the opinion of the audit, an aspect that deserves special comment. While during the project period (1976-80), freight traffic grew less than the forecasts prepared at appraisal (see PPAM, Table 3) it still grew. Although traffic volumes expected for 1976 were not realized until 1978, the forecast for 1978 was reached but in 1981, and projections for 1980 are not expected to materialize before 1985. But tonnages still grew by more than 7% in 1976 (more than 3.5 million tons) and another 2% in 1977. The main reason was that the decline in iron ore and coal traffic that followed the slump in the steel industry in the aid 1970s, was compensated for by higher volumes of manufactured and other industrial products. Contrary to conventional expectations, the 1976 economic slowdown did not have a significantly negative impact en traffic, which continued to grow, albeit at a lower rate than had been optimistically forecasted. However, because by 1977 none of the locomotives and rolling stock in the Investment Plan had yet been purchased the traffic growth of 1976 and 1977 put a significant strain on the use of the railway's equip- ment. It had to be used more intensively and workshop and maintenance facilities had to be stretched to keep up with the increased use of the rolling stock and motive power. Despite the obviously overtaxed condition of the railway, and in response to the overall economic crisis of the country the Bank urged N de M to cut back on investments since early 1977. As a result, expenditures on equipment and motive power were postponed still further; in particular, no locomotives were replaced or bought in 1977 and 1978 [PCR, para. 3.05(f)] with the consequent higher use and deferral of routine maintenance of the existing equipment. This led to a higher than normal rate of breakdowns and a declining availability of the equipment (see PPAM, Table 4). By late 1978 investments had been further stretched out in the revised Investment Plan worked out by N de M and the Bank, and the provision for locomotives and rolling stock had been drastically reduced. 11. However, in 1979-80 the need appeared for the railway to carry large amounts of grain from the U.S. to Mexico's heartland but, because of the earlier investment cuts N de M was not prepared for it and eventually moved the grain only at the expense of other traffic and under crisis condi- tions. Despite the large volumes of grain carried, total tonnage moved by the railway increased only slightly in 1979 (0.5%); however, total ton-kms produced grew by 11% on account of the long distance over which the grain was hauled (US border to Mexico City mainly). N de M reacted to this crisis by leasing (often with a purchase option) and purchasing, with the acquiescence of the Bank, a large number of new locomotives. By the end of the Plan period, 351 locomotives had been bought, most of them in 1980-81, as against the 299 in the original Plan and the 196 in the 1978 revised Plan (PPAM, Table 1). 12. Many factors interacted to produce the situation that led N de M to purchase this large number of locomotives. Four stand out. First, as men- tioned in the PCR (paras. 3.05 and 4.01), the failure to adjust the Invest- ment Plan in 1976-77 in response to traffic developments. This led to pres- sures that resulted in a rapid deterioration of the existing equipment as scheduled repairs and maintenance could not be made. Second, poor workshop performance: productivity levels apparently could not be sustained under pressure and, therefore, expected improvements in equipment availability did not e..terialize. It appears that the lack of imported spares and the poor quality of the domestically produced parts, contributed to this outcome, but poor labor productivity in the workshops also appears to have been a factor. Although rolling stock and locomotive availability had not been an issue when the project was appraised, it became the focus of the railway's management during project implementation. This raises the question of whether high earlier availability rates in the railway were not just the result of low utilization coupled with a rather comfortable stock of motive power. Third, the fact that SCT's (the Ministry's) track realignment program was not -5- iinplemented as expected,1/ imposed restrictive operating practices on the railway: instead of running longer and faster trains, the railway had to continue running comparatively slower, shorter trains, which use motive power more intensively. Finally, N de M's train programuing and scheduling and yard operating practices did not improve and neither did their wagon and stock control system. This was mainly the consequence of delays in implementing the communications program of the Investment Plan. All these factors contributed to create the impression that the problem was one of lack of motive power and rolling stock, rather than one that could be solved by other less expensive means, for example, improving the productivity of workshops and/or accelerating the communications program. Admittedly, most alternative solutions were likely to take considerably more time to implement than the comparatively short time it took to lease (and later purchase) and put in service 2 large number of locomotives: under the crisis conditions prevailing at the time this might have been the best that could be done. Yet, should the crisis situation have come about at all? To some extent the crisis was the result of poor sector management that could have been avoided if problems that existed well before the crisis had been dealt with earlier. For example, the reduction in real transport sector investments in the face of increasing traffic volumes could have been avoided, regulations that prevented the trucking industry from responding more aggressively could have been dealt with, import restrictions on equipment (especially trucks) and spare parts could have been reassessed, and in particular, policies on railway pricing as well as motor fuel pricing could have been dealt with. Most of these anomalies, although known before, became vividly evident only when the crisis occurred. Most, in fact, have been dealt with, though not solved, under subsequent Bank-assisted projects. 13. As shown in Table 4, contrary to the Plan of Action agreed at appraisal, locomotive availability decreased steadily during the project period indicating that insufficient attention was paid during project implementation either to workshop productivity or to see to it that locomotives were in fact making it to the shops for maintenance. Despite efforts under th follow-up project (Fourth Railway Project, December 1980) to bring locomotive availability in line with other improvements, this area still remains a problem.2! 14. Implementation of the telecommunications program caused innumerable problems and suffered the highest cost overrun and time delay. The plan called for N de M to use the Ministry's (SCT) microwave network, including SCT's communications towers, to install a VHF radio communications system to control locomotive and train operations. However, lack of experience with 1/ In Mexico track realignments and new construction are not the responsi- bility of the railways but of the Ministry in charge of railways, the Secretaria de Communicaciones y Transporte (SCT). 2/ The Government and N de M have suggested that the principal reason for this was the reallocation of resources to other uses (Annex, Specific Comments, para. 2). - 6 - the complex technology involved prevented realizing that the plan was inadequate: not only were the number of channels that would be made available by SCT too few (20 as opposed to the 40 needed) but union and other rules on access to the towers made it impracticable for the railway to use the system. When this was realized a new plan for an independent communications network had to be devised. The new plan involved the construction of the railway's own towers and cost much more than originally expected and took eight instead of three years to complete. III. PROJECT RESULTS 15. According to the Appraisal Report (paras. 5.01 and 5.02) growth of the Mexican economy from the 1940s through the 1970s was supported by the existence of a railway system that provided adequate capacity to move the increasing volumes of goods at very low costs. Because the heavy traffic increases of the 1960s (6.5% p.a. for freight and 3.8% p.a. for passengers) resulted in capacity problems which affected N de M in particular, continued growth of the economy, according to the SAR, depended on the Government's success in strengthening N de M, increasing its capacity, and maintaining its comparatively low working costs (SAR, para. 4.05). The audit has attempted to review whether, in retrospect, the project is likely to have achieved that goal. The audit has also reviewed the PCR's estimated rate of return for the project, but lacking the information and resources to repeat the calculations, has done so only cursorily. 16. The project was intended to enable the railway to cope with an expected large volume of added throughput (56% increase in ton-kkm) and this it did (31% increase in ton-km). While not as dramatically as expected at appraisal, traffic in tons increased significantly and in ton-km it grew by about one third. The railway moved these addeC volumes which was a significant achievement particularly in view of the turmoil in the Mexican economy during much of the project life. However, several physical aspects of the project fell short of expectations: (i) traffic increases in tons were 30% below appraisal forecasts and 16% below in ton-km, (ii) the Investment Plan was cut back in a major way, and (iii) some individual items, particularly locomotives, had large physical and price overruns. 17. In retrospect, it appears that the main problem that affected smooth project execution was the lack of agreement between the Investment Plan and the prevailing economic conditions. This was due to the fact that when the Plan was prepared the macroeconomic changes that tcok place during the project period were not foreseen, although a well documented diagnosis of prevailing economic conditions in Mexico and their future evolution was developed at length in the Bank's 1976 Economic Report for Mexico. The report was issued shortly before the project was appraised, but was apparently not used in framing it. The response of the railway to the 1976 recession proved to be inappropriate to deal with the 1979-81 growth and traffic boom and was made worse by the unforeseeable need to import large amounts of food grain in 1979 and 1980. - 7 - 18. Also, the timing of the project does not appear to have been the most felicitous: it straddled two Administrations and was placed, therefore, in an environment of uncertainty, which was eracerbated by the unstable overall economic conditions. In general, transition periods between administrations are poor times to reach lasting agreements on future actions and to start implementing large new projects. Mexico is no exception to the rule. In retrospect, the project had to be redefined and its financing reassessed shortly after approval, not only because the macroeconomic environment had not been foreseen, but because success depended on the continuation of the outgoing Administration's economic policies, and neither the Bank nor the railways had any indication that this would be the case. As it turned out a stabilization program that seriously affected the project was brought in at the very beginning of the new Administration. (i) Financial Results 19. There were two quite distinct periods during project implementa- tion: at first, a period during which operating costs decreased and tariffs increased in real terms, and then a period when exactly the opposite happened, costs increased while tariffs decreased in real terms (see PPAM, Table 5). Between 1976 and 1978 net total losses decreased as a result of relatively stable working costs caused by an about constant work force and tariff increases agreed during project negotiation. This was the transition period between the two Administrations when tough restrictions were imposed on spending and investing. The net result was a noticeable reduction in total costs per traffic unit. In contrast, after 1978, a period of increasing costs set in, particularly materials and depreciation, without an offsetting increase in tariffs and revenues. Net total losses, which had been coming down in real terms (i.e., net of inflation), increased again by over 100% (in real terms) between 1978 and 1980. These increasing deficits were financed mostly, as before, with foreign loans and, as a consequence, financial charges increased significantly after 1980. Also as a consequence, the 10% debt/equity ratio agreed at negotiations (Loan Agreement, Section 5.03) was far exceeded almost every year, despite substantial revaluations of fixed assets which increased net equity by more than five times. The railway had its worst year in 1980, that year coincided with the mid-point of project implementation and the year in which another loan was approved for N de M (Loan 1929-ME for the Fourth Railway Project, US$150 million). Since then the financial situation of the railway has improved considerably and although it is difficult to identify whether the improvements are attributable to the effects of this or the follow-on project, the fact is that improvements have been made. 20. From Table 5 it is clear that the railway's financial troubles have less to do with its transport operations, which are weak in several respects but not grossly deficient, but rather appear to be the consequence of low tariffs and heavy debt financing (including foreign borrowing) of operating deficits. In fact, while N de M has kept working costs under control, their financial costs and debt seivice have risen considerably. Consequently, their total costs (per traffic unit), which do not include a return on capital invested, have not changed noticeably since the project was - 8 - initiated. Thus, while the project appears to have broadly achieved its primary goal of increasing the railway's capacity while maintaining its working costs reasonably low, the railway has continued to take large financial losses and continued to be a considerable burden to the Government. Contrary to expectations, the project does not appear to have helped alleviate this situation. In fact, during the project period the intensity of capital utilization has declined. Whereas freight traffic in ton-km grew by just over 30% in the half decade since 1975, fixed assets in constant value have risen by about 100% (as a result of both the revaluation of assets and cortinuing investments) and traffic units per unit of fixed asset have declined by about one-third. (ii) Economic Results (a) General 21. For purposes of the economic appraisal as well as the evaluation on completion, major programs within the Investment Plan, rather than the narrow project-assisted elements were considered. Six main programs in the Plan were appraised (track renewal, track rehabilitation, track realignment and bridges, locomotives and rolling stock, shop equipment, and telecommunications and signalling), together they comprised about 81% of expected project costs (PPAM, Table 1). On completion four programs were evaluated (track rehabilitation, bridge strengthening, locomotives and rolling stock, including workshop equipment, and telecommunications and signalling), they represented 83% of actual costs. Although the PCR states (para. 7.01) that the definition of the programs was done in line with what was presented in the Appraisal Report, there are important differences: while the track renewal and track rehabilitation programs were appraised separately, only the new rail part of the renewal program, including the equipment costs of the rehabilitation program, were evaluated on completion; only the bridge program of the track realignment and bridge strengthening program was evaluated; the workshop equipment and improvement program was not evaluated but the equipment costs of it were included with the locomotives and rolling stock acquisition program; and while three sub-programs were appraised under the telecommunications program, only two were evaluated [the car control system (C.C.S.) was evaluated together with the VHF/URF sub-program instead of independently]. It is now, therefore, difficult to compare the rates of return of the programs appraised with those estimated on completion (PPAM, Table 6). 22. The PCR concluded (para. 7.09) that the rate of return of the project on completion was about the same as at appraisal (15% versus 17%). However, the project as implemented was significantly different from appraisal projections and several determinants of the rate of return developed such that the rate on completion would have been expected to be below that of the appraisal. These factors include. (i) the physical achievements of the project which did not fare too well compared with appraisal expectations; (ii) actual traffic flows which were below appraisal projections and project benefits must therefore have been below projections (ton-km were forecast to grow 56% between 1975 and 1980 and actual growth was - 9 - only 31%); and (iii) actual costs of the locomotive and rolling stock program which were much higher than forecast. As this last program was key to the outcome of the Plan, because as it absorbed over 62% of total expenditures, it is reviewed next in detail. (b) Locomotives and Rolling Stock 23. Approximately SO% of the Investment Plan (62% of actual expendi- tures) was dedicated to the acquisition of locomotives and rolling stock. The original intention was to purchase a total of 299 locomotives, mostly 2000 HP, along with 15,027 assorted freight cars and 274 cabooses. This large increase in motive power and carrying capacity was expected to prevent any existing traffic, or any increase in traffic, from switching to road transport. 24. On completion of the project 17% more locomotives (351) had been bought for a 69% increase in real expenditures, and 47% fewer wagons (7,994) had been bought for a 47% reduction in real wagon expenditures [PCR, Tables 2 and 3(a), PFAM, Table 1]. The increase in traction horsepower between 1974 (the year on which the appraisal analysis was based) and 1984 (a recent year for which data is readily available) is decisive (PPAX, Table 7). Whereas at appraisal N de M had a total of roughly 2,100,000 HP in locomotives, it had nearly double that in 1984, 4,100,000 HP. Moreover, the percentage of locomotives under 2,000 HP had declined from 44% to 17%, while the percentage of traction power represented by locomotives 21 years and older had stayed almost the same (about 9%). Thus, N de M's locomotive capacity greatly increased in quantity and improved in quality. This substantive increase in traction capacity was not matched by corresponding increases in traffic (1002 as against about 50%), which opens to question how much of it was really necessary and how efficiently the stock is being used. 25. Some of these new locomotives went to replace older equipment which was less economical to operate or could no longer function at all. Some of them substituted for locomotives in poor condition whica broke down frequently thus providing less reliable service. However, some were net additions to the total carrying capacity of the railway. How much of an effect each incremental locomotive represents depends on what equipment is displaced and the way the new equipment is used (availability, kilometers run per year, weight on the trains, etc.).3/ 26. Without a detailed operational analysis the audit is unable to specify the effects of various replacements and additions to N de M's locomotive fleet. However, the audit observes that by standards of North American railways the availability, annual utilization and the trailing weight on N de M is on the low side. Availability of locomotives on Class I 3/ The Government and N de M are of the opinion that the purchases were well justified by the crisis conditions at the time and because this was the only quick response to the problem (Annex, Specific Comments, paras. 3 and 4). - 10 - U.S. railways was 80% last year while on N de M it was 65%, down from 84% in 1976, average annual utilization of the locomotives was of the order of 150,000 km in the U.S. while at N de M it varied between 80,000 and 90,000 km in the past ten years; average net trnin loads in the U.S. were 2,400 tons as against about half that in N de M over the past ten years. While completely accurate comparisons are difficult because allowance must be made for differences in, for instance, terrain, some of which is very steep in Mexico, the audit nevertheless believes that a proportion of the investment in locomotives which is undetermined and which, without much more analysis, cannot be calculated, could have been avoided if N de M had been more efficient in its operations.4/ 27. Also, at least part of the large purchase of locomotives could have been avoided if it had been possible to maintain a higher availability level for the existing equipment. This in turn depended on whether the workshops were able to keep up with the higher demands that were imposed on them, which in turn was a function of the prompt execution of the workshop improvement and equipping program. However, this program was only piecemeal, if at all carried out. On completion few of the 84 pieces of workshop equipment included in the Plan had been purchased, none of the workshop improvements had been done and consequently the availability of locomotives instead of improving as called for in the Plan of Action had actually decreased (see PPAM, Table 4). 28. What level of operations should thus be assumed when making the economic evaluation of a project? In general, a "without" case with low efficiency would create a much higher demand for investment and have a higher rate of return than a "without- case with better operations and more efficient ones. However, if better operations would achieve the same result than thcse achieved with the project, the investments would clearly not be a least cost solution. The audit concludes that, in general, a reasonably attainable level of efficiency should be assumed in defining the "without" project case and believes that on this basis actual performance on N de M may fall short of expectations. 29. The economic justification for the locomotives and rolling stock program (62% of total expenditures under the project and a decisive influence on the project's overall economic performance), was based on the argument that without the investment the railway would not have been able to handle all the traffic offered, in which case traffic would have shifted to road transport at an increased cost. The value of the avoided switch (equal to the difference in the economic costs of the two modes times the volume) is then the economic benefit of the investment. This approach has been used in many other Bank railway projects: frequently systemwide average total rail costs for all commodities and average truck costs are used in the comparison (e.g. Indonesia), in other cases systemwide average costs for specific 4/ The Government and N de M have suggested that the preceding paragraph should be deleted as they consider it improper to c':mpare the Mexican Railways with the U.S. Railways (Annex, Specific Comments, para. 5). - 11 - commodities (e.g. coal) provide the basis for the comparison (e.g. Korea). In this project, the difference between long run systemwide marginal costs by rail for all commodities derived from a Bank sponsored costing exercise and average total costs for trucks were used to determine the benefit. 30. The method argues that costs and not prices should control the allocation of traffic and investment funds. Using costs rather than prices obviously is resorted to only where the two are substantially different and that certainly is the case for Mexican railways where total revenue hardly covers any return on assets in use (some 660 billion in 1984 Mexican pesos). To achieve an even modest return on capital (under prevailing inflationary conditions) the railway would have to raise its revenues by about one half. In fact, while N de M has raised tariffs substantially in recent years (and improved their operating ratio), it is still a long way from meeting the Bank's standards for cost recovery. Ideally, the railway should have prices sufficiently high to cover all working costs, depreciation, a return on invested capital, and a contribution to investments. N de M's revenues are well below covering all these costs; this opens the issue of what the traffic volume would be if tariffs were increased to cover those costs and, in turn, if higher tariffs depress the traffic and total costs are spread over a narrower volume, what would the new costs be. In addition, according to Bank staff, truck tariffs in Mexico are also below costs because the low price of diesel fuel leads to significant underrecovery of real economic costs. In these distorted conditions the question of what is compared with what becomes highly relevant. 31. While theoretically the comparison of costs provides a ready standard for estimating benefits and calculating the ERR, in practice, several uncertainties are raised: (a) What costs should be compared? In the PCR, long run systemwide marginal rail operating costs are compared with average truck operating costs (both exclude terminal costs and infrastructure costs), but as used in this case following Bank recommended methods, the long run rail costs exclude most administrative expenses which are thought to be invariable even in the long term. The audit believes this is an unrealistic proposition, in particular when trucking costs normally include administrative costs. Also, systemwide costs for all freight were used when the economically meaningful comparison is on the basis of point to point specific commodity movements. Finally, it has been argued frequently in the literature that the appropriate standard of comparison is short run rather than long run marginal costs. (b) What is the appropriate basis for estimating demand? Decisions on which mode to use are made by shippers largely on the basis of what they have to pay for the service (including all expenses in a door-to-door shipment) and not on economic costs (however defined). The demand for services (and modal split) reflects prices (tariffs) charged and not costs; however, if prices are not cost-based, shippers receive the wrong signals and distortions - 12 - occur in the market. The economic analysis of a project can either ignore these distortions and apply economic costs to distorted demands (traffic volumes) to estimate potential benefits, or it can attempt to adjust the demand projections so that they reflect economic costs and then apply economic costs to estimate project benefits. The difficulty with the former procedure is that it accepts distortions as they exist and by making investments which include them builds these distortions into the structure of the economy compounding the distortions. The difficulty with adjusting demand projections to the "economic" demand is that while investments would then be in accordance with the "economic" demand they would be insufficient to avoid (at least until prices are adjusted to reflect costs) bottlenecks generated by the -real" demand. In this case, because of the underrecovery of costs, traffic is overstated in both rail and road and an ERR estimated on the basis of their comparison gives an inaccurate picture of the project. Moreover, if, as is frequently done, the amount of traffic which is appropriate to the railway has been estimated beforehand, then it would be more useful to replace the traditional calculation of the ERR based on a rail/road comparison (as was done in the PCR), by another type of calculation similar to that done in power projects which demonstrates that the project indeed represented a least cost solution. 32. In the view of the audit the ERR calculated in the PCR partakes of problems similar to those of many other Bank railway projects. If the methodology in the PCR is adjusted to take account of some of the points raised above, the cost differential in favor of the railway may be reduced and the ERR would be correspondingly lower. Moreover, in the face of an inflated total demand for transport, the audit would hesitate to conclude that the traffic allocation between rail and road is adequate, and wonders whether meeting the full projected rail demand is justified if that demand would split differently and be altogether less with a cost-based full pricing policy. Thus, the audit has doubts about the optimality of the investments under the project and about the ERR as calculated in the PCR, but the audit is unable to calculate an alternative ERR without investigations much beyond the resources available to it. In view of the several methodological difficulties mentioned, the audit sees a need for the development of improved analytical tools to evaluate investments related to railway capacity. 33. The audit concludes that the assumptions and figures used to evaluate the locomotives and rolling stock program in the PCR seem to have produced a comparatively higher rate of return than would be the case if adjustments were made for the factors mentioned. Given the relative size of this program vis-a-vis the overall project, the' rate of return of the Investment Program as a whole would then also be affected. - 13 - (c) Track Renewal and Rehabilitation - 34. Under the renewal program, at appraisal it was expected that (i) 1,600 km of main line track would be renewed, including reballasting, resleepering and relaying with new and heavier rail, and (ii) another 1,000 . km would be renewed with used rails in good condition freed by the installation of the new ones. Under the rehabilitation program (actually an intensive maintenance program), 14,300 km of track were to be reballasted and sleepers, ties and switches were to be replaced. A total of 1.4 million cubic meters of ballast were to be used, 3 million sleepers were to be replaced, and 160 tipper cars, 76 ballast hoppers, and 164 pieces of equipment ranging from bulldozers to ballast regulators and compactors were to be purchased to do the job. The track renewal program would produce lower maintenance costs, longer life for sleepers and rails, and avoid delays due to speed restrictions. The rehabilitation program, which was no more than a program to catch up with deferred maintenance and was to be carried out concurrently with the railway's regular maintenance activities, was also expected to lower maintenance costs, avoid delays and prolong the life of sleepers and rails. The two sub-programs, which appear to have been principally designed for an intensive machine and equipment based maintenance as opposed to more labor intensive maintenance, were technically justified, according to Bank staff, on the basis that quality and productivity of labor based methods are inadequate for high density lines. 35. When the Investment Plan was revised in 1979, the renewal program was somewhat reduced: only 1,024 km of main line were to be relaid with new rail and 1,083 with used rail; and the rehabilitation program was consider- ably cut back as other works were given priority: ballasting was reduced to 470,000 cubic meters, just 500,000 sleepers were to be replaced, and unspeci- fied cuts were made on the materials and equipment required to carry out the program (PCR, Table 2). 36. On completion of the project, 1,017 km of track had been rehabili- tated with new rail, just 873 km (802 of the acheduled trackage) had been renovated with used rail (PCR, para. 3.05), and only a minor part of the rehabilitation program had been done; works were, in fact, halted altogether in 1979 (PCR, para. 3.05). At that point just 200,000 sleepers had been replaced, 280,000 cubic meters of ballast had been used, and only 35 tipper cars had been procured along with the ballast cars, and just 15 of the 164 pieces of equipment to do the job had been purchased. In other words, the physical accomplishments under the two programs were considerably less than expected: less track was in a condition where maintenance costs would be lower, fewer rails and sleepers had their life extended and the avoided delays due to speed restrictions were well below expectations. Costs of implementing the program were lower too in real terms, but the reduction in costs was much less than the reduction in physical achievements (PPAM, Table 1). However, what works were done were concentrated on high priority lines with high traffic volumes and for this reason the rate of return estimated on completion was somewhat higher than estimated at appraisal (16% vs. 14%, PCR, para. 7.03). - 14 - (d) Realignment and Bridges 37. As explained in the Appraisal Report (para. 5.09) the railway carries out coistruction works on its own only in exceptional cases, normally these works are done by the Ministry of Works and are handed over to the railway to operate when completed. The project included one such exceptional case in that several minor sections of main line were to be realigned and 557 minor bridges and culverts were to be reconstructed directly by the railway. The realignments were expected to reduce line grades and thus train operating costs, and the replacement of the bridges would allow the circulation of heavier cars and locomotives thus also reducing operating costs. A rate of return of 14% was estimated at appraisal for the program, with individual rates ranging from 12% to 26% for the realignments and 13% for the bridges. 38. On completion an unspecified amount of realignments had been done but they were worth less than half the estimated real cost of those planned at appraisal. Similarly, just 487 bridges had been reconstructed, 13% fewer than expected, for about 35% less cost (in real terms) than estimated at appraisal. On balance, therefore, ceteris paribus, the rate of return of the program may be assumed to have remained about as it was at appraisal. The PCR reached the same conclusion based on the review of the bridge program only (para. 7.04). (e) Telecommunications Program 39. One of N de M's weak areas at the time of appraisal was telecom- munications. Under the Second Railway Project efforts had been made to improve them: a consultant's study had been -repared and implementation of the recommendations had commenced. The Investment Plan in this project proposed to complete the job and supplement the development of the new microwave system with the installation of a car control system (C.C.S.) and a centralized traffic control system (C.T.C.) on four high density lines (Teotihuacan-Oriental, Oriental-Veracruz, San Luis de Potosi-Carneros, and Irapuato-Guadalajara). These investments were expected to improve locomotive and.rolling stock utilization and reduce accidents; in addition, the C.T.C. system was to reduce train on-line delays and avoid crew overtime costs. 40. As described in para. 14, the development of the microwave system met serious difficulties and eventually had to be revised and replaced by the installation of an independent VHF/UHF network for the railway. This cost more than twice what was expected at appraisal and took eight instead of three years to complete.5/ Since it was not possible to fully utilize the C.C.S. without the completed VHF/UHF network, until 1982 when the communications network was put into operation, it could only produce partial benefits. On completion, therefore, benefits from the improvements in telecommunications were well below appraisal expectations; however, now that 5/ The Government and N de M consider the additional costs were well worth the expense as large benefits will accrue in the future (Annex, Specific Comments, para. 12). - 15 - the system is complete important benefits will accrue on account of this investment. 41. Similarly, only one of the four lines that were to be fitted with C.T.C. was done (the Irapuato-Guadalajara line), and it cost roughly three times the appraised cost (per kilometer, in real terms); however, this is a high density traffic line and thus the rate of return on the investment that was done is, as shown in the PCR, quite high. 42. On balance, the audit concludes, mostly on the weight of the locomotives and rolling stock program, that the rate of return of the project as a whole is likely to have been somewhat overestimated in the PCR compared to the appraisal estimate. IV. CONCLUSIONS 43. Over the project period the railway managed to effectively carry a large increase in traffic and although traffic growth fell shurt of appraisal projections this constituted an important accomplishment. However, this accomplishment was reached at the expense of a compromise in the financial and economic results of the project. While working expenses were kept under control financial deficits exceeded forecasts and the ratio of output to capital significantly declined in real terms. In contrast, output per unit of manpower increased during the project period. 44. It appears, in retrospect, that it would have been preferable to design a more modest project befitting the transitional period between two administrations in which the project was developed. Similarly, it appears that closer attention should have been paid to the financial management of the railway, in particular to the sources of financing used to cover the high operating dei.cits that the railway had in the past and during the project period. The low tariffs continued to be a financial as well as demand distorting element during the project period and although important progress has been made since in remedying the anomaly more needs to be done in the future. 45. On balance, the audit considers that the project met its objectives of increasing the railway's capacity and maintaining its working costs relatively low, but fell short of appraisal expectations and is likely to have had a somewhat lower rate of return than estimated in the PCR. PROJECT PERFORMANCE AUDIT MEMORANDUM MEXICO THIRD RAILWAY PROJECT (LOAN 1232-ME) Estimated va. Actual Implementation and Cost of Ma.Jor Items in the Investment Plan (Mexican $ millions) SELECTED ITEMS INVESTMENT PLAN 1979 REVISED PLAN ACTUAL EXECUTION Cost Cost Cost Cost Expdtr. Expdtr. Units 1975$ 1983$ Units 1977$ 1983$ Units 1977-80S 1983$ Track Renewal new rail (km) 1,600 1,825 20,833 1,024 1,416 10,172 1,017 1,081 5,782 old rail (km) 1,000) 1,083) 873) sleepers (#) 3 m1n) 975 11,130 500,000) 253 1,818 200,000) 101 540 ballast (cu. m) 14 m1n) 400,000) 300,000) equipment (#) 164 277 3,162 ? 92 661 15 103 551 Track Realignment (m) ? 110 1,256 ? 98 704 ? 77 412 Bridge Strengthening (0) 557 268 3,059 403 259 1,861 487 275 1,471 VHF/UHF Telecom. System 522 5,959 1,195 8,585 1,862 9,960 C.T.C. (km) 1,430 208 2,374 7 148 1,063 260 172 920 C.C.S. 76 868 95 682 72 385 Locomotives (0) 299 1,949 22,249 196 2,765 19,799 351 5,262 28,147 Rolling Stock (#) 15,301 7,198 82,169 6,962 5,123 36,803 7,994 6,055 32,388 Workshop Equipment (#) 84 177 2,021 144 1,034 65 348 Workshop Improvements 573 6,541 225 1,616 265 1,418 TOTAL 14,158 161,621 11,804 84,799 15,390 82,322 INVESTMENT PLAN 17,521 200,012 14,437 103,715 18,061 96,583 % of INVESTMENT PLAN 80.8 81.8 85.2 Source: SAR, PCR, audit mission. September 1984 PROJECT PERFORMANCE AUDIT MEMORANDUM MEXICO THIRD RAILWAY PROJECT (LOAN 1232-ME) Estimated vs. Actual Investment Plan (Mex.$ and US$ million) Appraisal Estimate /a 1979 Revised Estimate Actual Expenditures in current in 1983 in in current in 1983 in in current in 1983 in Mex.$ Mex.$ /b US$ Mex.$ Mex.$ /b US$ Mex.$ Mex.$ /b US$ Local Costs 10,516 120,046 841.2 8,143 58,499 380.9 9,963 53,278 460.2 Foreign Costs 7,005 79,966 560.4 6,294 45,216 306.4 8,098 43,305 375.3 TOTAL 17,521 200,012 1,401.6 14,437 103,715 687.3 18,061 96,583 835.5 am.mm .m.mes...... ..-.. - amas -- - m-me /a The project covered only two of the five years of the Investment Plan. Project costs were estimated at appraisal to be: in current Mex.$7,201 million; in 1983 Mex.$82,203 million; in US$576.1 million. /b Converted by means of the GDP deflator index (1983 - 100) Aug. 1975 1976 1977 1978 1979 1980 1981 1982 1983 1977-80 8.76 10.66 13.92 16.23 19.51 25.12 31.96 51.52 100 18.70 Source: 8AR, PCR and audit mission. September 1984 PROJECT PERFORMANCE AUDIT MEMORANDUM MEXICO THIRD RAILWAY PROJECT (LOAN 1232-ME) Forecasted vs. Actual Traffic (units in millions) (1974-1983) Traffic Tons Ton-km Passengers Pass-km Units Year Appraisal Actual Appraisal Actual Appraisal /a Actual Appraisal /a Actual Actual 1974 - 51.7 - 25,457 - 20.0 - 3,115 28,572 1975 - 52.3 - 27,046 - 19.5 - 6,612 29,658 1976 57.3 51.3 29,687 26,839 - 19.1 - 2,507 29,346 1977 /b 54.9 /b 28,772 - 22.3 - 3,112 31,884 1978 66.9 56.2 35,145 29,650 - 22.2 - 3,295 32,945 1979 /b 54.8 /b 30,091 - 18.7 - 3,279 33,370 1980 75.0 55.1 39,655 33,404 - 16.6 - 3,057 36,461 1981 - 58.0 - 35,583 - 16.1 - 3,079 38,662 1982 - 54.0 - 31,429 - n.a. - 3,477 34,906 1983 - 58.7 - 35,802 - n.a. - 4,197 39,999 /a No forecast of passenger traffic was made at appraisal. 7- No forecasts are available for these years. n.a. = Not available Source: N de M September 1984 - 19 - TABLE 4 PROJECT PERFORNMCE AUDIT MEMRANDUM MEXICO THIRD RAILWAY PROJECT (LOAN 1232-ME) Locomotive Availability and Productivity (1976-83) Loco stock Average Loco-km Gross ton-km at beginning Availability per Locos per Locos Year of Year During Year in Service in Service (#- (%) (km) (000 ton-km) 1976 1,097 83.6 87,325 57,682 1977 1,070 80.9 94,535 61,157 1978 1,069 76.1 110,595 70,157 1979 1,101 76.5 93,805 66,239 1980 1,211 78.2 83,585 58,718 1981 1,411 72.1 81,420 59,220 1982 1,483 66.1 84,845 52,965 1983 1,532 65.5 93,539 58,733 Source: N de M, Completion Report, Audit Mission. Otober 1984 PROJECT PERFORMANCE AUDIT MWERNU0iHN MEXICO THIRD RAIIMAY PROJRCT (WAN 1232-N) N do M's Financial Results (million Mea.$) OPERATING OPERATING COSTS OPERATING FINANCIAL YEAR REVENUE Staff Materials a b. & Deval. Total LOSS CHARGES TOTAL LOSS _J 1983S ___ 18 _L_ 191 1 1933$~ _:T_ 1C 83$' = WM _1_1983$ 1976 5,665 53,143 5,001 46,914 1,920 18,011 1,597 14,606 8.478 79,531 2,813 26,386 1,091 10,235 3,904 36,623 1977 7,980 57,328 6,151 44,188 3,177 22,823 926 6,652 10,254 73,664 2,274 16,336 1,595 11.456 3,869 27,794 1978 9,812 50,456 7,355 45,317 3,303 20,351 516 3,179 11,174 68,648 1,362 8,392 1,720 10,598 3,082 18,990 1979 11,482 58,852 6,644 44,305 5,132 26,304 702 3,598 14,478 74,206 2,996 15,356 1,914 9,810 4,910 25,166 1980 13,842 55,104 11,595 46,158 7,461 29,701 2,925 11,752 21,981 87,611 8,139 32,508 2,904 11,560 11,043 44,068 1981 18,837 58,939 15,328 47,960 8,147 25,491 3,993 10,616 27,468 84,067 8,631 25,128 5,437 17,012 14,068 42,140 1982 28,42a 55,179 25,637 49,761 10,269 19,932 5,451 10,580 41,357 80,274 12,929 25,095 9,477 18,395 22,406 43,489 1983 64,572 64,572 36,865 21,521 21,521 14,352 14,352 14,352 72,738 72,738 8,166 8,166 28,806 28,806 '36,972 36,972 /a Including dourrage and rental charges for use of foreign cars. Sources PCR and Audit Kission. September 1984 to 'A PROJECT PERFORMANCE AUDIT MEMORANDUM MEXIOD THIRD RAILWAY PROJECT (LOAN 1232-ME) Forecasted vs. Actual Economic Results APPRAISAL PCR ESTIMATE ESTIMATE Cost ERR Cost ERR 1983 x 1983 x $M $m Track Renewal new rail 20,833) 14) 5,782 16 old rail 2,671) Track Rehabilitation matewials 8,459) 540 - equipmor 3,162) 21) 551 Realignment and realignment 1,256 12-26 412 - Bridges bridges 3,059 13 1,471 14 Telecommunications VHF/UHF 5,959 25 9,960) 13 C.C.S. 868 25 385) C.T.C. 2,374 25 920 27 Locos and Locos 22,249) 28,147) Rolling Stock Rolling Stock 82,169) 32,388) 15 Shops Equipment 2,021) 22 348) Improvements 6,541) 1,418 - Total Assessed/Evaluated Items 161,621 17 82,322 15 Total Investment Plan 200,012 96,583 Source: SAR' PCR, Audit Mission estimates November 1984 PROJECT PERFORMANCE AUDIT AUDIT MEMORANDUM MEXICO THIRD RAILWAY PROJECT (LOAN 1232-ME) Status of N de M's Locomotive Stock (end of 1974 and 1984) Status at End of 1974 Status at End of 1984 Loco Type Average Number of Locos Total Power (000) Number of Locos Total Power (000) (HP) (HP) less than more than less than more than less than more than less than more than 20 years 20 years 20 years 20 years 20 yeare 20 years 20 year. 20 years 800-1,200 SG 1,000 59 31 59.0 31.0 2 25 2.0 25.0 1,300-1,350 SG 1,325 76 13 100.7 17.2 10 62 13.3 82.2 1,500-1,600 SG 1,550 67 72 103.9 111.6 85 6 131.8 9.3 1,750-1,800 SG 1,775 274 14 486.4 24.9 77 157 136.7 278.7 2,000-2,250 SC 2,125 - - - - 279 - 592.9 - N 2,400-2,750 SG 2,575 131 - 337.3 - 170 - 437.8 - 3,000-3,600 SG 3,300 258 - 851.4 - 605 - 1,996.5 - 927 130 1,938.7 184.7 1,228 250 3,311.0 395.2 2,000-2,250 SH 2,125 - - - - 4 - 8.5 - 2,400-2,800 SH 2,600 - - - - 68 - 176.8 - 3,000-3,600 SH 3,300 - - - - 58 - 191.4 - - - - - 130 - 376.7 - Total Motive Power 927 130 1,938.7 184.7 1,358 250 3,687.7 395.2 1,057 2,123.4 1,608 4,082.9 Source: SAR Third Railway Project, 1975 SAR Proposed Railway Sector Project, 1985 March 1985 -23 - ANNEX 1 Page 1 of 5 E-1275/85 June 21, 1985 Spanish (Mexico) OED EGB:jb Translation of incoming telex Mr. Yukinori Watanabe Director, Operations Evaluation Department World Bank Washington, DC This is in reference to your letter of April 11, 1985, transmitting a copy of the Project Performance Audit Report for the Mexico Third Railway Project (1232-ME), and requesting comments thereon so that they may be taken into account in the preparation of the final version before it is presented to the Executive Directors of the Bank. It should be emphasized that the report contains valuable observations which undoubtedly will help to improve procedures for the appraisal, implementation and monitoring of future investment projects undertaken in the railways subsector with the participation of the World Bank. It is stated in some parts of the report that the benefits realized from the project fell short of the established objectives. In many cases this was due to circumstances beyond the control of the executing agency, and it is therefore believed that in general the project was of great benefit to the improvement of the national railways. It is also felt that the undertaking is one link in a chain of closely related projects intended to increase the efficiency of the railway system, and that within this context the results should be taken into account for future projects. The present management of N de M has taken major steps toward improving the quality and efficiency of railway service. In doing so it has in some cases referred to the Bank's recommendations, which are being reflected positively in the operation. In general, we feel that the document prepared by the Operations Evaluation Department considers all aspects related to project implementation. However, to clarify some aspects of the report and elaborate on its contents, we offer below some general and specific observations which we would like to see included in the final version. These comments have been prepared chiefly by staff members of Ferrocarriles Nacionales de Mixico in its capacity as Executing Agency, and by the Banco Nacional de Obras y Servicios Pfblicos as Borrower and the Secretariat of Finance and Public Credit in its capacity as Guarantor. A. General Comments 1. It is considered that the present document fulfills several objectives, the main ones including: to point out the most important aspects of project implementation, to assess the achievements of the project, and to - 24 - ANNEX 1 Page 2 of 5 analyze how problems that arose during its execution were met with the appropriate measures. In this sense the report is an excellent exercise. 2. We agree with the finding in the report that the Mexico Third Railway Project met with a large number of problems due - among other reasons - to the failure to foresee the budgetary cuts that were to occur during its execution and to the consequent restructuring of components. Still, it is relevant that the report stresses the Bank's participation in the varicus stages of the project and thereby assumes its own responsibility in project execution. 3. The report states repeatedly that the project met the programmed objectives partially because of the budget cuts which affected all components, and the reallocation of funds to purchase locomotives rather than to support other subprojects. It is suggested that the report take into account the reprogramming of the project which was approved in 1977, and the Bank's agreement that this be done. Also, we regard as questionable the statement in the report to the effect that the project was originally very ambitious, as was the number of components. It must be kept in mind that the Bank took part in the various stages of development of the project and that accordingly, the report should go into greater detail on its participation both in the original formulation and in its subsequent reprogramming. 4. It must be kept in mind that Ferrocarriles Nacionales de M6xico does not have the legal power to increase tariffs independently as a means of improving its financial situation. Therefore, the report should not consider, as a black mark against N de M, the fact that it has not increased tariffs sufficiently. B. Specific Comments 1. Paragraph 12 is considered to be extremely repetitive in its statements concerning the factors that led N de K to purchase a larger number of locomotives than programmed. To clarify the Bank's evaluation, it is suggested that this paragraph be summarized as follows: "Four factors interacted to produce the situation that led N de M to purchase this large number of locomotives. First, the Bank's suggestion to N de M to cut back the investments on (sic) the sector since early 1977. Second, the failure to adjust the investment plan in 1976-77 in response to traffic developments. Third, the lack of imported spares and domestically produced parts. Fourth, the growing needs of imported grains, mainly from the U.S.A. All these factors resulted in a rapid deterioration of the existing equipment, lower labor productivity levels in the workshops and finally the delays in implementing the communications program of the investment plan." 2. Paragraph 13 mentions the results in the component of maintenance shops, underscoring the negative features of its implementation. However, in order to give balanced consideration to both positive and negative aspects, it would be appropriate for the report to add in the same paragraph that the reallocation of investment funds to other components was the reason why the operational levels originally programmed were not achieved. - 25 - ANNEX 1 Page 3 of 5 3. With regard to the statements made in paragraphs 24 to 27 of the report on the large-scale acquisition of locomotives and a possible reduction, based on the fact that more efficient operation of the railway had been achieved and there was a greater availability of existing traction equipment, the following reasons should be included among those mentioned for the purchase of locomotives: (a) In 1979-80, and particularly in the latter year, there was a significant and unexpected rise in grain imports. Whereas 70,070 carloads were received from US railways in 1979, in the following year 151,895 units were received, an increase of 117%. (b) The lack of proper scheduling of the arrival of grain imports and of appropriate coordination of transport of the merchandise received among the different modes caused concentrations of vessels in the main ports, exceeding the capacity of railway facilities. (c) Because of budgetary constraints no locomotives were procured in 1977 and 1978. Thus, with the sudden increase in traffic beginning in 1979, the railway was faced with a critical shortage of traction power to handle the volumes of freight that appeared. In an effort to remedy this situation, authorization for emergency purchases of locomotives was requested and obtained. However, because manufacturers could not produce the necessary units immediately, it ultimately became necessary to lease used locomotives with option to buy. It should be noted that 104 locomotives were acquired in the manner described, a majority of which were over 15 years old and which, when put into use, broke down frequently making it necessary to send them to the shops for repair. This aggravated the overloading of lines and terminals. Furthermore, although many users have increased their demand on the railways to a substantial extent, the capacity of railway installations and freight loading and unloading facilities have not expanded at the same rate; it was therefore necessary to store wagons at consignees' installations and in yards and elsewhere in the railway system, hindering operations and causing a lower rate of utilization of motive power. In addition, the extraordinary rise in traffic on some lines - main lines to ports and to border points of contact with United S:ates railways, such as the Mexico City-Veracruz and Mexico City-Nuevo Laredo lines - which caused congestion, made it necessary to divert part of that traffic to other less congested lines involving much longer distances. The latter include the Monterrey-Torre6n, Irapuato-Mexico City line used instead of the customary and more direct Monterrey-San Luis Potosi-Mexico City line, imposing a greater requirement for locomotives. (d) The need to make maximum use of available locomotives in an effort to meet demand led to a deferral of regular servicing and maintenance of locomotives. The result was more and faster wear and tear on the locomotives, which meant more major repair work, morv time in the shops, and the consequent appreciable reduction in availability. 4. In view of the foregoing, because of the country's pressing need for transportation and precluded from taking other action with immediate results, the railway opted for the sole measure that would enable it to move decisively toward solving the problem. The feeling was that the costs incurred in the - 26 - ANNEX 1 Page 4 of 5 large-scale purchase of locomotives are fully justified when one considers the social and economic cost to the nation that would have resulted from a standstill in railway service. 5. It is proposed that paragraph 26 of the report be eliminated; we regard it as unsuitable to compare the operation of Ferrocarriles Nacionales de Mexico with that of United States railways, inasmuch as conditions in the railways subsector differ between countries. 6. It is suggested that the following sentence be eliminated from paragraph 27: "However, this program was only piecemeal, if at all carried out." The reason is that the same paragraph indicates that the N de M maintenance shops did not meet the demand in terms of efficiency in the maintenance of locomotives and existing equipment. 7. Turning to the evaluation of projects based on a given level of efficiency of the system as discussed in paragraph 28, we believe that this is the proper procedure and the one that the Bank and N de M have followed in seeking to establish project objectives based on an in-depth knowledge of the actual situation of the railway and of those improvements that would be feasible without requiring investments or with a minimum of them. 8. Paragraphs 29 to 31(a) refer to the method used to evaluate the acquisition of locomotives and trailing equipment. On this point, it is believed that when the considerations raised there for analysis of this specific project are taken into account, the result could be a lower rate of return than the one calculated in the audit report. We therefore find it appropriate to make some changes in the method, and N de M is fully prepared to cooperate with the Bank in the ana'sis of the proposed changes. 9. In our opinion, the estimation of demand based on a tariff policy which reflects actual costs of service - paragraph 31(b) - applies at this time to N de K only as an exercise, since its implementation does not depend directly on the railway but rather on government policies. One cannot run the risk of underestimating the requirements for investment in railways and allow a reappearance of congestion such as that which occurred in 1979 and 1980 and which ultimately led to much higher costs. In the most recent analyses made by N de M to evaluate the acquisition of locomotives and wagons we have considered options suggested by Bank missions, including as variable costs the elimination of depreciation charges from equipment maintenance expenditures and adjustment of fuels and lubricants to the international price. Furthermore, instead of taking systemwide average operating costs, we use the costs applicable to each of the items that presumably would no longer be transported by railway if the equipment were not acquired. For the operating costs of road transport, rather than calculating average cost based on a level, straight terrain and a given fixed rate of speed, a combination of costs is used based on different types of terrain and different speeds. Similarly, the analyses have provided for separation of the benefits obtainable for locomotives and wagons, based on an estimate of the traffic that each would handle with the purchases of equipment under consideration, calculating the respective rate of return for each case. - 27 - ANNEX 1 Page 5 of 5 10. Paragraph 37 discusses the evaluation of investments for realignments of line sections considered in the project. On this point, we must note that such an evaluation was not performed fully because the sections originally programmed were replaced by others, where improvements to existing slope and alignment were thought to be more urgent. 11. With regard to the telecommunications systems discussed in paragraphs 14 and 40, we may mention a number of factors that affected both the estimation of the project cost and the extension of the period for its execution. One key factor was the severe inflation during the project execution period; for example, in the construction industry prices rose by approximately 800% from 1975 to 1982, which meant that the budgetary resources allocated annually for the project were often insufficient to move ahead at the projected rate. We may also cite the lags that commonly occurred in budgetary authorizations, which caused major delays in the start of the work program for each year. Moreover, the original project called for N de M to acquire its own telecommunications equipment and use the microwave network of the Secretariat of Communications and Transportation and Tel4ifonos de Mixico. But, when the relevant propagation studies were made it was found that most of the towers that would be used were not appropriately located for the needs of N de M; there were also labor problems in their utilization. The final decision was that N de M would build its own towers, and this had an impact on project costs. 12. It is believed that despite the higher costs the N de M decision to build a complete, independent telecommunications network for the sole use of the railway was correct, and that it will be reflected in greater benefits for railway operation which will more than offset the additional expenditures incurred. 13. As regards the program for installation of the centralized traffic control (CTC) system on some main lines, as mentioned in paragraph 41, work was done only on the Irapuato-Guadalajara line. The installations for the San Luis Potosi-Carneroso line, where work is now under way, were deferred. The Teotihuacan-Oriental and Oriental-Veracruz lines, included in the program for installation of CTC, were cancelled because of the planning and initiation of works for alignment and duplication of the other line between Teotihuacan and Veracruz, these works now being undertaken by the Secretariat of Communications and Transportation. Sincerely, Jose Luis Flores H. Director of International Financial Institutions Secretariat of Finance and Public Credit - 28 - ANNEE 2 pafe 1 of 7 248423 UORLDBANK 1777313 SHDCHE RPT TLX 0946 19:33 PH SR. YUKINORI NATANABE DIRECTOR DEL DEPARTAMENTO DE EVALUACION DE OPERACIONES BANCO INTERNACIONAL DE RECONSTRUCCION Y FOMENTO WASHINGTONP D.C. HAGO REFERENCIA A SU CONUNICACIO.N DE FECHA 11 DE ABRIL DE 1985, MEDIANTE LA CUAL ENVIA COPIA DEL INFORME DE AUDITORIA DEL PROYECTO FERROCARRILES DE MEXICO III (PRESTAMO 1232-HE) Y SOLICITA COMENTARIOS AL MISMO CON EL FIN DE QUE SEAN CON. SIDERADOS EN LA ELABORACION DE LA VERSION FINAL ANTES DE QUE SEA DISTRIBUIDA AL DIRECTORIO EJECUTIVO DEL BANCO. CABE RESALTAR QUE EL INFORME DE REFERENCIA CONTIENE VALIOSAS OBSERVACIONES QUE INDUDABLEMENTE CCADYUVARAN A PERFECCIONAR LOS MECANISMOS DE EVALUACION, DESARROLLO Y SEGUIMIENTO DE FUTUROS PROYECTOS DE INVERSION QUE SE LLEVEN A CABO EN EL SUDSECTOR FERR0CARRI :S CON LA PARTICIPACION DEL B4NCO MUN- DIAL. EN ALGUNOS RENGLONES DEL INFORME SE MENCIONA UUE LOS RESUL- TADOS OBTENIDOS DEL PROYECTO NO LOGRARON ALCANZAR LAS METAS ESTABLECIDASP EN MUCHOS CASOS POR SITUACIONES rUERA DEL CON- TROL DE ORGANISMO EJECUTORo POR LO QUE SE ESTIMA QUE COMO CONCLUSION GENERAL, EL PROYECTO FUE DE GRAN BENEFICIO PARA EL MEJORAMIENTO DE LOS FERRONALES. SE CONSIDERA TAMBIEN QUE EL PROYECTO DE REFERENCIA FORMA PARTE DE UNA CADENA DE PROYECTOS ESTRECHAMENTE RELACIONADOS, TENDIENTES A INCREMENTAR LA EFICIENCIA DEL SISTEMA FERRO- VIARIO Y QUE DENTRO DE ESTE CONTEXTO SE DEBEN TO11AR EN -- CUENTA LOS RESULTADOS OBTENIDOS PARA FUTUROS PROYECTOS. ES IMPORTANTE SEIALAR QUE LA PREGENTE ADMINISTRACION DE FERRONALES HA TOMADO IMPORTANTES MEDIDAS PARA MEJORAR EL NIVEL DE CALIDAD Y EFICIENCIA DEL SERVICIO FERROVIARIOY TENIENDO PRESENTE EN ALGUNOS CASOS LAS RECONENDACIONCS DEL BANCO, LAS QUE lE ESTAN REFLEJAN-0 POSITIVn,MENTE EN LA OPERACION. - 29 - AMMU 2 EN TERMINOS GENERALES CONSIDERAMOS QUE EL DOCUMENTO ELABO- Page 2 of 7 RADO POR EL DEPARTAMENTO DE EVALUACION DE OPERACIONES CON- TEMPLA TODOS LOS ASPECTOS RELACIONADOS CON EL DESARROLLO DEL PROYECTO. SIN EMBARGO, CON EL FIN DE ESCLARECER VARIOS ASPECTOS DEL INFORME Y ENRIQUECER SU CONTENIDO, A CONTINUA- CION NOS PERMITIMOS PRESENTARLE ALGUNOS COMENTARIOS TANTO GENERALES COMO PARTICULARES QUE SERIA DE NUESTRO INTERES SE INCLUYERAN EN EL INFORME FINAL. CABE SE*ALAR QUE ESTOS COMENTARIOS FUERON ELABORADOS PRIN- CIPALMENTE POR FUNCIONARIOS DE FERROCARRILES NACIONALES DE MEXICO EN SU CALIDAD DE ORGANISMO EJECUTOR, ASI COMO POR EL BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, COMO PRES- TATARIO Y LA SECRETARIA DE HACIENDA Y CREDITO PUBLICO, EN SU CALIDAD DE GARANTE. A. COMENTARIO GENERALES 1. SE CONSIDERA QUE EL PRESENTE DOCUMENTO CUMPLE CON VARIOS OBJETIVOS, ENTRE LOS QUE SOBRESALEN: DESTACAR LOS ASPECTOS MAS IMPORTANTES DEL DESARROLLO DEL PROYECTO, EVA- LUAR LOS LOGROS OBTENIDOS Y ANALIZAR LA FORMA EN QUE SE CONTRARRESTARON LOS PROBLEMAS QUE SURGIERON DURANTE SU EJECUCION CON LAS MEDIDAS APLICADAS FARA SU SUPERACION.EN ESTE SENTIDO, EL INFORME DE REFERENCIA CONSTITUYE UN EXCE- LENTE EJERCICIO. 2. SE ESTA DE ACUERDO CON LA AFIRMACION DEL INFORME RESPECTO A QUE EL PROYECTO ''FERROCARRILES DE ilEXICO III'' ENFRENTO MULTIPLES PROBLEMAS DEBIDO, ENTRE OTRAS CAUSAS, A LA FALTA DE PREVISION DE LOS RECORTES PRESUPUESTALES OCU- RRIDOS DURANTE SU EJECUCION Y A LA CONSECUENTE REESTRUCTU- RACION DE LAS COMPONENTE.G. SIN ENDARGO, SE CONSIDERA PERTI- NENTE QUE EL INFORME RESALTE LA PARTICIPACION DEL BANCO EN LAS DISTINTAS ETAPAS DEL PROYECTO Y ASUMA DE ESA MANERA SU RESPONSABILIDAD EN LA EJECUCION DEL MISMO. 3. DE MANERA PERSISTENTE EL INFORME SE*ALA QUE EL PROYECTO CUMPLID PARCIALMENTE CON LOS OBJETIVOS PROGRAMADOS A CONSECUENCIA DEL RECORTE PRESUPUESTAL QUE AFECTO A TODAS LAS COMPONENTES Y LA REUBICACION DE LOS RECUP.SOS FINANCIE- ROS HACIA LA ADQUISICION DE LGCOMOTORAS EN LUGAR DE APOYAR A LOS DEMAS SUBPRO"ECTOS. SE SUGIERE QUE EL INFORME TOME EN CONSIDERACION LA REPROGRAMACION DEL PROYECTO 2UE SE APRODO EN 1977 Y LA ACEPTACION POR PARTE DEL BANCO DE QUE SE LLEVARA A CABO. AGIMISMO, SE CONCIDERA CUESTIONABLE LA ASEVERACION DEL INFORME RESPECTO A QUE EL PROYECTO ORIGI- NALMENTE ERA MUY AMBICIOSO, ASI COMO SU NUMERG DE COMPO- NENTES. CABE RECORDAR QUE EL BANCO PARTICIPO EN LAS DISTIN- TAS ETAPAS DE DESARROLLO DEL rROYECTO Y QUE POR LO TINTO EL INFORME DEBERIA PROFUNDIZAR SOBRE SU PARTICIPACION TANTO EN LA INSTRUMENTACION ORIGINAL COMO EN SU POSTERIOR REFP GRAMACION. 4. ES IMPORTANTE TOMAR EN CUENTA QUE FERROCARRILES NACIONALES DE MEXICO NO TIENE CAPACIDAD JURIDICA PARA IN- CREMENTAR LAS TARIFAS INDEPENDIENTEMENTE, CON EL FIN DE MEJORAR SU SITUACION FINANCIERA. POR LO TANTOP EL INF0RMZ NO DEBE CONSIDERAR COMO UN ASPECTO NEGATIVO DE FERROCARRI- LES EL QUE NO HAYA INCREMENTADO SUFICIENTEÍENTE LAS TARIFAS. - 30 - AmNEX 2 D. COMENTARIOS PARTICULARES Page 3 of 7 1. SE CONSIDERA QUE EL PARRAFO 12 ES MUY REPETITIVO EN SUS ASEVERACIONES RESPECTO A LOS FACTORES QUE CONDUJERON A FERRONALES A COMPRAR UN MAYOR .NUMERO DE LOCOMOTORAS DE LO PROGRAMADO. A FIN DE CLARIFICAR LA APRECIACION DEL BANCO SE SUGIERE QUE ESTE PARRAFO SE RESUMA DE LA MANERA SIGUIEN- TE: ''FOUR FACTORG INTERACTED Tu rRODUCE THE SITUATION THAT LED N DE M TO PURCHASE THIS LARGE NUNBER OF LOCONOTIVES. FIRST, THE BANK'S SUGESTION TU N DE N TU CUT BACK THE INVESTMENTS ON THE SECTOR SINCE EARLY 1977. SECOND, THE FAILURE TO ADJUST THE INVESTAENT PLAN IN 1976-77 IN RESPONSE TO TRAFFIC DEVELOPMENTS. THIRDP THE LACK OF IMPORTED SPARES AND DOMESTICALLY PRODUCED PART3. FOURTHi THE GROWING NEEDS OF IMPORTED GRAINS, MAINLY FROM THE U.S.A. ALL THESE FACTORS RESULTED IN A RAPID DETERIORATION OF THE EXISTING EQUIPMENT, LOWER LABOR PRODUCTIVITY LEVELS IN THE WORKSHOPS AND FINALLY THE DELAYS IN IMPLEMENTING THE COMUNICATIONS PROGRAM OF THE INVESTMENT PLAN.''. 2. EN EL PARRAFO 13 SE HACE MENCION AL RESULTADO OBTENIDO EN LA COMPONENTE DE TALLERES DE MANTENIMIENTO, SE- #ALANDO LOS ASPECTOS NEGATIVOS DE SU DESARROLLO. SIN EM- BARG, A EFECTO DE PONDERAR EQUILIBRADAMENTE LOS ASPEC- TOS POSITIVOS Y NEGATIVOS, SERIA PERTINUNTE QUE EL INFORME A*ADIERA EN EL MISMO PARRAFO QUE FUE LA REASIGNACION DE LA INVERSION HACIA OTRAS COMPONENTES LA CAUSA QUE ORIGINO EL NO HABER ALCANZADO LOS NIVELES DE OPERATIVIDAD ORIGINAL- MENTE PROGRAMADOS. 3. EN RELACION CON LO MENCIONADO EN LOS PARRAFOS 24 A 27 DEL INFORME SOBRE LA ADQUISICION MASIVA DE LOCOMOTORAZ Y SU POSIBLE REDUCCION TOMANDO COMO BASE QUE SE HUBIERA OB- TENIDO UNA MAS EFICIENTE OPERACION DEL FERROCARRIL Y UNA MAYOR DISPONIBILIDAD DEL EQUIPO TRACTIVO EN EXISTENCIAr CABE ACLARAR QUE ENTRE LAS CAUSAS QUE CONDUJERON A DICHA ADQUISICION DE LOCOMOTORAS, SE CUENTAN LAS SIGUIENTES: A. EN LOS A40S DE 1979-1980y Y ESPECIALMENTE DURANTE ESTE ULTIMO, SE MANIFESTO UN IMPORTANTE E INESPERADO AUMENTO EN LA IMPORTACION DE GRANCS, YA GUE MIENTRAS GUE EL NUMERO DE CARROS RECIBIDOS DE LOS FERROCARRILES AMERICANOS FUE DE 70,070 EN EL A40 DE 1979, EN CL SIGUIENTE AIO SE RECIBIERON 151895 UNIDADES CARGADAS, LO QUE REPRESENTO UN INCREKENTO DEL 117 POR CIENTO. D. LA FALTA DE UNA ADECUADA PROGRAMACION EN LA RECEPCION DE LAS IMPORTACIONES DE GRANO3 Y DE UNA CONVENIENTE COOR- DINACION PARA LA TRANSFORTACION DE LAS MERCANCiAS RECirI 24C423 UORLDBANK :UWEQXUX1=( DAS DAS ENTRE LOS DIVERSOS MODOS, MOTIVO CONCENTRACIOUES DE BARCOS EN LOS PRINCIPALES PUERTO> REBASANDi EU CAFAILAr DE LAS INSTALACIONES FERREAS. - 31 - ANNE 2 C. DEBIDO A LAS RESTRICCIONES PRESUPUESTALESP NO ADQUIRIE- Page 4 of 7 RON LOCOMOTORAS ENTRE 1977 Y 1978, POR LO QUE AL PRESEN- TARSE EL SUBITO INCREMENTO E DE TRAFICO A PARTIR DE 1979, EL FERROCARRIL SE ENCONTRO CON UNA CRITICA ESCASEZ DE FUERZA TRACTIVA PARA TRANSPORTAR LOS VOLUMENES DE CARGA QUE DE TENIAN. PARA TRATAR DE REMEDIAR LAS SITUACIONP SE SOLICITO Y OBTUVO AUTORIZAVION PARA EFECTUAR COMPRAS DE EMERGENCIA DE LOCOMOTORAS. SIN EMBARGOY DADO QUE LOS FA- BRICANTES NO PODIAN SURTIR EN FORMA INMEDIATA LAS UNIDAD- _ES NECESARIASo SE TUVO QUE RECURRIR EN ULTIMA-INSTANCIA-_ A LAS RENTA CON OPCION A COMPRA DE LOCOMORAS DE MEDIO USO. CABE DECIR QUE LAS LOCOMOTORAS ADQUIRIDAS EN LA FORMA DESCIRTA, TOTALIZARON 104 UNIDADEG, LAS CUALES EN SU MAYO- RIA SOBREPASABAN 15 A#DS DE EDAD Y QUE AL UTILIZARSE PRE- SENTABAN FRECUENTES FALLAS QUE OBLIGABAN A ENVIARLAS A LOS TALLERES PARA SU REPARACION, AGRAVANDOSE LA SITUA- CION DE SOBRACARGA QUE YA PRESENTABAN LAS LINEAS Y TERMI- NALES. ADICIONALMENTE, AUN CUANDO MUCHOS USUARIOS HAN- INCREMENTADO EN FORMA IMPORTANTE CL USO DEL FERROCARRIL, LA CAPACIDAD DE SUS INSTALACIONES Y LOS MEDIOS CON QUE CUENTAN PARA LAS MANIODRAS DE CARO Y DESCARGA DE LOS CARROS, NO HAN EVOLUCIONADO EN FORMA PARALELA, LO QUE OBLIGO A QUE SE ACUMULARAN CARROS EN LAS INSTALACIONES DE LOS CONSIGNATARIOS Y EN LOS PATIOS Y OTRAS FACILIDADES DEL FERROCARRIL, ENTORPECIENDO LA OPERACION E INCIDIENDO EN UN MENOR APROVECHAMIENTO DE LA FUERZA MOTRIZ. ASIMIS- MO, EL AUMENTO EXTRAORDINARIO DE TRAFICO EN ALGUNAS LI- NEASs COMO LAS TRONCALES A LOS PUERTOS Y A LOS PUNTOS DE FRONTERA CON LOS FERROCARRILES AMERICANOS, COMO LA MEXI- CO-VERACRUZ Y LA MEXICO-NUEVO LAREDOY QUE CREO PROBLEMAS DE CONGESTIONAMIENTO EN LAS MISMASr OBLIGO A LA NECESI- DAD DE DESVIAR PARTE DE DICHO TRAFICO POR OTRAS LINEAS MENOS CONGESTIONADAS PERO CON RECORRIDOS MUCHO MAYORES, COMO EL CASO DE LA RUTA MONTERREY-TORREON, IRAPUATO-ME- XICO, UTILIZADA EN LUGAR DE LA HABITUAL Y MAS DIRECTA MONTERREY SAN LUIS POTOSI-MEXICOY LO QUE IMPLICO MAYORES REQUERIMIENTOS DE LOCOMOTORAS. D. LA NECESIDAD DE UTILIZAR AL MAXIMO LAS LOCOMOTORAS DIS- PONIBLES PARA TRATAR DE SATISFACER LA DEMANDA, PROPICIO UN DIFERIMIENTO DE LOS TRABAJOS NORMALES DE CONSERVACION Y MANTENIMIENTO DE LAS MISMASP HECHO QUE REDUNDO EN UN MA- YOR Y MAS RAPIDO DESGASTE DE LAS LOCOMOTORASP LO QUE RESULTO EN TRABAJOS MAS PESADOS DE REPARACION, MAYOR TIEMPO EN LOS TALLERES Y EN CONSENCUENCIA DISMINUCION APRECIABLE DE LA DISPONIBILIDAD. 4. POR LO ANTERIOR, CABE RESALTAR QUE DE ACUERDO A LA APREMIANTE NECESIDAD DE TRANSPORTACION QUE VIVIO EL PAIS, Y ANTE LA IMPOSIBILIDAD DE APLICAR OTRAS MEDIDAS DE RE- SULTADO INMEDIATOr EL FERROCARRIL OPTO POR LA UNICA ALTER- NATIVA QUE LE PERMITID ACTUAR DINAMICAMENTE PARA CONTRI- BUIR A SOLUCIONAR EL PROBLEMA, EGTIMAADO QUE LOS COSTOS INCURRIDOS POR LA COMPRA MASIVA DE LOCOMOTOAS QUEDnN AM- PLIAMENTE JUSTIFICADOS, SI SE TOMA EN CUENTA EL COSTO SOCIAL Y ECONOMICO QUE HUBIERA REPRESENTADO PARA LA NA- CION LA PARALIZACION DEL SERVICIO FERROVIARIO. - 32 - ANNEX 2 Pace 5 of 7 5. SE PROPONE ELIMINAR EL PARRAFO 26 DEL INFORME, YA QUE SE CONSIDERA INADECUADO COMPARAR EL FUNCIONAMIENTO DE FERROCARRILES NACIONALES DE MEXICO CON EL DE FERROCARRILES DE ESTADOS UNIDOS* DADO QUE LAS CONDICIONES DEL SUBSECTOR FERROCARRILES CAMBIAN DE UN PAIS A OTRO. 6. SE SUGIERE ELIMINAR EN EL PARRAFO 27 LA SIGUIENTE FRASE ''...HOWEVER THIS PROGRAM WAS ONLY PIECENEALI IF AT ALL CARRIED OUT.''. EN VIRTUD DE QUE EN EL MISMO PARRAFP SE HACE REFERENCIA A QUE LOS TALLERES DE MANTENIMIENTO DE FERRONALES NO SATISFIZO LA DEMANDA RESPECTO A LA EFICIEN- CIA EN EL MANTENIMIENTO DE LAS LOCOMOTORAS Y EQUIPO EXIS- TENTE. 7. POR LO QUE RESPECTA A LA EVALUACION DE PROYECTOS A PARTIR DE UN NIVEL DETERMINADO DE EFICIENCIA DEL SIGTEMA DESARROLLADO EN EL PARRAFO 28v SE ESTIMA QUE ES LA FORMA MAS CORRECTA DE PROCEDER Y LA QUE HAN SEGUIDO EL BANCO Y N DE H. TRATANDO DE ESTABLECER LAS METAS DE LOS PROYECTOS, PARTIENDO DEL CONOCIMIENTO PROFUNDO DE LA SITUACION REAL DEL FERROCARRIL Y DE LAS MEJORAS QUE FUERAN FACTIBLES DE LLEVARSE A CABO SIN NECESIDAD DE INVERSIONES O CON EL MININO DE ESTAS. 8. EN LOS PARRAFOS 29 AL 31 A) SE HACE REFERENCIA A LA METODOLOGIA UTILIZADA PARA LA EVALUACION DE LA ADQUISICION DE LAS LOCOMOTORAS Y EQUIPO DE ARRASTRE. SOBRE ESTE PARTI- CULAR, SE CONSIDERA QUE DE TOMARSE EN CUENTA LAS APRECIA- CIONES AHI VERTIDAS PARA EL ANALISIS DE ESTE PROYECTO ES- PECIFICO, POSIBLEMENTE REPERCUTIRIAN EN UNA MENOR TASA DE EANTABILIDAD QUE LA OBTENIDA EN LA EVALUACION EX-POST PRACIICADA, POR LO QUE ESTIMARSE CONVENIENTES ALGUNOS CAM- BIOS EN LA METODOLOGIA SEGUIDA, FERROCARRILES ESTA EN LA MEJOR DISPOSICION DE COLABORAR CON ZL BANCO EN EL AMA- LISIS DE LAS MODIFICACIONES QUE SE PROPONGAN. 9. SE ESTIMA QUE EL PRONOSTICO DE LA DEMANDA A PARTIR DE UNA POLITICA TARIFARIA QUE REFLEJE LOS COSTOS REALES DEL SERVICIO, PARRAFO 31 (D) ES INAPLICABLE POR EL MOMEnTO EN N DE M MAS QUE COMO UN EJERCICIO, YA QUE SU APLICACION NO DEPENDE DIRECTAMENTE DEL FERROCARRIL SINO DE LAS POLITICAS DEL GOBIERNO Y NO PUEDE CORRERSE EL -- RIESGO DE SUBESTIMAR LAS NECESIDADES DE INVERSION EN FE- RROCARRILES Y DAR LUGAR A QUE SE PRESENTEN NUEVAMENTE -- CONGESTIONAMIENTOS CONO LOS GUE SE TUVIERON EN 1979 Y 19B0 Y QUE RESULTAN EN COSTOS MUCHO MAS ELEVADOS A FINAL DE CUENTAS. EN LOS ULTIMOS ANALISIS REALIZADOS EN FERRONALES PARA EVALUAR LA ADQUISICION DE LOCOMOTORAS Y CARROS, SE HAN MANEJADO VARIANTES SUGERIDAS PCR LAS MISIONES DEL BANCO, QUE INCLUYEN PARA LOS COSTOS VARIABLES DEL FERROCA- RRILo LA ELIMINACION DE LOS CARGOS DE DEPRECIACION CONSIDE- RADOS EN LOS GASTOS DE MANTENIMIENTO DEL EQUIPO Y EL AJUSTE DE COMBUSTIVLES Y LUDRICANTES A PRECIO INTERNATIONAL. ASI- MISHO, EN LUGAR DE TOMAR LOS COSTOS DE OPERACION PROMEDIO SISTEMALES, SE UTILIZAN LOS COSTOS CORRESPONDIENTES A CADA UNO DE LOS ARTICULOS QUE SUPUESTAMENTE DEJARIAN DE TRANSPORTARSE POR FERROCARRIL DE NO ADQUIRIRSE EL EQUIPO. - 33 - ANNEX 2 Page 6 of 7 PARA LOS COSTOS DE OPERAC10N DEL AUTOTRANSPORTE, EN VEZ DE CALCULAR EL COSTO PROMEDIO "OMANDO EN CUENTA UN TIPG DE TERRENO PLANO Y RECTO Y UNA VELOCIDAD FIJA DETERMINADAr SE USA UNA COMBINACION DE COSTOS EN FUNCION DE DIFERENTES CLASES DE TERRENO Y DIFERENTES VELOCIDADEES. DE LA MISMA MANERA, SE HA INCLUIDO EN LOS ANALIGIS, LA SEPARACION DE LOS BENEFICIOS OBTENIBLES PARA LOCOMOTORAS Y CARROS, CON BASE EN LA ESTIMACION DEL TRAFICO QUE CADA UNO DE ELLOS MANEJARIA MEDIANTE LAS ADQUISICIONES DE EQUIPO CON- TEMPLADAS, CALCULANDGGE LA RENrABILIDAD CORRESPONDIENTE PARA CADA CASO, 10. EN EL PARRAFO 37 SE ANALIZA LA EVALUACION DE LAS INVERSIONES PARA RECTIFICACION DE TRAMOS DE LINEAS CONSIDE- RADAS EN EL PROYECTO. EN RELACiON A ESTE ASPECTO, ES NE- CESARIO SE*ALAR QUE DICHA EVALUACION NO SE LLEVO A CABO EN VIRTUD DE QUE LOS TRAMOS PROGRAMADOS INICIALMENTE SE CAMBIARON POR OTROS, EN DONDE LOS TRABAJOS DE 11EJORAMIENTO DE LA PENDIENTE Y CURVATURA EXISTENTES SE ESTIMARON MAS URGENTES. 11. RESPECTO AL SISTEMA DE TELECOMUNICACIONESP CITADO EN LOS PARRAFOS 14 A 40, PUEDEN MENCIONARSE DIVERSAS CAU- SAS QUE REPERCUTIERON TANTO EN LA ELAVORACION DEL COSTO DEL PROYECTO, COMO EN LA EXTENSION DEL PERIODO DE SU EJE- CUCION. UN FACTOR DETERMINANTE LO CONSTITUYO LA FUERTE INFLACION REGISTRADA EN EL PERIODO DE REALIZACION DEL PRO- YECTO, COMO LO EJEMPLIFICA EL HECHO DE QUE EN EL CASO DE LA INDUSTRIA DE LA CONSTRUCCIONY LGG PRECZOS SE INCREMEN- TARON EN APROXIMADAMENTE 800 PCT ENTRE 1975 Y 1982, CON LO QUE FRECUENTEMENTE LOS RECURSOS PRESUPUESTALES CONSIDERA- DOS ANUALMENTE PARA EL PROYECTO, RESULTARON INSUFICIENTES PARA OBTENER LOS AVANCES ESTIMADOS. ADICIONALMENTE, PUEDEN CITARSE LOS RETRASOS QUE NORMALMENTE SE TUVIERON EN LAS AUTORIZACIONEF PRESUPUESTALES, LO QUE INCIDIO EN IMPORTAN- TES DEMORAS EN EL INICIO DE LOS TRABAJOS PROGRAMADOS PARA CADA A40. ASIMISMOr EL PROYECTO ORIGINAL CONTEMPLABA LA ADQUISICION POR PARTE DE FERROCARRILESP DE SU PROPIO EQUI- PO DE TELECOMUNICACIONES Y UTILIZAR LA RED DE MICRGONDAÜ DE LA SECRETARIA DE COMUNICACIONES Y TRANSPORTES Y DE TE- LEFONOS DE MEXICO. SIN EMBARGO, AL REALIZARSE LOS ESTUDIOS DE PROPAGACION CORRESPONDIENTESP SE ENCONTRO QUE LAS TO- RRES QUE SE PENSABAN UTILIZAR NO ERAN SUFICIENTEMENTE CONVENIENTES EN SU MAYOR PARTE PARA LAS NECESIDADES DE N DE Mp ADEMAS DE LOS PROBLEMAS LABORALES QUE SE PRESENTA- BAN PARA SU UTILlZACIONY OPTANDOSE DEFINITIVAMENTE POR QUE CONSTRUYERA N DE M SUS PROPIAS TORRES, DECISION QUE IMPACTO LOS COSTOS DEL PROYECTO. - 34 - ANNEZ 2 Page 7 of 7 12. ES DE CREERSE, GUE A PERAR DEL INCREMENTO EN LOS COSTOS, LA SOLUCION ADOPTADA POR N DE M DE CONSTRUIR UNA RED COMPLETA DE TELECOMUNICACIONES INDEPENDIENE PARA USO EXCLUSIVO DEL FERROCARRILo FUE ACERTADA, Y SE REFLEJARA EN MAYORES BENEFICIOS PARA LA OPERACION FERROVIARIA QUE COMPENSARAN AMPLIAMENTE LnS GASTOS AD1CIONALES REA- LIZADOS. 13. EN LO QUE TOCA AL PROGRAMA DE INSTALACION DEL SISTEMA DE CONTROL SEIALIZADO CTC EN ALGUNAS LINEAS PRIN- CIPALES, REFERIDO EN EL PARRAFO 41y SOLO SE ORABAJO EN EL TR 1O IRAPUATO-DUADALAJARA, RETRASANDOSE LA WNSTULNJUON EN EL TRAMO SAN LUIS POTOSI-CARNEROSO EN ELSCUAL LOS TRA- BAJOS SE ESTAN EFECTUANDO AVTUALMENTE. LOS TRAMOS TEOTI- HUACAN-ORIENTAL Y ORIENTAL- VERACRUZ, INCLUIDOS EN EL PRO- GRAMA PARA LA INSTALACION DE CTCP FUERON CANCELADOS AL PROYECTARSE E INICIARSE LOS TRABAJOS DE RECTIFICA-- CION Y DUCPLICACION DE LA OTRA VIA EXISTENTE ENTRE - - TEOTIHUACAN Y VERACRUZ, OBRAS GUE SE ENCUENTRAN A LA FECHA EN PROCESO POR PARTE DE LA SECRETARIA DE CONUNICACIDNES Y TRANSPORTES. ATENTAMENTE LIC, JOSE LUIS FLORES H. DIRECTOR DE ORGANISMOS FINANCIEROS INTERNACIONALES SECRETARIA DE HACIENDA Y CREDITO PUBLICO. (GRF) 248423 WORLDBANK 1777313 SHDCME 248423 UORLDBANK..,. =06150230 - 35 - PROJECT COMPLETION REPORT MEXICO - LOAN 1232-ME THIRD RAILWAY PROJECT I. INTRODUCTION 1.01 Transport has played an important role in the economic development of Mexico and will continue to do so given the economic growth projected for the future. Up until the mid 1970s public investment in the transport sector was adequate and consistent with the Mexican Government's goal of spatial decentralization and integrated regional economics. However, the surge in economic activity in the late 1970s and the correspondingly rapid increases in demand for transport services required that increased investments be undertaken so as to expand carrying capacity. 1.02 Mexico's transportation system has a good modal balance despite the road and rail systems' domination of the general traffic's trZsport needs. Mexico's recent exploitation of its petroleum resources have spurred the development of specialized pipeline transportation and coastal shipping. Large scale grain movements are also influencing the growth of coastal shipping. Aviation, although highly specialized, is experiencing dynamic growth. 1.03 While the present transport system is a major achievement, it has not been without problems. The Bank has been active in addressing these problems by making various loans for highway, railway, aviation, and ports projects. Loans for che railway sector have amounted to US$386 million, including the current Fourth Railway Project for US$150 million. The first project (Loan 103-ME, US$61 million) was made in 1954 and was limited to Ferrocarriles del Pacifico. The subsequent loans have been to N de M and have aimed at the rehabilitation and modernization of the system. The track renovation, acquisition of motive power and rolling stock, and the introduction of telecommunication and operational control systems in the latter project aim to improve the railway's operational and financial performance. 1.04 This project completion report covers the Third Railway Project (Loan 1232-ME US$100 million) and was prepared from a Completion Report and data provided by N de M and from information taken from LAC Files, Project Appraisal Report No. 957a-ME, and staff supervision reports. - 36 - II. PROJECT PREPARATION AND APPRAISAL 2.01 Early in 1975, the Government of Mexico and Ferrocarriles Nacionales de Mexico (N de M) asked the Bank for assistance in continuing the task of rehabilitation and modernization of N de M started under the Second Railway Project 1/. In February 1975 a delegation from N de M arrived in Washington to present an Investment Plan and financial forecasts for 1975-1979. The Plan, prepared by N de M with technical assistance from consultants and financed under the Second Railway Project, was used to propose a follow-up Bank project. The Bank responded by sending a mission to Mexico to perform a Traffic Costing Study which identified the long-run variable costs of the railway's services. The results were used to develop financial forecasts and evaluate the proposed investments. In April 1975, an appraisal mission visited Mexico to develop the package of investments and plan of action that would comprise the Third Railway Project. 2.02 The main issue brought to light during appraisal concerned N de M's reluctance to raise tariffs and to eliminate uneconomical passenger services to help Improve its financial position. Although the Bank realized the difficulty of solving the problem quickly, it proposed that the project should continue stressing the importance of a sound financial policy as opposed to only focusing on operational and administrative improvements. Thus, the Third Railway Appraisal Report incorporated specific financial targets as well as action to be taken concerning uneconomic passenger services. 2.03 In January 1976 the Bank invited N de M to Washington for negotiations to discuss the Project, the 1975-1979 Investment Plan, and the Loan Agreement. As a result of the agreements reached during these negotiations, a loan of US$100 million was approved by the Bank's Executive Directors on March 30, 1976. Project Description and Goals 2.04 The project covered the 1976-1977 portion of N de M's 1975-1979 Investment Plan and a Plan of Action. The project's main objectives were to (a) enable N de M to cope with increased traffic by the improvement of its operational efficiency, rehabilitation and renovation of track and rolling stock, acquisition of rolling stock, motive power, and machinery, and the modernization of its telecommunications and control systems; and (b) gradually achieve financial viability through reduction in its operating deficits. 2.05 The main project components were originally envisaged as follows: (a) purchase of about 124 new diesel locomotives, 5,800 freight cars, 30 mail vans, and 180 passenger coaches, and additional machinery and equipment for workshop and service departments; 1/ The First Railway Project was the basis of a loan to Ferrocarril del Pacifico (103-ME). The Second Railway Project (Loan 825-ME) was the first Bank project for N de M. - 37 - (b) rehabilitation of 660 km of main line track sections with new rail and renovation of 400 km of secondary track with used rail taken from main lines; (c) rehabilitation of track by re-sleepering, reballasting, strengthening of bridges, and provision of track maintenance equipment; (d) development and installation of VHF/UHF telecommunication system, centralized traffic control, and operational control systems; (e) drainage and earthworks for station, terminal, and marshalling yard extensions, and construction of workshops, depots, and other buildings; and (f) consulting services for civil works and operational improvement programs; telecommunications and car/train control systems. 2.06 The Plan of Action aimed to improve the operations and financial viability of N de M, specifically by: (a) the preparation of a corporate plan designed to achieve certain financial and operating targets; (b) the preparation of a comprehensive and integrated manpower plan; (c) the continued preparation of analyses of uneconomic lines to assist in the reduction of the railway's deficits; and (d) taking all action necessary to obtain sufficient revenues to cover all operating costs and debt service charges by 1986. - 38 - III. PROJECT IMPLEMENTATION AND COST Initial Implementation and Project Revision 3.01 Initial implementation of the project was smooth and in accordance with appraisal estimates. A 1976 supervision mission found significant improvements in the technical and operational areas. However, shortly after the Loan became effective (June 1976), Mexico experienced two massive devaluations, one in August 1976, the next in October 1976. The newly elected government followed up the devaluations by the introduction of austerity measures related to public sector investments and a redefinition of intersectoral investment priorities. Accordingly, N de M was forced to revise and reduce its 1975-1979 Investment Plan significantly, reducing the average annual investment from approximately US$288 million to US$126 million. In order to better meet N de M's investment needs, the Bank decided to extend the project to five years, in effect making the revised project a trimmed version of the original Investment Plan. The important changes in the project and the list of goods are summarized in Table 1. Although the scope of the project was revised and reformulated, the amount of the Bank loan remained the same (US$100 million), with only the list of goods and disbursement schedule being changed to take into account reduced investments and extended implementation. It is, however, pertinent to point out here that the revised project wa= a response to the budgetary constraints following the devaluation, and both N de M and the Bank understood that, although the project as revised was not as good as the original one (particularly in regard to efficiency improvements), it was nonetheless essential to go ahead with it in the interest of the long-term objectives of the project. Project completion and loan closing dates were extended to December 30, 1980 and June 30, 1981 2/ , respectively. 3.02 The general slowdown in economic activity that followed the devaluation required that traffic forecasts and income projections for N de M be adjusted accordingly. These revisions meant that the achievement of financial targets and operating ratios as stipulated in the Project's Plan of Action were no longer viable. The revised ratios, as outlined below, anticipated a year's delay in achieving the originally envisaged operating ratios. Operating Ratio 1976 1977 1978 1979 1980 Appraisal 130 120 115 110 - 1978 Revision 130 120 123 119 110 3.03 The changes in conditions for Loan 1232-HE which were reviewed in detail between the Bank, the Mexican Government and N de M were officially incorporated into the Loan Agreement by a Bank letter dated January 31, 1979. 2/ Original appraisal dates were Dec. 31, 1978 for Project Completion and June 30, 1979 for Loan Closing Date. - 39 - Project Execution 3.04 Table 2 gives a detailed account of completion dates for project items as compared to both the original and revised expected completion dates. An analysis of Table 2 indicates that the major portion of the project was completed in 1980 in accordance with the revised dates. Only the telecommunications and CTC works were behind schedule, with 3.1% of the telecommunications works and part of the CTC works still to be completed in 1982. Overall, 98% of tht [rvestments in the project were completed by 1980. 3.05 A summary of the revised project's main components as implemented follows. (a) Track and Structures In all, 2,107 km of track was scheduled for rehabilitation during the five year period under the revised plan. Of these, 1,024 km were to be rehabilitated using new rail, and the remaining 1,083 km utilizing the rails and materials recovered from the former. By the 1980 expected completion date, 1,017 km of track (or 99% of scheduled works) had been rehabilitated using new rails. Renovation of track using old rail was 873 km, or 81% of scheduled works. The length of track renovated with used rail was lower principally because the percentage of old rails found to be reusable was lower than expected. Details of the track works executed are indicated in Map 3655R. (b) Deferred Maintenance This subproject, designed to reduce deferred works, contained the provision of 500,000 wooden sleepers and 470,000 cubic meters of ballast. Actually, only 200,000 sleepers and 280,000 cubic meters of ballast were replaced. The percentage of works completed was low because, when the project was revised, other works were given priority and, after 1976, work on this subproject was stopped. It should be mentioned, however, that as part of the regular works from the maintenance budget, 5,800,000 sleepers and 4,400,000 cubic meters of ballast were replaced between 1976-1980. (c) Branch Lines and Other Miscellaneous Civil Works (i) To improve the gradients and curves, the project included the construction of a diversion line with a total length of 17 km between Bellaco and Colorado, Tezonapa y Tacho Tablas, and Cuichapa y Xuchiles. (ii) Sidings With the procurement of bigger locomotives and freight cars and a gradual increase in train loads, it became necessary to increas- the lengths of several sidings to increase line capacity. Accordingly, 250 sidings with a total length of 170 km were lengthened under the program. - 40 - (iii) Bridges The strengthening of 403 bridges and culverts was planned (again to improve their load carrying capability to Cooper E-72 standards). By the time the project was completed, 487 bridges and culverts were strengtheted, i.e. 21% more than scheduled. (iv) Track Machinery and Equipment Track machinery comprising 15 units (1 crane, 2 tractors, 3 aligning machines, 2 ballast regulators, 2 ballast compactors, 3 compressors and 2 front end loaders) were purchased. The purchase of 35 tippler wagons and 76 hoppers (gondolas) was made for carrying ballast. (v) Assorted construction works were undertaken and completed as planned in the project. These included yards, workshop modifications, station alterations, buildings, housing, ho3pital and social works. (d) VHF and UHF Telecommunication System The installation of the VHF/UHF system was expected to be completed by 1980 in line with other project works. Instead, the works were completed in 1982. The delays in implementaulon were a result of the general investment uncertainties that prevailed in 1977 and 1978 following the 1.976 devaluations. Budget approval delays, local cost increases due to inflation, SCT's 3/ inability to contribute the use of 128 towers as foreseen in the planni7g stage (thereby increasing the number of telecommunication towers from 302 to 430) and finally, N de M's inability to retain experienced supervisors who left for better-paid jobs in the private industry, all affected the implementation of this part of the project. It should also be remembered that N de M was the first railway in LPtin America to install a system-wide UHF/VHF telecommunications network. (e) Signals, Operation Control Systems and Electrical Works Acquisition and installation of CTC equipment on the Guadalajara- Irapuato line was 70% complete by the completion date in 1980 and was finally completed in 1982. The installation work of the Operational Control Systems was completed in 1982. The delay in completion of these works was largely due to the re-ordering of priorities when budget cuts were made. Electrical works were completed on time. (f) Locomotives The project, at appraisal, foresaw the purchase of 124 locomotives in the years 1976 and 1977, and another 110 in 1978 and 1979. Actually, 93 locomotives were purchased In 1976 and none in 1977 or 1978. When the project was reviewed in 1978, N de M, under pressure from continued restraints in investment levels, decided to reduce locomotive purchases to 103 new locomotives in the years 1978-1980, making a total of 196 for the 3/ Secretaria de Comunicaciones y Transporte - 41- project period 1976-1980. As traffic levels rose, N de M purchased 82 locomotives in 1979 and 176 in 1980, making a total of 351 new locomotives in the five year period 1975-1980, as against 234 locomotives originally foreseen in the four year period 1975-1979. The plans and actual purchases of locomotives are tabulated below. 1976 1977 1978 1979 1980 Total Appraisal 82 42 78 32 - 234 1978 Revision 93 - 16 11 76 196 Actual 93 - - 82 176 351 The failure of FA to purchase locomotives in 1977 and 1978 led to a greater utilization of locomotives in these years (as reflected in the higher kms earned by locomotives in these years). Simultaneously, the Mexican Government's expectations of increasing grain production within the country did not materialize, necessitating greater imports of grain from the USA (151,895 grain cars in 1980 against 70,070 in 1976), greatly increasing the demand on the locomotive fleet and the neglect of scheduled repairs, under pressure of traffic. This resulted in a deterioration of the condition of the locomotives an* in effect the improvements in availability anticipated during appraisal did not materialize. The Project Completion Report of N de M points out that N de M had to scrap an additional 92 locomotives found uneconomical to repair. In the period 1976-1980, N de M purchased 351 locomotives against 234 foreseen during appraisal, the increase being the direct result of lower efficiency standards and the larger number of locomotives retired from use by scrapping. The failure of N de M to achieve the expected efficiency standards for maintenance has been a subject of concern to the Bank and was the subject of several discussions with N de M. In 1980, it was agreed that a study of locomotive maintenance on N de M would be carried out by consultants. The report of the consultants was submitted in 1981 and has been very useful in identifying problem areas in the maintenance field which are being gradually tackled. However, it has to be mentioned here that future expectations of maintenance standards would need to be somewhat less ambitious than those indicated in this project. (g) Rolling Stock (Freight) In the original program, it was planned to procure 15,027 freight cars of various types in the period 1975-1979. The revised project, however, permitted the procurement of 6,710 freight cars only comprising 2,472 boxcars, 2,425 gondolas, 1,400 mineral gondolas, 300 platform cars, and 113 tank cars. In addition, 252 cabooses were proposed to be procured. However, these purchases spread over a period of five years, were adjusted from time to time in keeping with the current traffic needs and in consultation with the Bank. Finally, the caboose purchases were reduced from 252 to 214, but it was necessary to increase the freight car purchases to 7,669 principally by adding 70 covered hoppers (for grain traffic), 60 platforms for the piggyback service and increasing the box wagon purchases to 2,610 and the gondolas to 3,116. However, the total purchases of freight cars were still far below ap!wraisal figures - N de M having purchased about 11,903 cars in the six year period 1975-1980, versus 15,027 foreseen in the five year period 1975-1979. - 42 - (h) Passenger Cars Thirty mail vans and 200 passenger cars were received in line with the original and revised project. Of the passenger coaches, 60 were first class and 140 were second class cars. (i) Technical assistance as foreseen in the project was provided by Tops-on-Line and Missouri Pacific Railway (see para 3.11). Project Costs 3.06 The original 1975-1979 Investment Plan envisaged a total expenditure of Mex$ 17,521.5 million (US$1,401.6 million), inclusive of price and physical contingencies. The original 1976-77 project was estimated to cost Mex$ 7,201.3 million (US$576.1 million). The Bank loan of US$100.0 million was to finance approximately 40% of the project's foreign exchange component (estimated at US$252.7 million). 3.07 In 1978, the revision of the Bank project to extend over the five year period not only reduced the level of investments per year, but also substantially changed the cost estimates for individual items. The revised estimates, besides taking into account physical changes in the scope and the time-span of the project, were also made to (i) reflect the fact that the price of foreign bought goods had increased significantly due to devaluation; and (ii) the costs of local goods and services increased due to inflation. The revised cost projections made by N de M foresaw a total cost of Mex$ 14,437 million (US$687 million) 4/ for the 1976-1980 project. The foreign exchange component was increased to Mex$ 6,294 million (US$306.4 million). Since the Bank loan of US$100.0 million was to remain the same, the percentage of the foreign exchange component financed by the loan was reduced to 32.6%. 3.08 At the end of 1980, project costs had reached Mex$ 17,451.3 million (US$818.3 million). Final cost figures to complete the project equalled Mex$ 18,061.0 million (US$835.5 million). Comparison with the revised estimates of Mex$ 14,437 inclusive of contingencies, shows a 25% cost increase in Mexican pesos. In terms of US dollars, actual cost of US$835.5 million was 21.5% higher than the estimated US$687.3 million including contingencies. The foreign exchange component of the project equaled Mex$ 8,097.6 million (US$375.3 million) vs. the estimate of Mex$ 6,294.4 million (US$306.4 million), a 28% increase in terms of Mexican pesos and 22.5% increase in US dollars. 3.09 A break-down of the actual costs versus the estimated costs is given in Tables 4a (in millions of Mex pesos) and 4b (in millions of US dollars). As summarized in the table below which compared actual costs with revised estimated costs, track and construction works were completed in less cost than foreseen (83% in Mex$ and 88% in US$), while signalling and 4/ The revised estimate in US$ takes into account the expenditures made in 1976 at an average exchange rate of US$1 - Mex$ 15. Estimates for 1977-1980 use an average exchange rate of US$1 - Mex$ 23. - 43 - telecommunication works and locomotive/rolling stock purchases had significant cost overruns. Cost Overrun/Underrun Mex$ US$ Track Structures & Construction 89% 88% Signalling, Telecommunications & Electricity 128% 146% Locomotives & Rolling Stock 139% 142% Cost overruns in locomotives and rolling stock were caused by purchases of larger numbers than planned (see paras 3.05(f) and 3.05(g)) whereas cost overruns in signalling and telecommunication works resulted from factors detailed in paragraph 3.05(d) above. Procurement 3.10 Procurement of Bank-financed items proceeded on the lines of the list of goods foreseen during appraisal with amendments as made in 1978. It is, however, significant that although the rate of disbursements was slower than agreed, 98.5% of the disbursements were completed by the revised loan closing date of June 30, 1981 (see Table 4). Two reallocations of funds in the Bank loan were made, first when the principal change in the project/loan agreement was made on January 31, 1979 and the second one on November 4, 1981. The final closing of the loan account was made on March 31, 1982. 3.11 A unique feature of the procurement under this loan was the procurement of imported components for freight cars manufactured by the local Mexican industry. Bulk purchases by ICB under Bank financing enabled these components to be procured at very competitive prices thereby lowering the cost of the freight cars produced in the country. Consultant' Performance 3.12 Consultants Tops-on Line of the Southern Pacific Railroad continued their assistance (started in the Second Railway Project) particularly in the field of Operational Control Systems, in which they had initiated proposals under the previous project. They also assisted in the evaluation of the telecommunications offers. In addition, Missouri Pacific assisted in the installation of control systems in the yards. Both the consultants performed well and, in addition to their contracted work, helped N de M's Instituto de Capacitacion design training programs in telecommunications and operational control systems. -44 - IV. Traffic and Operations Freight Traffic 4.01 At the time of appraisal due to major expansions in the steel, cement, and oil industries, freight traffic was expected to grow by 7.8% p.a. in ton-km for the period 1974-1980, with a 5% increase from 1980 onward. Since iron-ore and steel products were to account for 64% of the increase in ton-km, traffic projections were estimated to be fairly insensitive to tariff increases. Traffic growth was also anticipated in oil related industrial products - of which a major portion would be carried by N de M. Although traffic increases did take place during the 1974-1980 period, they were not as large as expected during appraisal. The overall slowdown in the country's economic activity that followed the 1976 devaluations of the peso had a negative impact on traffic growth for the project's initial years (1976-77). In an effort to respond to these situations (i) the Bank urged N de M to begin an aggressive marketing plan to gain a higher share of the available market; and (ii) N de M revised traffic projections downward and cut railway investments accordingly, particularly in 1977 and 1978. Despite the rebound in freight traffic after 1977, the investment levels were not adequately restored as general budget constraints continued. As a result, adequate action was not taken in anticipation of the increases in the demand for rail transport which led to the crisis situation in N de M in 1979 (see Operations para 4.06). 4.02 Freight traffic continued to grow after 1978 as the Mexican economy recovered from its 1976-1977 recession. Table 6 shows that the most important increases took place in the agricultural and industrial product groups with ton-km growth rates for the 1974-1980 period of 8.3% p.a. and 8.1% p.a. respectively. The growth in agricultural products stemed from Mexico's large imports of wheat and grain products coming mainly from the U.S. Industrial freight traffic increases resulted principally from the new steel plant at Las Truchas. Increases in mineral and inorganic products also account for overall growth with per annum growth rates of 2.2% and 6.7%, but N de M's share in the transport of petro and petro-related products was lower than expected, mainly due to the increased transportation by pipeline. 4.03 In summary, freight traffic increases in terms of ton-km, although below original forecasts of 56% cumulative (7.7% p.a.), did increase by 31.2% cumulative (4.6% p.a.), from 25,457 ton-km in 1974 to 33,402 ton-km in 1980. Original forecasts for freight tonnage anticipated a 45% cumulative increase, 6.4% p.a., thus a somewhat higher ton-km growth compared to tons was expected due to an increase in average hauls. As traffic developed, the growth in tonnage was low with a (6 year) cumulative increase of only 6.6%, or 1.1% p.a. This points to the substantial increase in average hauls from 492 km in 1974 to 606 km in 1980. Passenger Traffic 4.04 Passenger traffic increases were forecast conservatively at the time of appraisal. The need for large fare increases, coupled with the policy of selective reduction of low-density and uneconomic passenger lines, made it unlikely that traffic would increase unless major improvements in the quality of service were made. Progress has been made in eliminating the - 45 - lines that were contributing to the railway losses, while service has been improved on other lines. For those lines that the Government wishes to remain in operation for social reasons, N de M has been successful in obtaining government compensation for its losses. Table 7 points out how pass-km increased by 22% from 1976 to 1980 but, at the same time, the number of passengers decreased by 13%. This indicates that, although fewer people are using the system, the average distance travelled increased from 131.2 km to 183.7 km. The absolute decline in passenger traffic is attributable in part to the expansion of the public road transport and private automobile ownership. However, a more important reason is the fact that (during the project's life) passenger services have been reduced considerably. In summary, N de M's estimates of passenger traffic were consistent with the required reduction in services, the increase in fares, and the trend of fewer people utilizing rail transport. Operations - General 4.05 The initial years of the Third Project showed noticeable improvements in N de M's operational performance as measured by decreased turnaround times, improved locomotive utilization and availability, longer average hauls, and fewer foreign cars on line. Such improvements were primarily a result of increased usage of through and unit trains allowing N de M to carry more freight at higher speeds with fewer wagons. Improvements are reflected in the operating ratios decreasing from 139 for 1977 to 123 for 1978. 4.06 Operational targets, as set out in the Plan of Action, were mostly achieved in 1976 and 1977, with locomotive and freight-car availability of 86.7% and 971, above appraisal targets of 84.5% and 95%. Beginning in 1978, operational problems began to surface and locomotive availability declined to 75%. The noticeable decline in operating performance stemmed from two facts: (i) the government's 1977-78 cutback in the railways' Investment Program, not only with regard to N de M's program for track, motive-power and rolling stock, but also in respect of SCT's program for realigoment of track which imposed severe restrictions on the speeds and capacities of freight trains5/ 5/ N de M's Investment Plan for track rehabilitation and equipment which forms the basis of this project is complemented by SCT's infrastructure program for the realignment of existing lines and the construction of new lines and yards. The necessity for SCT's realignment works arose principally because the railway network of Mexico was constructed mostly in the 19th Centur, with sharp curves and severe gradients which imposed capacity constraints on the heavier locomotives and freight cars introduced in recent years, and necessitated realignment works to ease the track curvature and gradients particularly on the Mexico City - Veracruz line which experienced substantial problems from 1979-1981. Thus, the effect of the investment cuts was two-fold, first because reductions were made in N de M's track, motive power and rolling stock program and, secondly, because deferment of important realignment works resulted in continued speed restrictions and critical capacity constraints. - 46 - and (ii) an upsurge in freight traffic demand that began in late 1978 due to renewed economic activity and particularly increased grain imports. The combination of these two occurences culminated in the crisis of 1979 with N de M unable to meet the increased demand for rail transport due to both operational bottlenecks and line and yard capacity constraints. A large spurt in agricultural imports from the United States caused a general congestion of the system since ports and stations were unable to efficiently unload the grain causing railway cars to be held up in the stations and siding particularly because CONASUPO did not effectively coordinate movements between the ports, the railways and the unloading points. This meant turnaround times of freight trains increased and large numbers of freight cars from U.S. railroads were trapped on the Mexican system. In 1980, the number of foreign cars on line was 32,000. This compares with less than 2,000 cars in 1976 and 1982. The Bank missions followed up very closely the congestion of the railway system and helped to improve the collaboration between N de M and the U.S. Railroads on the one hand, and CONASUPO, the ports and the railways on the other. Another problem that emerged was the lack of adequate unloading and storage facilities. Emergency measures taken to bring down the number of foreign cars included a temporary embargo on U.S. wagons entering Mexico, punitive demurrage charges for delayed wagons, increased usage cf unit trains, the establishment of a joint review system between N de M and the American Railroad Association and, finally, the construction of additional unloading and storage facilities. Such actions proved extremely effective. Capacity Constraints 4.07 Operational problems with respect to longer-term issues such as capacity constraints have become manifest during the appraisal of the Fourth Railway Project. The need for realignment of main lines to reduce the sharp curves and steep gradients of the system is Imperative in order to achieve higher speeds and increased capacity. The operational performance of N de M has also Improved as a result of the modern telecommunication system and control systems that were installed as part of the main project works. The modernized systems have helped performance and fluidity in both rail lines and yards. The use of signalling and communications has assisted N de M in handling increased traffic and to better utilize limited mainline and yard capacities. But in order to obtain the maximum advantages from these systems, the realignment of the track and early completion of SCT works is a must, and this is currently the subject of a careful review as the proposed evaluation of the Fifth Railway Project gets underway. Staff Levels 4.08 Staff level objective of maintaining the same number of workers throughout the project was successfully reached. In fact, staff numbers decreased from 63,400 in 1976 to 62,300 in 1980. Efficiency measured in traffic units per employee improved from 463,000 in 1976 to 586,000 in 1980. Such improvements can be partially attributed to the five-year manpower plan, which critically assessed staff needs and, as a result, led to an overall tightening-up of the staff level. With the final tranfer of N de M's pension and medical scheme to the Mexican Social Security System, additional - 47 - improvements can be expected both in worker productivity and in the absolute reduction of staff levels. Merger plans with additional rail systems might in the future cause temporary setbacks in worker productivity until further adjustments in manpower needs can be made ru the basis of updating the manpower studies to the changing needs and circumstances. - 48 - V. FINANCIAL PERFORMANCE 5.01 Appraisal forecasts were for a 51% increase in net revenues and an 18% increase in operating expenditures over the period of the five year Investment Plan. With the said increases, projected working and operating ratios (without government compensation) were to improve from 129 and 136 in 1975 to 105 and 110 in 1979, respectively. Despite the 1978 revisions of financial targets to take into account the unforeseen events of the devaluation of the Mexican peso, lower than expected traffic growth, and large increases in wage and material costs, N de M still did not succeed in attaining the targets; in fact, it was unable to substantially improve its financial position. The 1980 working and operating ratios of 148 and 171 were well above the actual 1975 figures of 120 and 126, but close to the 1976 figures of 155 and 163 respectively. Operating losses, originally estimated to decline to Mex$ 451 million (US$36.8 million) by 1979 from the 1975 figure of Mex$ 1,297 million (US$103.8 million) instead climbed to Mex$ 2,996 million (US$130.3 million) and, by 1981, had reached Mex$ 8,631 million (US$344.4 million). The gap between revenue and costs has widened considerably over the years 1975-1981. While the revenue increased by 277%, costs increased by 326% and the net operating loss jumped by 565%.6/ In real terms, the revenues increased by 6.34%, costs by 20.3%, and the operating loss by 80%. 7/ 5.02 The main reasons for N de M's inability to improve its financial position and meet the set targets are sunmarized below: (a) Devaluation of the Mexican Peso Financial forecasts made during appraisal (which were calculated in 1975 constant pesos) did not anticipate the series of devaluations that would bring down the value of the Mexican peso from a 1976 average rate of Mex$ 12.50 - US$1 to a 1982 average of Mex$ 55 - US$1, at the time of project completion. These devaluations had negative effects on Mexico's overall economic activity; affected N de M's traffic and revenues; led to large increases in N de M's financial charges (Interest and service charges), from Mex$ 1,091 million in 1976 and Mex$ 2,904 million in 1980,(a 166% increase); and affected the cost of imported materials (which increased by about 80%). (b) Inflationary Process - Material and Wage Price Increases The devaluation of the Mexican peso also affected the cost of local goods (which increased by about 40% in 1976). In 1976, the Government declared a 30.5% increase in wages and a subsequent increase of 10% in October 1977. To take account of further increases staff cost increases of 12% in 1978, 10% in 1979, and 10% in 1980 were incorporated into the revised 6/ 1975 revenue was Mex$ 5,001, operating expenses were Mex$ 6,298, and operating loss was Mex$ 1,297. 7/ Cumulative inflation from 1975-1981 was 354.2%. - 49 - projections. Cost increases of 15% in 1978 and 1979 and of 10% in 1980 for materials were also incorporated. The revision seemed successful in that, in 1978, N de M's financial position showed an improvement and financial targets were met for the first time. Yet, in 1979, the country experienced another inflationary boom causing material and staff costs to increase faster than rojected in the financial statements. 8/ Thus, by 1980, despite improvements in worker productivity and in absolute decline in the number of workers, staff costs had increased by 140% and materials by 204% over the five year period, 1976-1980. (c) Inadeq.te Tariff Increases Th. appraisal mission assumed N de M would request and the Government would authorize periodic tariff increases that would assure N de M adequate revenue to offset any cost increases stemming from inflation. Uniortunately, government authorization to increase tariffs was often difficult and slow in coming. Yet, despite the delays, in comparison to the 15 year period (1960-1974) when no freight tariff increases were authorized, the tariff increases that did take place during the 1974-1980 period were substantial. However, the increases were too late and inadequate to cover cost increases, leaving revenues insufficient to cover costs. Tariff increases lagged behind the inflationary cost increases making N de M unable to meet financial targets (see Table 11). (d) Freight Traffic Actual freight traffic in 1976 and 1977 did not develop as anticipated in the original forecasts. The general slowdown in economic activity that followed the 1976 devaluations depressed freight traffic levels, thereby generating lower than expected freight revenue for the railway. In 1978 N de M revised traffic forecasts downward and although traffic increased, it was still below the revised forecast levels and revenue also fell below projected levels. (e) Foreign Car Rentals Charges due to the rental of foreign cars in 1979-1980 were an unexpected burden on N de M's operating expenses. A large grain importing program initiated by the Government led to congestion of the system at US/Mexican borders and ports (see para 4.05). The railways' inability to unload the grain rapidly resulted in the cars being used as buffer storage and delayed their return to the system. (f) Revaluation of Fixed Assets In accordance with the supplementary letter sent out after loan negotiations had taken place, a revaluation of fixed assets was carried out in September 1977. The pu.pose of the revalustion was to adjust costs 8/ Actual Increases: 1978 1979 1980 Staff 22.6 18 T Materials -7.0 45 36 - 50 - and tariffs accordingly. Unfortunately, no action on tariff adjustments followed. The Government did not allow the 1977 revaluation to be incorporated into the official balance sheet, but after efforts by the Tripartite Commission (see para 6.02), the results of a second revaluation were incorporated in the 1979 balance sheet. The resultant increased depreciation charges in 1980 affected operating deficits accordingly, but despite three tariff increases that took place in 1980, N de M was still unable to improve its financial situation since inflation more than offset the tariff increases. Achievement of Financial Viability 5.03 As foreseen during appraisal, N de M was to generate revenues sufficient to cover, by 1983, all operating costs and interest on debts and, by 1986, all operating costs and debt service charges formerly being met by the Government. Such targets proved to be overly optimistic and, in 1981, the Bank's mission recommended that the target dates be extended to 1986 and 1989 respectively as part of the Fourth Railway Project. Balance Sheets 5.04 Projected Summary Balance Sheets (Table 10) indicate that total debt was expected at appraisal to climb to Mex$ 7,781 million by 1978 and gradually decline after 1979. In reality, due to the large devaluations, N de M's debt increased tremendously to Mex$ 35,624 million in 1981 with a correspondingly large increase in interest charges of (almost 400%) to Mex$ 5,437 million. The revaluation of fixed assets that was incorporated into the 1979 Balance Sheet was responsible for the decrease in debt/equity ratio of 52/48 in 1978 to 19/81 in 1979. Government contributions, originally expected to decrease to a low of Mex$ 2,210 million by 1979 (after compensating N de M for unprofitable passenger and low density lines) instead jumped to an all time high of Mex$ 19,497 million by 1981, mainly in order to cover increases in debt service charges. 5.05 In 1978 an excess in N de M's inventory levels was identified by supervision missions and efforts were initiated to bring down the level of stock. These included (i) establishing minimum and maximum levels, (ii) re-order quantity limits, (iii) classification of materials, and (iv) the performance of an audit to eliminate slow-moving and obsolete stock. When a subsequent mission still identified inventories as unnecessarily high, N de M assured the Bank that physical counting of stock would begin and obsolete parts would be disposed of. The introduction of a centralized computer system is also helping control inventory and reduce unnecessarily high levels of stock. Financins Plan 5.06 In order to take into account project items that extended beyond the original two year duration of the project (1976-1977), the Bank and N de M prepared a plan to cover 1975-1979. Financial sources for the investment plan were to come largely (48% of total requirements) from the Government. Other sources included the World Bank, foreign and local banks, and depreciation reserves. Table 11 gives a summary of the expected and actual financing plan, including the revision for 1978-1980 to take into account the revised list of goods. - 51 - Financial Covenants 5.07 N de M's compliance with the financial covenants as stipulated in the Loan Agreement was mixed. Their ability to meet the financial targets as set out in Schedule 5, Item 1 was hampered by factors discussed previously (para 5.02). The Mexican Government's performance as Guarantor was good with respect to the provision of funds and less than satisfactory with respect to the granting of tariff increases. Performance of the Borrower and Guarantor with respect to the main items in the respective Loan and Guarantee Agreements are discussed below. The major part of the covenants were complied with and are not mentioned below. Loan Agreement 5.08 In accordance with Section 2.02 and 4.04, the original Investment Plan and Project underwent a complete revision in December 1978 with a joint agreement being made between the Bank and N de M. 5.09 Except for 1976, when the ratio of short and medium term debt to total cavitalization was 10.3%, the debt limitation covenant (Section 5.03) was satisfactorily complied with. The 1976 result was accepted by the Bank in consideration of the difficulties N de M had in coping with the devaluations. 5.10 Section 5.06, which required N de M to review passenger train services, reduce the losses due to these services, and request compensation from the Government, was satisfactorily performed. Various studies were carried out by N de M, but requests made to the Government for compensation were not consistently made. Thus, Bank missions often urged that claims be made and specific losses cited. Plan of Action - Schedule 5 (i) Operating Targets 5.11 N de M's performance with respect to meeting financial and operating targets as detailed in Item (a) varied during the 5-year implementation period (see Table 7). Except for 1978, operating and working ratios were above targets for reasons explained earlier (see para 5.02). Targets set out in items (b-g) were generally more successfully met, although performance proved somewhat erratic with marked deterioration in 1978 (see paras 4.05 to 4.08 and 5.02(d) and operations). (ii) Manpower Plan 5.12 In accordance with Schedule 5.2(b) of the Loan Agreement, N de M submitted a manpower plan in June 1977. Based on Bank comments and the revision of the Investment Plan and traffic forecasts, a reworked plan was submitted in December 1978. The revised plan projected year-by-year departmental manpower requirements up to 1982. As part of the Fourth Railway Project, the plan was extended to 1985. - 52 - 5.13 Section (ii) of the Manpower Plan called for a scheme to solve the problems of overaged staff and the long-range financial burden of pensions. The scheme devised by N de M involved transferring responsibility of pension and medical payments to the Mexican Social Security System. Final agreements have been reached and the official transfer took place in 1983. 5.14 The third element on the Manpower Plan involved the updating and improvement of recruitinj and training procedures. The railway complied fully with this covenant by instituting new training procedures, developing new courses in line with advanced technologies (see paras 6.07 to 6.10). (iii) Uneconomic Passenger Services and Low-Density-Branch Lines 5.15 In accordaace with Section 5.06(ii) of the Loan Agreement and Schedule 5, Item 2(c) (Plan of Action), N de M performed periodic cost analyses to study the effect of such services and make requests to the Government to discontinue them or to pay compensation for losses incurred. Such action led to the discontinuance of 24 passenger trains over the period 1974-1978, with 32 remaining in service for social reasons. N de M makes claims for the losses incurred by operating the trains and the Government reimburses them for the losses. Regarding low density branch lines, specific requests for receivinag compensation on the losses were not submitted to the Government. In February 1980, the Bank concurred with N de M's request to waive this requirecent because of the manpower work required. Prior to this date, N de M has studied 39 low density branch lines and discovered 12 lines to be uneconomic; 4 were closed. 5.16 The required study on the economic implications of less than carload traffic (LCL) was completed prior to the December 31, 1976 deadline. Losses of Mex$ 20 million were cited for 1976. Although a decision to close stations where service and traffic are lightest vs. complete elimination of LCL service was made, concrete action was slow in coming. A covenant was, therefore, included in the Fourth Railway Project to follow-up action. (iv) Mail Service 5.17 N de M made claims to the Government for the losses incurred by providing mail service. Compensation by the Government on the specified losses had only been partial up until 1979 when, upon the Bank's suggestion, N de M requested payment for the total costs of carrying mail. An agreement was reached whereby the Government agreed to pay N de M Mex$ 450 million in back-payments for losses incurred in 1977, 1978 and 1979. (v) Financial Viability - Target Dates 5.18 In accordance with item 4 in Schedule 5 of the Agreement, N de M increased revenues by 144% over the 5-year life span of the project (in current terms). Despite the said increase in revenues, operating expenditures increased by 201%, thereby eliminating the possibility that N de M would be able to cover operating costs and interest on debt by 1983 and by 1986 all debt service charges. - 53 - (vi) Guarantee Agreement 5.19 Section 3.02 - regarding Government authorization to increase tariffs, fares and other charges. Although the covenant was partially complied with (para 5.02(c)), the increases were slow in coming and inadequate to allow N de N to achieve targets stipulated in the Plan of Action. -54- VI. INSTITUTIONAL PERFORMNCE AND DEVELOPPENT 6.01 Institutional developments included in the Second Railway Project continued with renewed emphasis in the Third Railway Project. The main objectives of the Bank's institutional development program focused on: (I) the development of the planning functions of the N de M and the SCT and the strengthening of a productive relationship between the two; (ii) the integration of the five railway systems in Mexico into the N de M to achieve economies of scale and operation; (iii) the development of N de M's Planning Office for analysis of invest- ment priorities and for carrying out cost analyses to be used for reduction of uneconomic services and for adjusting tariffs; (iv) the preparation of a comprehensive Manpower Plan. The progress in each of the above-mentioned areas is reviewed in the following paragraphs. SCT/N de M 6.02 Although Mexico has five railways, only the two largest, Nacionales de Mexico and Ferrocarriles del Pacifico, are autonomous government agencies and play an important role in the transportation system of the country. The other three railways (Chihuahua Pacifico, Sonora-Baja California and Sureste) are relatively small, carry little traffic and were managed by the Railway Directorate of the SCT under General Managers appointed by the Secretary of Communications and Transport. In addition, the SCT undertakes major construction works for all railways, including important realignment works, new yards and new lines, and the Directorate of Tariffs of the SCT determines the tariff policy and authorizes rail tariff levels. Thus, a considerable amount of coordination has always been necessary between Nacionales de Mexico, the principal railroad, and SCT, not only in matters concerning operations and construction works but also in respect of subsidies, and costing and other studies related to tariff increases. Collaboration between SCT and N de M has been relatively trouble-free and effective but in the area of financial control it needed to be institutionalized particularly in the light of the Bank's emphasis on the improvement of N de M's financial status. It was, therefore, a welcome development when in 1979 the SCT created a special commission to improve coordination and communication in financial matters between SCT and N de M. The commission, consisting of SCT's General Controller for Accounts, N de M's Financial Manager, and the External Auditors, is responsible for overseeing the financial performance of N de M. Its activities include the 1979 revaluation of N de M's assets and, in general, promoting greater cost consciousness on the part of the various government departments and N de M's management. The commission's work has also proved very helpful to Bank supervision missions, and in focussing attention on the importance of improving N de M's financial position by cost controls and the timely increase of tariffs. - 55 - Integration of Railways 6.03 Ever since the inception of the first railway project the Bank had expressed concern on the dispersal of management of the five railway systems in Mexico, which were not only managed by separate General Managers, but had different unions, labor laws and tariff policies. From the Second Railway Project onwards a certain unification of tariff policies between the different systems started but operationally the different railways stayed apart and thus the economies of scale possible in a unified system were not possible. In January 1977, the Government of Mexico finally issued a decree authorizing the integration of the five railway systems into a single operating unit. The first phase of unification was carried out during the implementation of this project when the management of the five railways was entrusted to a single Board of Directors under the control of the President of N de M, re-designated as the Director General of Mexican Railways. 6.04 Since working rules and labor regulations differ on the five railway systems, it has been necessary, before integration of the railways is carried out, to (a) have an agreement with each of the labor unions concerned,and (b) to issue a legal decree setting out in detail for each railway the basis on which the integration will take place. This process has been slow and time-consuming, but during the implementation of the Third Railway Project, the first railway to join N de M was the Sureste. The entire process covering all the railways is expected to take 3-4 years. The advantages from the amalgamation will be coordinated development, the optimum use of equipment, lower operating costs and administrative expenses and, hopefully, in the long term, lower number of employees. N de M's Planning Office 6.05 N de M's Planning Office, established in 1973 as part of the Second Project's Plan of Action, was responsible for the development and evaluation of the 1975-1979 Investment Plan, which served as the basis for the Third Project. The office operating under the Director of Planning has as its principal objective the preparation of aggregate investment plans along with specific methods and programs to carry out the said plans. The office is functionally divided into separate units for planning, project evaluation, costing, organization and methods, statistics and information. These units and their progressive development over the life of the Third Project have proven to be effective and useful management aids. Bank missions have received substantial assistance from the Planning Unit not only in the evaluation of projects during appraisal but also during supervision when project changes take place, and finally in the writing of the Project Completion Report. However, it should be clarified here that, during the implementation of the Third Railway Project, the Planning Office was still finding its feet and many of the functions which the Planning Office is currently performing with a degree of maturity were still developing. 6.06 In particular, the cost analysis unit developed substantially during the Third Project. In line with the Project's Plan of Action, the unit was required to carry out a number of cost analyses focusing on uneconomic passenger services and low density branch lines. The findings of these studies were to be used to make specific claims to the government for tariff and rate increases, thereby helping N de M achieve the Project's operational and financial targets and goals. A brief description of the studies performed and their results are summarized below: - 56 - (a) The identification of uneconomic passenger lines and low-density branch lines led to the reduction and/or elimination of a number of these lines. For those lines kept open due to social reasons, N de M was able to use the studies to cite specific losses and obtain appropriate government compensation. (b) Detailed studies on the economic implications of LCL and mail traffic was made. (See paras 5.17 and 5.18) (c) The issue of allowing N de M to include as official revenue the government tax on gross revenues was resolved by the intro- duction in 1981 of a 10% VAT. This situation is expected to be slightly more advantageous to the railway and results in a somewhat improved financial position. (d) It however needs to be mentioned that, despite the sustained work done by the Planning Office/Cost Analysis Unit in justifying the need for tariff and fare increases, the government was still reluctant to allow this for fear of stimulating inflation. Manpower Plan 6.07 Since the start of the Second Railway Project a major area of concern of the Bank had been the manpower of N de M. As part of the institutional development required under the Third Railway Project, it was agreed that N de M would prepare a comprehensive Manpower Development Plan for 1976-1980. The Plan addressed three major issues regarding the manpower: (i) manpower needs consistent with traffic requirements; (ii) retirement benefits; and (iii) recruiting and training procedures. The plan's objective was, through careful planning, to eliminate non-essential staff, increasing worker productivity, to cope with projected traffic increases. 6.08 The first part of the Plan was to specify departmental manpower requirements for each year through 1980. The Plan was later updated to 1982 and subsequently extended to 1985 to be included as part of the Fourth Railway Project. In forecasting manpower requirements, the Plan took into account anticipated operating improvements that would result from track rehabilitation and mechanization. The original plan submitted in June 1977 was later revised and Improved based on Bank mission recommendations. The revised plan, submitted in December 1978, estimated a marginal increase in staff of only 0.31, while traffic increases were projected at 43%. Actual traffic increased by 241 over the project's life span whereas the number of staff actually decreased about 1% from 63.4 thousand workers in 1976 to 62.8 thousand in 1980 (Table 7). As a result, worker productivity, measured in terms of traffic units per employee, improved substantially from 463,000 in 1976 to 586,000 in 1980. - 57 - 6.09 The second part of the Plan was to address the problem of over-aged staff eligible for retirement, but unable to do so because of N de M's inability to incur the financial burden of pension payments. The scheme that was developed to solve this problem involved transferring responsibility for pension and medical benefits to the Mexican Institution of Social Security (Instituto Mexicano de Seguro Social - IMSS). The arrangement was foreseen to be doubly beneficial in that (i) it would eliminate the long-run financial burden N de M incurred by its responsiblity to pay medical and pension benefits; and (ii) by enabling N de M to retire some 15,000 eligible employees, younger more productive staff could be brought in with comple- mentary increases In worker productivity. Substantial advances on the official transfer of responsibility were made during the project implementation period, although final agreements concerning N de M's initial lump-sun payment to IMSS were made only during negotiations for the Fourth Railway Project. At the time of the Fourth Railway Project Appraisal, the amount to cover all payments was estimated at Mex$ 9,000 million. N de M received government assistance, combined with the transfer value of all medical assets, in paying this sum. The final integration of the medical and pension functions into the IMSS has ocurred during the implementation of the Fourth Railway Project. 6.10 The last part of the Manpower Plan involved upgrading N de M's standards and procedures for the recruitment and training of staff. The objective was to update the existing practices to keep staff abreast of the modern techniques, systems, and equipment which would be introduced during the Third Project. This objective was reached by expanding the railways' already extensive training schedule. As a result, N de N now has a large and well-managed training establishment which has organized programs for training at principal railway centers and through schools and corresponding courses for (a) maintenance of way and structures; (b) operation of stations, yards, trains and locomotives; (c) maintenance of locomotives and rolling stock; and (d) general administration, including training courses for railway officials at the middle-management level. The training institute also responded to the training needs for new technologies such as telecommunications and developed excellent courses in the operation and maintenance of telecommunications equipment. During the past few years, the N de M training institute has-also organized special training courses to cater to the specific training needs of other Latin American railways which have been using N de M's facilities to an increasing extent. - 58 - VII. ECONOMIC REEVALUATION General 7.01 At appraisal, the economic evaluation focused on the 1975-1979 Investment Plan. For evaluation purposes the Plan was divided into categories depending on the type of investment and its economic effects. These categories were evaluated separately and, from the results, an overall evaluation of the Plan was derived. The project, which formed an integral part of the Plan, was not evaluated separately. The ex-post economic reevaluation which follows was prepared by N de M and modified by Bank staff to bring the analysis in line with that prepared at appraisal. The evaluation covers the 1976-1980 investment period. 7.02 The investments associated with the Bank project together with the ex-post economic rates of return are set out below: Ex-Post Investments 2 of Rate of Item 1976-1980 Total Return (million pesos) (%) Rehabilitation of Way 1,184 7 16 Bridge Strengthening 274 2 14 Locomotives, Rolling Stock & Workshops Equipment 11,419 66 15 Telecommunications 1,309 8 13 CTC 172 1 27 Subtotal 14,358 82 15 Miscellaneous 3,092 17 - Total 17,450 100 Rehabilitation of Way 7.03 The economic evaluation for the rehabilitation of way made at appraisal included (i) benefits from avoidance of delays due to speed restrictions which existed due to the poor state of the track, and consequently improved equipment utilization, with the project; and (ii) maintenance cost savings. Speed improvements ranged from 5 km/hour to 15 km/hour and average about 10 km/hour. Savings in equipment cost per gross ton-km were calculated as a function of speed. For example, a savings of US$0.0083 per gross ton-km (mid-1980 prices) was derived for a 10 km/hour change in speed. The overall economic rate of return for the track rehabilitation actually carried out (see para 3.05(a)) is reestimated at 16% as compared with the appraisal estimate of 14%. The higher return is due principally to focussing on the lines with higher traffic densities as the overall program was cut. Bridge Strengthening 7.04 Some 487 bridges were strengthened over the 1976-1980 period. The strengthening of bridges was justified as a means of increasing the capacity of the corresponding lines to carry heavier cars and locomotives being procured during the plan period. The savings from the use of heavy track equipment have been estimated at US$0.0008/gross ton-km (mid 1980 prices). - 59 - This was applied to 60% of the relevant lines actual traffic to 1982 and forecast thereafter. The ex-post economic rate of return is estimated at 14% as compared with the appraisal estimate of 13%. 7.05 The realignment works along three lines contemplated at appraisal were not carried out due to budget restrictions and are therefore not reevaluated. Locomotive, Rolling Stock and Workshop Equipment 7.06 The acquisition of locomotives, rolling stock and workshop equipment represented 66% of the 1976-1980 plan as executed. At appraisal, the acquisition of locomotives and rolling stock was analyzed separately from that of workshop equipment. In the ex-post economic evaluation N de M analyzed all three components as a group as they were considered to represent an integrated investment. As in the appraisal, the quantified project benefits consist of transport cost savings. The benefit was calculated as the difference in road versus rail transport costs, under the assumption that, without the proposed investment, part of the forecast traffic would be diverted to trucks due to lack of rail carrying capacity. N de M calculated the average long-run variable rail cost at US$0.26/ton-km and the average truck operating cost at US$0.70/ton-km (mid 1980 prices). The ex-post economic rate of return on these investments is estimated at 15% as compared with the appraisal estimate of 16% for the locomotives and rolling stock and 22% for the workshop equipment. Although it was expected that the rate of return for locomotives and rolling stock would have been substantially below appraisal estimates because of the lower traffic levels and higher locomotive purchases, it was not possible to fully replicate the appraisal calculations to make such an analysis. Telecommunications and Signallin& 7.07 This element of the Plan was divided into two different components for the economic evaluation: (i) the VHF/UHF Communication Network and Car Control System; and (ii) CTC Signalling. The Communications Network and Car Control Systems were introduced to improve train turnover by decreasing terminal delays and improving yard utilization. The quantified benefits to these investments included those related to improved car utilization. Although recognized as a benefit, improved locomotive utilization was not included in the appraisal analysis. In the ex-post evaluation, the appraisal analysis was updated principally to take into account real price changes. However, because the systems were only completed and made fully operational in late 1982, actual statistics on improved operating results with the investments are not yet fully available. As a result, the ex-post economic evaluation assumes the same productivity improvements with the investment as those considered at appraisal. The ex-post economic rate of return on this plan element is estimated at 13% if benefits derived from improved locomotive utilization are included and 10% if these are excluded. This compares with an appraisal estimate of 25%. The reasons for the lower than expected return on this Plan component are (i) real increase in project costs due to increased scope of civil works required (para 3.05d); and (ii) longer than anticipated implementation period which delayed initiation of project benefits by three years. - 60 - 7.08 Of the four CTC signalling systems which were to be installed under the original plan, only one, Guadalajara-Irapuato, was completed. Work on that system was completed in 1982. The other sections were postponed until the Plan for 1981-1983 which is being implemented under the Fourth Railway Project. The ex-post economic evaluation of the CTC system on the Guadalajara-Irapuato line is based on benefits derived from avoidance of train delays on the line. The ex-post economic rate of return is estimated at 27% as compared with the appraisal estimate of 35%. As in the case of other telecommunication systems, the lower than expected return is due to longer implementation period than expected and consequent delay in accrual of benefits. Overall Economic Evaluation 7.09 The overall ex-post economic rate of return on the Plan as implemented is estimated at 15% as compared to 16% estimated at appraisal, which is satisfactory. The Plan was revised to take into account changing priorities during a period of economic difficulties and large fluctuations in traffic demand. This delayed Implementation of some components while at the same time ensured that economically justified investments were implemented. Although it has not been possible to fully replicate the appraisal estimates, the findings suggest that the estimated economic rate of return at appraisal would have been significantly higher had the methodologies applied in this Project Completion Report and current rail lending operations been applied at that time. - 61 - VIII. ROLE OF THE BANK Project Justifications and Objectives 8.01 The Bank realized the need to continue Improvements in N de M's operational and financial performance given the Mexican Government's plans to emphasize development in the agricultural and industrial sectors, and the railways role as the primary means of low cost long-haul bulk transport. N de M's ability to handle the projected rapid increases in railway traffic efficiently without further increasing their deficits was cited as the principal objective in the Bank's Third Mexican Railway Project. The Bank's strategy to achieve these objectives was based on N de M's Five Year Investment Plan, of which the original project would comprise the 1976-1977 foreign exchange components. The Bank's interpretation of the Borrower's priorities and problems was basically sound, and the principal strategy of the project, comprising a series of investments related to a target-oriented plan of action appears to have been well founded. Project Content and Scheduling 8.02 Substantial amendments to the project in 1978 became necessary largely as a result of the unprecedented developments following the devaluation of the peso and its effect on the Mexican economy. Large cuts in government appropriations to the railways led inevitably to a slow-down in the pace of investments and in extension of the project to cover the years 1976-1980. These cuts were the subject of considerable deliberation which minimized, but could not eliminate, the ill effects of the reductions in investments. Project Implementation and Operating Outcomes 8.03 The frequency of Bank supervision was adequate and the quality of work was high inasmuch as the collaboration between N de M and Bank missions was close, and N de M received from the Bank missions continuous advice in respect of project reformulation, government compensation, tariff increases, etc. 8.04 Although the Bank was, in general, helpful in strengthening N de M's system for planning, developing and evaluating the iuvestment projects and within this context recommending action to carry out and achieve said plans and objectives, perhaps the most significant result of the N de M - Bank collaboration was the development of the Manpower Plan and the resultant improvements in worker productivity as outlined in paragraphs 6.07 through 6.10. Implications of Project Outcomes 8.05 The good working relationship between the Bank and N de M, initiated during the Second Railway Project, continued in the Third Project. However, the dialogue with SCT unfortunately was less productive. 8.06 The Bank's experience with the two railway projects (Loan 825-ME and Loan 1232-ME) indicates the sensitivity of Bank-set financial targets to the broader political and economic events that occur. In retrospect, it can - 62 - be seen that assumptions made during appraisal regarding price and wage costs were optimistic. On the other hand, the fact that major revisions were made in the project, accompanied by revisions of operating targets, points out the ability of the Bank to respond to unexpected changes, and to incorporate these changes into the Project's targets. - 63 - IX. CONCLUSIONS 9.01 The Third Railway Project was the second lending operation to N de M and, as such, represented an important step in the progressive improvement in the operational and financial condition of the railways. The Project did contribute to the physical rehabilitation of railway facilities and the acquisition of needed equipment and assisted in significant operational and institutional improvements. The expost estimated economic rate of return on the project is estimated at 15%. Although the Project did not meet its original targets, it did help to strengthen and better formulate the follow-up lending operations, i.e. the Fourth Railway Project. 9.02 Among the major accomplishments, the Project assisted in: (a) improving coordination between N de M and the Government (para 6.02); (b) the further development of N de M's planning unit as a more effective area of management (paras 6.05-6.06); and (c) the preparation of a comprehensive manpower plan leading to improvements in productivity, the transfer of the pension scheme to DSS and the Improvement of recruitment and training procedures (paras 6.07-6.10). 9.03 The Government's performance as Guarantor was satisfactory in as much as the necessary funds for the railway (for investments, as well as operations) were provided within the limits imposed by the economic situation in the country. The Government's compliance in respect of tariff increases required for improving the Borrower's financial position, however, was not satisfactory. Lessons and Recommendations 9.04 Important lessons were learned through this Project which have served follow-up lending operations in Mexico and which are relevant to railway lending in general: (a) the limitations which surround covenants; (b) the volatility of traffic and its impact on long-term investment plans; and (c) the complex interrelationship of variables affecting operational targets. 9.05 Financial Covenants. While the Government apparently shared the view that the railways should strive for financial viability through reduced costs and increased tariffs, there arose a difference in opinion on the timing and scale of corrective measures. The general macro-economic policies of the Government, particularly during the period of this Project, were to maintain a broad array of subsidies in all sectors. Furthermore, the combined effect of devaluations of the Mexican Peso and inflation made the tariff increases required to meet loan targets more unpalatable. Although - 64 - the Government agreed to the 1978 revised financial targets, it apparently still held to the mistaken belief that such increases would feed inflationary pressures more than the increased subsidies that resulted from the failure to raise tariffs and, as a result, did not meet the revised targets. Although the Bank continued to press for appropriate tariff increases, interrupting lending operations was not considered an appropriate or effective measure under the circumstances during the 1979-1981 period. The new government administration which took office in late 1982, facing the severe financial crisis, has since reversed the traditional subsidy policy and has significantly raised prices on previously subsidized goods and services, i.e. fuel and railways. It is doubtful whether a different approach by the Bank would have had any more effect on meeting the financial targets during the 1979-1981 period. 9.06 Traffic and Investment Plans. As experienced in most railway projects, the traffic forecasts proved to be optimistic, particularly in the early years of the Project. In light of the slow traffic growth and the continued improvement in operational standards, revisions to the investment plan in 1978 were not expected to cause much difficulty. However, the unprecendented rise in grain imports in 1979 and the surge in traffic (particularly in ton-km) in 1980 and 1981 altered the investment needs dramatically, and the drop in operational efficiency indicators exacerbated the situation further. N de H has since focussed on upgrading its forecasting procedures and has directed more resources at their forecast efforts, particularly individual commodity studies and corridor analyses. Still, it will always be difficult to project agricultural imports in particular and, in such a volatile economic environment as Mexico, it is necessary to maintain flexible investment plans with updated analyses year by year. Bank lending should accomodate such an approach by applying the highway sector lending procedures of year by year analyses of investment items, using the medium-range plan as only an indicative plan. This will require more time for adequate supervision than is currently permitted. 9.07 Operational Targets. The factors which affect the attainment of operational targets (vagon-turnaround, locomotive availability, annual kilometer per locomotive, etc.) are numerous and diverse. Nany of such factors depend on entities outside of the railways, such as for loading and unloading wagons at ports and users' sidings. It takes a substantial amount of time and experience to understand this complex interrelationship in a given country and successive lending operations to treat problems. In retrospect, the operational targets of the Third Project proved over-optimistic, particularly with regard to locomotive indices and wagon-turnaround. The problem of the grain imports and the poor ship scheduling at the ports and the problem of foreign cars on line could not have been foreseen. These targets are being adjusted in ongoing and future projects in the light of experience gained in the field. Furthermore, it is apparent that the analytical tools which transport planners have to establish such targets are not fully developed enough to take into account all possible factors and, thus, the means to achieve the targets are not always discernible at appraisal, requiring successive revisions to operational targets. The Fourth Project is attempting to deal with the problems which arose, and it is clear that the proposed Fifth Project will include further actions to close the gap between targets and performance. - 65 - TABLE 1 PROJECT COMPLETION REPORT MEXICO - LOAN 1232-ME THIRD RAILWAT PROJECT Major Project Changes and Revised List of Goods Original Revised Unit 1976-1977 1976-1980 I. Project (Principal Item) Track Rehabilitation (New Rail) has 660 1024 Track Renovation (Used Rail) 400 1063 Strengthening of Bridges Nos. 265 403 Signalling and Telecomunications System Implementation time extended Freight Cars Nos. 5819 6710 Locomotives Nos. 112 196 Passenger Cars Was. 176 200 II. Loan (Bank-finaned Items) Category Declption Original Revised 1 Track and Structures 35,175,000 36,400,000 (including track machinery) 2 Signa and Telecomimaications 15,000,000 13,200.000 j 3 Freight cars, cas est & 35.175,000 41,300,000 anchinary for workshops 4 Consulting services 650,000 800.000 5 Unallocated 14,000,000 8,300,000 TOTAL 100,000,000 100,000,000 1/ VHF/UNF equipment financed partly from Loan 825-ME ($13.4 million) and partly from Loan 1232-)E ($13.2 million). August 1983 - 66 - PROJECT COMPITION REPORT TABLE 2 MEXICO - THIRD RAZIMAY PROJECT (LAA 1232-E) Physeical Completion of Project Components Units Completed Dates of Completion Z of Unrks Original Completed A,prlas Revised Completion Revised by fpeated Main Works Units BaDoatee Etimates Actual Dae Estimate Actual ne I/ (Project (Project jT197b- 1976-77) 1976-80) 1. Track A Structures Rehabilitation k. 1,060 2.106.9 3.889.7 1977 1980 1980 89.7 Rall - New km 660 1.024.0 1,016.9 1977 1980 1960 99.3 Rail - Used km 400 1,082.9 872.8 1977 1980 1980 80.6 Sleepers nos.(000) 1.200 500 200 1977 1980 1976 40.0 Ballast m3 700 470 280 1977 1980 1976 59.6 Brench Lines km - 17.2 17.2 - 1980 1979 100.0 Sidings km - 203.8 206.8 - 1980 1980 100.0 Bridges now. 265 603 487 1977 1980 1980 120.8 Track Machinery z 53 - - 1977 1980 2980 117.5 Niscellaneous Z 12 - - 1977 1980 1980 83.6 2. Construction Tards 1977 1980 1980 95.2 Uorkabopa 1977 1980 1980 123.1 Building Stations 1977 1980 1980 85.4 Housing 1977 1980 1980 143.9 miscellaneous 1977 2980 1980 99.4 3. Telecommunicationa, Signal & Electric works UKRP/Vff E 100 100 96.9 1978 1980 1982 96.9 Signalling CTC km 609 260 - 2/ 1977 1980 1983 70.0 Miscellaneous 2 - - - 1977 1980 1980 104.0 4. Procurement Locomotives Dus. 112 196 351 1977 1980 1980 179 Rolling Stock now. 5,930 7.073 31 7.994 1977 1980 1980 113 Passenger Cars nos. 176 200 200 1977 1978 1978 100 Postal Vans na. 30 30 30 1976 1976 1977 100 Workshop Machinery 2 42 - - 1977 1980 1980 67.9 Awlen 2 Roller Bearing. sets 7,500 10.000 8,000 1977 1980 1980 80 miacellaneous Z - - - 1977 1980 1980 183.4 5. Consulting Services Consultance (Poreign) 2 59 - - - - - - Consultants (Local) 2 40 - - - - - Consultanto (Total) z - - 1977 1980 1980 106.6 1/ Based on Revised figures. 21 Equipment installed 70Z. '/ Rolling stock estimate based on 6,710 freight cars. 35 tippler cars. 76 ballast hoppers and 252 cabooses - 7,073. Source: 9 de K August 1983 - 67 - PROJEC CfLUTZON ILPORT TÅELE 3( mEnICo - TMU10 &11UT PEI2CT ( LM 1232-EM) Proet Costa <es Klllnems) Appraltal Estimatad evisad EUtiates 2/ 2/ (Project 1976-1977) (Prlject 1976-980)~ Actual Costa Ld F g Toaal L lr& _a _ Parei Total A. Track 4 stnetures 1. Track Pameal - new rail 259.3 281.3 540.6 621.1 719.0 1340.1 627.3 453.9 1081.2 2. Track Reumel - 2nd hand rall ren! af slewper £ ballast deferred mtsn~c 172.3 116.1 288.4 217.5 21.5 239.0 79.9 21.5 101.4 3. Realign~ens 54.0 - 54.0 92.8 - 92.8 70.9 - 76.9 4. Yard. & Statione - enlårge 39.2 - 39.2 111.5 - 111.5 110.2 - 110.2 5. Bridges - strengthen 85.0 - 85.0 244.8 - 244.8 274.4 - 274.4 6. Meter & Puel Rquipent 4.4 - 4.4 8.7 - 8.7 5.4 - 5.4 7. Weighig Platfor=e 1.4 - 1.4 13.4 - 13.4 6.0 1.1 7.1 8. Track Machinery & EqupCent 14.7 95.8 110.5 39.2 48.1 87.3 28.4 74.2 102.6 9. Field Euipeme 1.1 - 1.1 0.2 - 0.2 0.2 - 0.2 10. Techical Design 4. Superwislon 18.3 - 18.3 64.0 - 64.0 60.5 - 60.5 1U. Hlocellneous 11.3 2.3 13.6 28.6 - 28.6 22.8 - 22.8 Subtat&l 641.0 495.5 1156.5 1441.8 788.6 2230.4 1292.0 530.7 142.7 6. Contruction Sarka 1. Tard.. Station . Earth Vorks 104.2 3.0 107.2 137.8 - 137.8 131.2 - 131.2 2. Excenaloms - Shope 8 Others 200.0 - 200.2 215.3 - 213.3 264.9 0.1 265.0 3. Station Uuildinge/Office 34.8 - 54.8 37.9 - 37.9 29.7 - 29.7 4. Staff luag 80.4 - 80.4 60.1 - 60.1 86.5 - 86.5 5. opitals a Velfare fuidings 45.2 - 45.2 35.9 - 35.9 37.4 - 37.4 6. Mucellaneoe 8.2 - 8.2 3.4 - 3.4 3.4 - 3.4 7. Emginseriag & Supervieion 34.0 - 34.0 95.2 - 95.2 92.9 - 92.9 Subtotal 526.8 3.0 529.8 585.6 - 585.6 64.0 646.1 C. Signel. Telmcoo. 6 Electricity 1. TM/UMF System 31.9 247.4 329.3 599.8 530.8 1130.6 787.3 1075.0 1862.3 1/ 2. Signe1 - CTC 38.9 55.0 93.9 84.6 55.4 140.0 126.4 45.2 371.6 ~ 3. Electriclty Supply 17.4 - 17.4 154.7 7.6 162.3 154.3 5.7 160.0 4. tlpretio Cmatrol system <itrodctary) 15.0 16.5 31.5 47.1 30.7 77.8 46.0 10.5 56.5 5. Internal Telecom - varkahops. stors hoepital 2.5 - 2.5 1.0 - 1.0 1.2 - 1.2 6. Interwal Tel~ece - yard@ 3.0 - 3.0 6.8 - 6.8 7.8 - 7.8 7. ieternal Tölecom - Vall* de M~eco 4.0 - 4.0 5.0 - 5.0 7.3 - 7.3 8. EngineerIng & Supervielon (lcal) 17.0 - 17.0 97.5 - 97.5 132.2 - 132.2 9. miocellaneus 26.9 0.4 27.3 44.3 - 44.3 45.4 - 45.4 Subrotal 206.6 319.3 525.9 1040.8 624.5 1665.3 1307.9 213.4 2~ .3 D. Locomoivmr Rallin Stock, etc. 1. Locamotives - 601.7 601.7 507.3 2099.9 2607.2 1339.9 3921.6 5261.5 2. Freight Car/Carbuaei 1512.5 632.1 2144.6 3775.9 1071.5 4847.2 4976.5 1078.4 6054.9 3. &sle.. Roller Doarings 10.7 32.1 42.8 2.3 117.5 119.8 2.3 100.6 102.6 4. Hil Tam (30) - 78.1 78.1 - 110.2 110.2 - 110.2 110.2 5. Fasseger Caches (200) 3.0 544.9 547.9 - 1127.0 1127.0 - 1120.1 1126.1 6. Train Lighting Equipmnt 13.8 - 13.8 15.7 3.5 19.2 16.3 - 16.3 7. Workshop Iachdery 19.7 36.0 55.7 64.9 71.0 135.9 12.0 53.2 65.2 8. Work Service Vehiclem 21.0 - 21.0 18.9 - 18.9 69.6 - 69.6 9. Office 6 Other EquIpment 25.0 - 25.0 68.9 - 68.9 83.8 5.9 89.1 10. Miscellsnaua 46.2 9.4 55.6 103.8 - 105.8 211.0 - 211.0 Subtotal 1651.9 1934.3 3586.2 4557.7 4600.6 958.3 6711.2 6396.3 13107.5 E. Coneultiu Service. 1. Lal for bridge vork. conetruction. etc. 27.3 - 27.3 5.5 - 5.5 2.3 - 2.4 2. Foreig for celeco. ar control, etc. - 10.1 10.1 - 14.0 14.0 4.0 14.1 18.0 Subtotal 27.3 10.1 37.4 5.5 14.0 19.5 6.3 14.1 20.4 Total Vlthout Contingenctes 3073.6 2762.2 5935.8 7631.4 6027.7 13659.1 9963.4 8097.6 18061.0 Contingencie Physical 5Z (bagin ta 1977) 97.0 56.4 153.9 123.2 99.5 222.7 - - - Total With Phyeleal Couringencsem 3170.6 2819.3 5989.* 7754.6 6127.2 13881.8 - - - Price Contigenciem 870.6 340.9 1211.5 388.0 167.2 555.2 - - - Total With Price Contingenciem 4041.2 3160.0 7201.5 8142.6 6294.4 14437.0 1/ Include eS 609.7 for completion of marka in 1981-1982. Exclunive of this, total project tast - Nex 17451.3. 2/ Where figura ara eimaing. indiidaal csts have not been broken damen and are given eder ahtotal. Source: K de k August 1983 ；鴃了 ’〕〕！‘〕〕！!，〕！!!,‘〕〕！〕！〕〕〕〕〕―：〕！〕〕〕！！〕〕〕！！〕！〕〕〕〕〕〕’&：〕〕〕〕！〕〕〕〕！〕“:,,-，。， 〔·…〕〕二〕〔〕一〕·：：〕〔〔〕〕；一；::;:！·！·〕〕！〕〕〔〕一〕一〕〕〕〕〕i::,. 牌 ra~ Celft~ u~ TuLt 4 xmco - lillu-ZOUVAT ~ ~ i Z32-=) Dighero~et sch@~ KluionD) Actuelf C~ atl~ Awrelnål Actuel percentau 1. Plecol Tmer 1976 Ta March 31. 1976 Ta imm 30, 1976 0.4 4.1 0.4 4.1 9.7 plucal y~ 1977 Ta Bept~ber 30, 1976 0.1 4.6 0.3 8.7 3.7 To Doce~ 31. 1976 4.2 4.7 4.7 13.4 33.0 Ta March 31. 1977 0.1 14.2 4.8 27.6 17.4 To j~ 30, 1977 0.1 14.2 4.9 41.8 11.7 111. Flec&I iaar 19711 Ta Septm~ 30. 1977 6.3 12.5 11.2 34.3 ZO.6 Ta Doc~er 31. 1977 0.6 10.7 11.8 65.0 18.2 Ta March 31. 1978 0.5 10.6 12.3 75.6 16.3 Ta imm 30. 1978 - 9.0 12.3 84.6 14.5 IV. Fl~ T«r 1979 Ta Boptm*er 30. 1978 0.4 15.0 7.7 12.7 12.7 92.3 13.7 To Doom~ 31, 1978 8.3 5.4 7.7 21.0 27.7 100.0 21.0 Ta March 31. 1979 6.5 3.4 27.5 33.1 83.0 1/ To Juna 30. 1979 2.5 29j0 36.5 79.5 71~ Der IM Ta Sm~ er 30. 1979 2.4 8.4 37.4 44.9 69.9 Ta Doc~ 31. 1979 9.9 8.4 41.3 53.3 77.5 To Nerch 31, 19m 3.9 4.6 47.2 37.9 81.5 To im* 30, INO 3.9 4.6 51.1 62.5 81.8 VI. Pi~ T~ 1991 To Sept~ 30, 1 M 6.6 12.1 37.7 74.6 77.3 ta D~ ber 31. IM 4.5 12.2 62.2 86.8 71.7 Ta March 31, 1981 18.9 6.6 81.1 93.4 86.8 To Jme 30, 1981 17.4 6.6 98.5 100.0 96.3 Vii. 719«1 Tmar iga To sept=ber 30. 1981 - 98.5 98.5 To ~ ber 31. 1981 0.3 99.9 M9 To March 31, iga 0.1 100.0 100.0 1/ Ac~ov~ Cumlative pwrc»t~ dleburnad- ft~ Supervluiom N~rte. N de k 1983 vmosæoetu.c TabIa 5 anI - Tau M~AT Fn CE (iM-wM ~pasal rnmet ad -Actual Freeht Traffie, 1974-1980 ('000 ta; ailin te/~~ a) 1974 Appreinat Formaut Groøth 1J 1974-1980 Actual-' 1976 17 M A - r am~ Produet GraupS T _Tk g kmT TI8 Ta_o nSSOT . Tas. Ts/km 1. Agrulture a~d forestry 9.870 5.103 9.810 5.164 10.614 5.608 11.485 6.091 16.4 19.4 2. Kinerals 3.717 7.624 16.473 10.436 21.648 13.733 24.711 15.597 565.0 10.5 3. nydrcarb~e 6.186 2.732 5.934 2 442 6.436 2.642 6.981 2.862 12.8 4.8 4. 1.orsmuaIoJ 7.862 1.825 8.528 2.162 9.363 2.396 10.097 1.638 28.4 44.5 5. Industr1ial' 13.273 7.612 15.795 8.904 17.986 10.155 20.610 11.822 55.3 55.3 6. Othøer 616 509 641 529 680 561 721 595 17.0 16.9 gubtatak 51.524 25.405 17.181 29.637 66.727 35.095 74.605 39.605 44.8 55.9 7. Lame than Carload (LCL) 176 52 175 50 175 50 175 50 -0.5 -3.8 Total 51,700 25,457 57,356 29.681 66.902 35.145 74.980 39.655 45.0 55.8 Actual Praght Traffle ActLul Graits 1974-1980 (2) 1974 1976 1978 1908 C~.lativa Per mu Preduet Grope Toms T~ka Tauf T T~0 s T-n/k- -ans. Tak e Tom/km T s. 1. AgrIcultur. and før~stry 9.870 5.103 9.792 5.062 10.562 5.777 11.709 8.239 18.6 61.5 2.9 B.3 2. ~ilaral 3.717 7.624 11.618 7.348 13.797 7.895 13.327 8.691 258.5 14.0 23.7 2.2 3. ~7drocarbone 6.186 2.732 7.201 3.135 5.645 2.207 3.807 1.432 -38.4 -47.6 -7.8 -10.2 4. Inr jt 7.862 1.825 6.155 3.939 6.435 2.388 6.604 2.695 -16.0 47.6 -2.9 6.7 5. .ndutruial 13.273 7.612 16.342 9.200 19.543 11.161 19.417 12.112 46.3 59.1 6.6 8.0 6. Otbar 61L 509 147 120 173 207 207 20N 4 -51 -UL -3. Subtotal 51.524 25.405 51.255 26.804 56.161 29.601 55.071 33.377 7.8 31.4 1.1 4.6 7. Leie than Carl~od (LM) 176 52 67 35 64 38 42 25 -76.1 51.9 -27.0 -13.0 Total 51.700 25.457 51,322 26,39 56,225 29.639 55.113 33.402 -6.6 31.2 1.1 _l 1974 actuel ftrV a gLven for coaparison base. _2 Sand. mulatur. ]imt~. it, variou. inargnir. 3/ Ineludiag meuar and ~ae. Source: N de K August 1983 - 71 - TABLE 6 ME)ICO THIRD RAILWAt PROJECT (LOAN 1232) PROJECT COMPLETION REPORT Selected Operating Scatiscics (1976 - 1980) (Actual) ITEMS 1974* 1976 1977 1978 1979 1980 I. SYSTEM Length (ka.) 14,023 14,224 14,210 14.211 14,301 14.225 Staff (000) 61.3 63.4 62.5 62.5 62.8 62.3 Staff (Operations)(000) N/A 25.5 23.8 22.0 21.3 21.3 Staff (Other)(000) N/A 37.9 38.7 40.5 40.6 41.0 IX. TRAFFIC Nhber of Passengers (millions) 20 19.1 22.3 22.2 18.7 16.6 Passenger Ka. (millions) 3,115 2,507.6 3.112.0 3,295.4 3,278.7 3,056.6 Average Journey (Km.) 156 131.2 139.5 148.3 175.8 183.7 Net Tons (millions) 51.7 51.3 54.9 56.2 54.8 35.1 Net Ton Km. (millions) 27,000 26,838.8 28,722.1 29,649.7 30,090.9 33,404.4 Average Ral (fm.) 522 522.9 523.4 527.3 549.3 606.1 Gross Ton-Km. (milliuns) 49,221 51,984.0 52,890.0 58,782.4 61,365.3 64,789.6 Loaded Freight Car - Ka. (millions) 580.9 571.3 603.4 676.5 683.8 742.3 Empty Freight Car - Im. (millions) 326.7 381.8 353.3 334.8 325.3 407.8 III. TRAFFIC DENSITY Passenger Ka. per Route Ea. (000) 222.1 176.3 219.0 231.9 229.3 214.9 Net Ton Ka. per Route Ka. (000) 1,925 1,887 2,021 2.086 2,104 2,348 IV. OPERATION Passenger Train Km. (millions) 13.9 12.8 12.0 11.8 12.0 11.9 Freight Train Em. (millions) 21.7 24.3 24.5 25.6 26.3 26.9 Total Train Km. (millions) 39.6 40.9 40.4 41.5 42.2 42.7 Locomotive Ka. Diesels (millions) 87.4 84.7 81.2 77.9 79.7 V. OPERATING EFFICIENCIES (Freight) Gross Ton Ka./Train K 2,158 2,072 2,097 2,206 2,230 2,302 Net Ton Km./Train Ka. 1,168 1.098.2 1,126.1 1,224.2 1,239.7 1,276 Net Ton Km./Loaded Car Ka. 46.47 47.94 46.97 48.09 49.71 48.23 Average Car Turnaround Time (days) 17.2 12.41 12.10 13.05 16.67 23.21 1/ Average Spped (Xm./Hour) 20.4 26.4 25.0 22.7 22.1 22.8 Traffic Units/Employee (000) 427.2 423.3 459.6 474.4 486.1 516.2 * 1974 - For Comparison Basis 1I Car turnaround times were computerized this year and figures for 1980 were reported to be not very accurate. Source: N de N August 1983 f: プ ら5 三5 ミ99 &&--&―「―-&-&-&---―夏―。，。。．「 ：。：-*-(：【】― 。1111(11‘】1, 73 PROJECT COMPLETION REPORT' Table 8 1GMIC0 - LOAN 1232 Schedule of Authorized Tariff Increases (1975-1982) Date Z Increase Index 1974 - 100 January 1. 1975 40.0-11 146 November 1, 1976 MON 164 Decimber 16, 1976 .20.0 197 January 22. 1978 15.0 227 Feburary 1, 1979 15.0 261 January 1, 1980 12.2 293 April Ij 1980 8.9 319 May 15, 1980- 5.6 337 January 2, 1981 23.0 415 December 15, 1981 25.0 519 January 15, 1982 9.0 566 1/ Estimated Increase Annual 2/ Authorized increase was 20Z but due to a reclassification of 13 products, net tariff- increase was only 17Z. NOTE: Annual inflation rates were as follows: (1974 100) 1975 12.0 112.0 1976 27.0 142.3 1977 20.6 171.5 1978 16.2 199.3 1979 20.0 239.2 1980 29.8 310.5 1981 28.7 399.7 1982 98.9 794.9 Source: N d M July 1983 ‘· 盒―方’‘次l=-＿晉實絮彥實實百彎。【言實望雪了＿更登才19償！煙望＿實露＿實＿＿藝蠶徊奮雪愛寥面日屆 雙I鳥：當•。―。豐，登二震靈二：魚『號蒲遼法寫弟r方，熙擊奮縱燙乞：個響．二〞才發義曆遲必：奮審法良 邑！望奉鳥妻濺―藝乏藝蠶寥賽！霉『寫l斤吞蔔龍俗奮物膩奮一仔離寫要審乏響響蘿晨計誰呈韋豐喜雙建 藝：臘藝臘―i藝l廈喜審暴蒼；廈！！晝實中坏‘婦修―婪廈覓鈴’丰朧才忠霆 霎，此于―乏參造霎待三『響糁斗計’鳥鸚；畏I計一―呈后合斤此’計要亂并甭 萬計露蓄卜―卜h萬可為邑：訂：F計甚藝響丰，偶他魷呈蓄丰鳥邵【頂 儲豐潰寫―渥奢I逐蘊記蔔症1釁造亂合荔鳥看才甩奮乞方藝鬍三江二：& 訕邑喜電―黑鳥實秀乞亡計！叮界徑參‘邑“！實I！菅結辭 藝芝：鳥‘講討蓄藝磬‘辭江‘&j’討黑’重弄輪 邑鵝讓鳥’面r f亂膩；纏：& 7彥蓄，禺 仕亂才‘ :!!！〕‘法〕！·“星。“論；,“一，‘。，,，一！毛 蘆i華華屆籐徑怔徑震．：爾，籐：劉，。，：籐籐•日，二。。，;：。，籐區― 響冉一騙‘,& 汙量響響＿:＿。．＿二＿．。…： 莽亂喜華薑，莖莖，讓呂。膩“濺‘奮。：“蘿騰。萬‘。‘.:＊。：&；他登訕屆 ；一，--－一」。卜奮． 〕〕：！籐！〕’!&!&!&!&&&!!&!&&&&&&&:&&!::,｝【！ 弓寫三辭至登·劍呈，馴蘑日沼頸望：。酒法―•蓄馴‘s&‘汗‘：三蘿丰惜―盒斤厲日二 戶I:I.b二 ’一，.,.,.___”卜訐總嘔『 }!&&!”·！&&!&“日”囑“&”·’”謝繃震！譬‘11廖 言讓r rr，州．,l計＿州芝勰乙．－曆I屆編 〕〕‘”邑”&&&&&&”矓‘&&&&&&&&,:!｝區 S日r．月．們r州計勰馴e間l口 〕：〕！〕〕‘】‘&:’〕’付！!&:!&&&&”〕l轟 蘿發辟法竺至‘馴’萬劉響“訓“’于’洛•瀾“&&&&&”日庫ll: 藝薔，：日夕只只：,＿。：：吁月：，仕― 匹界仕他柚柚．萬．響闐訕訕寥嗡l認；袖辟袖化：瀾h二d。。一。盒。他爾！ 騙必屆；丰產’蔔‘認澗，•＄劉“：緣“,！。認織。”•：，名‘•呂；卜｝ &”于·只只／,:，妒劍二，留劉 ．寫榣露編言斷，已觀忿曾客織盤讓緊．忠I巴！劉名．，鬱：唱一二d匕馮袖寫l- &,，註遝s:I&‘跚：：留；;；︰‘！織；賽，&;;;&,,，拿磚馴； ;::.::：二，;―。，:.＿。．•二；法！莖 望登仔髻二召．邵．9劊召徑，么屹茲壯：―二，:::；。：婦灣― 蒲萬已丰蔥三’黝’，織認認：調，;&,―秀認―&&&；認丰•：當，:- 要絕者：。。，仕。：名；:．乙二；．症必；―一；＿一：俗卜澤 丰法呈侮弄擎騙喜―·丰馴日醫藝劉望斗賽法擊―霆彎―…藝靈絕毫號華讓三甩―。‘. 萬鰓一、：忠．01驕劉“一•州”j一“＇洶。I-.-.－一＇戶斗 amn (D~ matt~] B 9 7 1 1 9 7 9 9 11 1 1 0 av den ma tal= 21.6W 23^ 28.4% M.586 xI.11Y X.613 34.05 33.444 39,191 ».effi ».ådl 42.2y1 44,710 sam ,ncellmentiffi j/ ING.M ta. m M3.131 Lamas 4~ 3~ --d*Un <2.630 (2.24ID 13.6123 (2.3§5) 14.186) (2.«») C4,6m (4.1»> (2,7593 (5.228) 0.no) 0~ ) (mi.bes) CI.zol) &~l~ Deposclactan dem to ~Ibdi« ULJ fårt Kod ~9 Ibf~ Aftecip 319 218 lag &78 276 0@ am ler 176 ta. 178 ma 91 3» 737 303 793 IGG 793 1,el 193 393 son 40 443 273 sa §84 ma MIG 330 443 144 1.1» B.DU ina in an 17 Ida de m 29 De L64, 342 B64 273 lag v~Möl.se - mest de ud 1& Måbrrel ~ ge »6 451 325 ta 149 VA 1.2o vi am I.Inse, va &.bl§ 4.903 mivsmortorlan - an of pramisejon kr obsgämma~ & 1.489 1.578 &~ 1.7117 1.60 1.787 2,50 1.197 1.797 1.1o 1.791 &.39s 8.612 1s,täl C~& 4««. Xw ~ _rzw _rw -T-M = Mfp ~ _rM 130 ~ -m T-DH TYM 1680 14-342 27j35 vilt IZ.343 33^ 33.151 35. IM P-an koh»_1 % L" %rr- b Illn &J1LJI UOM--4 AuLuck wc~ 1.495 &.st& ftfqL.w.hj.wflktce hx port a Ibuffiss 1~ Lsmus. Swäpplå.n endst. - 2,937 - 2.251 1.273 &,Got 379 1.~ 254 9.936 3.391 6,351 åtju 7.171 33.154 7.791 el.XLI 15. um B6.471 IT.MO re.wc -Y:qyf 11.WI cagneal gob«~1« db 9.5 1 m 13.019 18.906 13,WE 10.767 14.741 28.992 17.190 jö.713 23.9111 19.384 19.019 71.721 le.w 54.942 %~,sier kw at ekt F1-4 L-, Accomsplatm Disfult. 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