Colombia - Atlantic Railroad Equipment Project

-TrURN TO R E S T R I C T E D .C-PORTS DESK WITHIN R e p o r t N o. TO-252a ONE WEEK | This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE ATLANTIC RAILROAD EQUIPMENT PROJECT COLOMBIA August 31, 1960 Department of Technical Operations  CURRENCY EQUIVALENTS U.S. $1.00 = 7 Pesos 1 Peso = U.S. $0.143 1 million Pesos = U. S. $143, 000  APPRAISAL OF THE ATLANTIC RAILROAD EQUIPM1-ENT PROJECT (COLGIBIA) TABLE OF CONTENTS Page SMARY i-i I. INTRODUCTION 1 II. THE COLCKBIAN NATIOMTAL RAILROADS 2-6 A. Organization 2 B. Management 2 C. Property 3 D. Rehabilitation Program 3-4 E. Traffic L5 F. Operational Efficiency 5 G. Earnings 5-6 H. Debt Service During the Construction Period 6 III. THE ATLANTIC RAILROAD 6-9 A. Backgrovund 6-7 B. Organization and Recent Progress 7-8 C. Financing 8 D. Financial Aspects 8-9 VI. THE PROJECT 9-10 A. The Need for the Project 9-10 B. Financing 10 V. CONCLUSIONS 10 Annex 1 - Consolidated Balance Sheet of CNR, March 31, 1960 Annex 2 - Proposed List of Goods for the Project Map - Colombia National Railroad Network  SUIIARY i. The Colombian National Railroads have asked the Bank for a loan of US'5.4 million equivalent to finance the foreign currency part of the cost of' locomotives, rolling stock and shop equipment. ii. Loans to the eouivalent of US<;25 million and US"'Z5.9 million were made bar the Bank in August 1952 and June 1955 respectively, to help finance the construction of a new railway line between "?uerto Salgar and Fundacion and the rehabilitation of the existing Fundacion-Santa lIarta line (together called the Atlantic Railroad) and the acquisition of railroad equipment. As part of the ^irst loan agreement the Colombian Governm1ent undertook to establish an autonomous corporpte body which would ovwn and operate the various existing railroads; to reorganize the administrative, operational and financial systems of the railroad network and to finance the rehabilitation of the existing properties. iii. The Colombian National Railroads were established in December 195h. The reorganization of the system met with a succession of delays and setbacks and little headway was made. Since November 1958 however the Railroads them- selves have been rmaking greater efforts to establish a sound accounting and statistical system, which is now under review by a firm of accounting consult- ants. Improvements in train operations have been realized. Rlehabilitation of the Railroads' existing properties has made slow progress, being hampered by the inadequate level of education and experience of supervisory staff. iv. Available data indicate that although the Railroads are operating at a deficit, there has been improvement in financial results since 1956. Re- cently tariffs have been revised to increase expected revenue from freight by 30%. v. Recent studies by the Railroads have shown that substantial invest- ment involving expenditures in foreign exchange of about US.;38 million would be necessary to complete rehabilitation of the CNR's prooerties. However, it is believed that the Bank should not consider financing expenditures of such magnitude until CNR's financial status and its operational efficiency can be thoroughly appraised. vi. The Atlantic Railroad is now expected to be open for through traffic beginning early 1961. However, the Atlantic Railroad cannot be operated with- out purchase of additional equipment such as included in the proposed project. A large part of CYR's earnings for the coming years will come from the onera- tion of the Atlantic Railroad; completion of the Atlantic Railroad will bring substantial economic benefits to the country. vii. There now seems to be ground for hope for the improvement in the ad- ministration and financial situation of the CiKR. In view of the _econoic benefits of putting the Atlantic Railroad into operation, there is a good case for making a small loan now to cover the foreign exchange cost of additional motive power, rolling stock and shop equipment necessary to move estimated future traffic on the Atlantic Railroad.  - ii - viii. For the foregoing reasons, and without awaiting the result of the Accounting Consultants' review, it is recommended that consideration be given to a loan of US'5.4 milllon for the purchase of locomotives, rolling stock and shop eouipment. A term of 15 years including a grace period of one and a half years would seem to be appropriate.  APPPAISAL OF TE ATLANTIC RAILROAD EQUIPIENT PROJECT I. INTRODUCTION 1. The Colombian National Railroads (CNR) have approached the Bank for a loan of US$5.4 million equivalent to finance the foreign currency component in the procurement of locomotives, rolling stock and other equip- ment, necessary to move the expected traffic on the Atlantic Railroad. 2. In August 1952 the Bank made a loan (68-co) of US$25 million to the Colombian Government to finance the foreign exchange cost of (a) con- struction of a railroad line between Puerto Salgar and Camarra, called the Magdalena Valley Railroad and (b) the rehabilitation of the Bogota work- shops, The Borrower undertook to execute and to finance a program concur- rently with the works mentioned above, consisting mainly of: i. Establishment of an autonomous body to operate the railroad network owned by the Borrower, with- in six months after the effective date of the loan (December 23, 1952); ii. Reorganization of the administrative, operational and financial system of the railroads; iii. Rehabilitation of existing railroad track and other properties; iv. Acquisition of such supplementary rolling stock and other equipment as might be needed for the efficient operation of the expanded and rehabilitated railroad system. 3. In June 1955 a second loan (119-C0) of US$15.9 million was made to the CNR to finance the foreign exchange cost of (a) the construction of an extension to the IMagdalena Valley Railroad from Gamarra northward to Fundacion, (b) the rehabilitation of the existing line between Fundacion and the Atlantic seaport of Santa Marta, and (c) the procurement of loco- motives and rolling stock needed for the operation of the above extension and some other equipment. The Government agreed to expand port facilities at Santa Marta and to construct a 60 km paved highway connecting the rail- road at Cienaga with the port of Barranquilla. The whole of the line from Puerto Salgar to Santa lNlarta has been named "Atlantic Railroad". Construc- tion of this line between Puerto Salgar and Fundacion is now nearing com- pletion and it should be open for through traffic beginning 1961.  - 2 - II. TE COLOI`IAk1 NhTI`UAL RAILROADS A. Organization 4. The CNR are an autononous entity of which all capital stock is owned by the Government. It was established on December 1, 1954. 5. A five-member Board is responsible for the CGM. The 1Z1inister of Public works is ex-officio Chairman of the Board; the other members are appointed by the President of the Republic from lists submit- ted by various groups representing trade and industry. The Railroads' operating and capital budgets are established b-y the Board. The Board appoints the General Ilanager and sets general salary scales. Changes in tariff rates which are determined by the Board are subject to Gov- ernment approval. 6. There are five regional divisions incorporated in the Colom- bian i'ational Railroads; they are: Central, Pacific, Santander 1 ag- dalena and \!,arino (see attached map). There are two Department-otmed railroad lines in Colombia of which one, the Cundinamarca Railroad be- tueen 3ogota and Puerto Salgar is being operated by the CNR for the account of the Department of Cundinamarca, iAhile the other, the Anti- oquia Aailroad between Puerto Berrio and lAejandro Lopez is being operated by the Department of Antioquia. r1Jegotiations are under way to incorporate these lines in the CNR system. B. 2Ianagement 7. A General lianager, residing in Bogota, is responsible for day-to-day management of the CMR, and each division has a MIanager who reports to the General lIanager. There is no direct system rail con- nection as yet between the regional divisions, which tends to sustain the provincialis-.i of divisional management to the detriment of effec- tive centralized control. After completion of the Atlantic Railroad and the incorporation of the Departmental railroads in the CNR system, the system will be integrated. 8. UDith a few exceptions, the quality of executive officers is not high. Low salary scales malce it difficult to retain cormipetent staff, especially in the higher echelons, while the political instabil- ity of the country before 1957 has had an adverse effect on the effi- ciency of management and personnel. 9. The reorganization of the administrative, operational and fi- nancial system of the CNR was initiated with the assistance of M4adigan Hyland 6outh American Corporatio:-, a firm of- consulting engineers, who also extended their services for the rehabilitation of the CNR's prop- erty.  - 3 - 10. After three different foreign accounting consultants had been unable to obtain results in reorganizing the accounting and statistical systems, the CNR appointed a new Accounting Manager in the latter part of 1958. In April 1960, the CNR hired another accounting consultant, lHessrs. Bruce Payne and Associates of Wlestport, Connecticut, USA, to review and analyze the Railroads' financial status and to report on the effectiveness of the measures tak-en by the CNR to improve their systems. Their initial report is expected before the end of the year. C. Property 11. The route-length of the lines owned by CNR is 2,309 km, which with the 200 km of the Cundinamarca line, makes a total of 2,509 km operated by CNR; the Central and Pacific divisions together contain 2,188 km or 87% of the total. All lines are one-yard gauge. 12, CNR currently operates three separate sections totaling 271 km of the Atlantic Railroad (39% of the new line) which, though not fully completed, were opened to traffic during 1959 and 1960. 13. The CNR have at present 218 steam locomotives, 26 diesel railcars, 28 diesel locomotives, some 485 passenger cars and 4,500 freightcars. D. Rehabilitation Program_ 10 Rehabilitation of the CNR's property and reorganization of their maintenance were part of the commitments entered into by the Government in connection with loan 68-Co. Work was started in 1953. Progress was slow mainly because of the poor quality and the frequent changes of supervisory personnel. In recent years there has been a slight improvement in the rate of progress. Two workshops have been reorganized and adapted to diesel lo- comotive maintenance. Early in 1957, against the advice of the Bank, an order was placed for 28 additional diesel railcars to be financed by a suppliers' credit. Delivery of the first 8 in December 1958, revealed faulty design, resulting in cracked frames and bogies. Re-design and rebuilding were necessary and recently one rebuilt railcar has been de- livered for trial runs. CUDR also purchased 175 freightcars and some other equipment. i5. In February 1959 the CNR presented to the Bank a program for the rehabilitation of some 300 freightcars at an estimated cost of US;J1.2 million in foreign currency, which - in time - could be operated on the Atlantic Rail- road. CTR were informed by the Bank that it wzould not consider further lend- ing unless (i) CNR submitted a complete plan and program for rehabilitation of the existing network, including a study of the need for rolling stock; (ii) this plan was based on reliable statistics of present operations; and (iii) the reliability of these statistics was affirmed in the Accounting Consultants' report, which was expected to be ready in the latter part of 1960.  16. In April 1960, the Chairman of the Board presented a general re- habilitation and dieselization program to the Bank for consideration writh a view to further lending to the CNR. Foreign currency needs for this five-year program were estimated at about US$38 million equivalent, includ- ing the acquisition of locomotives and rolling stock for the Atlantic Rail- road. 17. As the Accounting Consultants' report was not available and thus the conditions in paragraph 15 (ii) and (iii) had not been fulfilled, the Bank felt that the time had not come to consider a loan for this program; however, in view of the immediate requirement for motive powfer and rolling stock on the Atlantic Railroad, the Bank expressed its willingness to con- sider financing the present project. E. Traffic 18. Total freight movement since 1955 increased as shown below: Percentage Ton-Km of Annual Year (millions) Increase 1955 492 - 1956 513 4.3 1957 574 11.9 1958 576 0.3 1959 713 23.8 The total increase between 1955 and 1959 was 40% and the average was 10% per annum. A very steep rise of almost 24% occurred during 1959, mainly because of the opening to traffic of the La Dorada-Puerto Berrio part of the Atlantic Failroad, which connects the Cundinamarca and Antioquia rail- roads. 19. Passenger traffic showied an over-all increase of 17.8% between 1955 and 1959, as follows: Passenger-km Percentage of Year (millions) Annual Increase 1955 506 _ 1956 510 0.8 1957 548 7.5 1958 6o6 10.6 1959 596 - 1.6 Passenger traffic in earlier years had reached a peak in 1950 of 616 mil- lion passenger-km and then fell steadily to a nadir in 1955. Apparently there was an increase in higher class travel in 1959 as passenger traffic revenue was 14.8% larger than in 1958 without an increase of fares.  - 5 - 20. The increase in traffic volume has come about notwithstanding the substantial improvement in Colombiats highway network, and the rapid develop- ment of truck and bus traffic on highways more or less parallel to the main railroad lines. Competition is mainly felt in passenger traffic. F. Operational Efficiency 21. The Accounting Consultants are working on a review and analysis of the CN\R's accounting and statistical systems. Until this work has been completed no adequate information will be available to appraise the CNR's operational efficiency or its financial status. Some of the available data would indicate that, operational efficiency has been improving during recent years but there seems to be considerable scope for further increase in the utilization of equipment. About 24% more freight traffic was moved in 1959 than in the preceding year without adding substantially to the motive power or rolling stock, and it should be possible to make further advances with better utilization of the existing equipment. G. Earnings 22. The following table shows the operating revenues and expenditures for 1956 through 1959, the results for 1960 insofar as available, derived from the CNR's books, as well as the estimate for 1960 as a whole. (Col. Ps, 000) 1960 Actual re- Estimate sults to for en- 1956 1957 1958 1959 May 31 tire year Freight revenue 40,059 52,027 63,430 71,751 28,823 85,100 Passenger revenue 10,342 11,186 13,052 14,55o 5,676 15,800 Other revenue 1,832 2,558 3,399 1,223 Total 52,233 65,771 79,881 90,430 35,722 105,900 Operating expenses 52,398 58,673 82,136 88,628 39,802 105,100 Depreciation 2,000 4,310 2,800 4,500 - a/ 4,500 Fixed charges 7,617 8,726 __a - a/ - a2 Total expenses 62-015 71,709 O4,936 93,128 39,802 109,600 Operating losses -9,782 -5,938 -5,055 -2,698 -4.,080 -3,700 Non operating income (net) 2,872 1,130 1,904 2,677 1,563 2,000 Result -6,910 -4,808 -3,151 -21 -2,517 -1,700 / Included in operating expenses.  - 6 These figures do not include the results of the Cundinamarca line. They should be regarded with caution as there is reason to doubt the relitbility of the data on which they are basedo The figures appear to show an improve- ment in operating results, particularly if the rapid increase in prices and wages during the same period is taken into account. H, Debt Service During the Construction Period 23. Loan 68-co was made to the Government and its counterpart appears on the balance sheet of the CNR on account of a transfer-of-funds agreement between the CNR and the Government. Loan 119-CO was made to the CNR directlyo Although ultimately the CNR will have to assume the burden of debt service on these loans, at present payment of interest and amortization on both loans is made by the Government on behalf of the CNR, the amounts in question being credited to the Governmentts capital account. The interest charges are added to the construction cost of the Atlantic Railroad and do not yet affect the profit and loss account. 24. The peso funds placed at the CNRts disposal by the Government are also added to the capital account of the Government. CNR have a contingent liability to repay these funds depending on the availability of funds after the Bank loans have been entirely repaid. For all practical purposes these sums can be considered as non-repayable and interest free. The balance sheet of CNR is given in Annex 1. IIIC THE ATIANTIC RAIIROAD A. Background 25. The main route at present for the export-import trade of most of central Colombia is the Magdalena River, supplemented by various rail and road links, and this river is an important route for North-South internal trade as well. It is an unsatisfactory and inadequate artery, because of uncertain navigability upstream from Gamarra, particularly during the dry season. 26. Following the recommendations in the report of a General Survey N.ission in 1950, sponsored jointly by the Colombian Government and the Bank, the Government in 1952 decided to construct a railroad between Puerto Salgar and Gamarra (403 km.) to provide more adequate transportation along that section of the river. In 1955 it was subsequently decided to extend the rail- road for 269 km to Fundacion, linking it up with the existing railroad and providing through-traffic to the Atlantic Ocean port of Santa Marta, and to improve the existing section Fundacion to Santa Marta (97 Ica). 27. Apart from the provision of more adequate transportation between central Colombia and the Atlantic ports, the projected railroad also had the purpose of interconnecting existing rail lines, and to allow uninterrupted rail traffic between Bogota, Medellin and Bucaramanga. (See map)  - 7 - 28. Work started early in 1953 and from the very beginning the project was faced with a succession of problems, which caused considerable delays in the completion schedule and an increase in foreign and local currency con- struction costs. To offset the increased foreign currency cost, the Bank agreed that the rehabilitation of the Bogota shops, originally planned under Loan 68-CO, could be abandoned, and the total amount of the loan was made available for railroad construction. 29. The original financing plan for the Atlantic Railroad contemplated that the Colombian Government would meet from its own resources the cost of necessary motive power and rolling stock. However, when Loan 119-CO was negotiated, about 03 million was allocated to cover the foreign exchange cost for procurement of motive power and rolling stock needed for moving freight and passenger traffic on the new line extension; provision was also made for acquisition of a ferry boat and of tractor-trailer units to carry freight traffic over the highway between the port of Barranquilla and Cienaga, the transshipment point between Fundacion and Santa I4arta, In 1959 the amount set apart for the tractor-trailer units was made available to meet the increased foreign exchange cost of railroad construction; the purchase and operation of the tractor-trailer units are now to be undertaken by private highway trans- port firms. 30. Anticipating completion of the Atlantic Railroad in 1958, 20 diesel locomotives were ordered in 1956 and delivered in 1958, payment thereof being made mainly with the 43 million allocated in Loan 119-CO. In the meantime, however, progress of line construction had slowed down to a virtual standstill for a variety of reasons, and the Bank agreed to the diesel locomotives being put to work on the existing lines of the CNRR, where they have now been in operation for almost two years. It would be difficult and inadvisable to retire them from their present assignment for operation on the Atlantic Rail- road when this line is opened to through-traffic in early 1961. Consequently it will not be possible to put the Atlantic Railroad into operation without acquiring additional motive power and rolling stock. 31. It should be noted that in the areas where earthwork for the rail- road track has been completed and access roads to the construction facilitate transportation, new settlements and agricultural development are already much in evidence. New farms and cattle ranches have been established near the com- pleted sections and there is evidence of increased economic activity. The coming into operation of the Atlantic Railroad in the near future will give Colombia, for the first time, a unified rail network linking all imporant parts of the economy and will provide, also for the first time, a reliable and speedy means of transportation along the liagdalena Valley at all times of the year. B. Organization and Recent Progress 32. After progress of line construction slowed down to almost a stand- still by the end of 1958, responsibility for the work was transferred from the 14inistry of Public Works to the COR, which established the "Atlantic Railroad Committee" consisting of three members: i) a representative of the Ministry of Public Works; ii) a representative of the CNR's Board; and iii) the General Manager of the CNR. A new Chief Engineer for construction was appointed, re- porting directly to this committee.  - 8 - 33. The unit price contracts on the most difficult line sections were cancelled and construction was continued by direct administration under control of the sectional resident engineers who were transferred from the staff of the Consulting Engineers to the Chief Engineer. This reorganization resulted in improved progress during 1959 and in recent months. At present about 39% of the new line has been opened to traffic. the 132-km section between La Dorada and Puerto Berrio; 32-km between Barrancabermeja and Puerto Wilches, and 107- km from Fundacion southward to El Paso (see map). Over-all progress of earth- movement, rail-laying, ballasting and construction of bridges and buildings is about 80%. It is expected that the whole new line will be in operation in early 1961, although the final ballasting work may have to be continued for several months thereafter. 34. Rehabilitation of the Magdalena Division between Fundacion and Santa Marta will probably take till the end of 1962. The existing line is unfit for regular diesel operation because some low spots in the line are inundated after heavy rains. A number of bridges will have to be strengthened or replaced be- fore heavy (1,200-hp) diesel locomotives can be admitted to the line. For about two years more the Magdalena Division must therefore continue to be oper- ated with steam locamotives. 35. The delay in the rehabilitation of this line is mainly due to recent concentration of all efforts on completion of the new railroad line, while in earlier years the need for rehabilitation was not readily recognized by the authorities in charge. Earthwork is now under way; plans and specifications for most of the structures for the new Santa Marta Terminal have been finaliEd. C. Financing 36. The foreign currency needed to complete the projects, apart from the necessary motive power and rolling stock, can be largely covered by balances available in the two loan accounts. 37. Since 1958, the Government has substantially increased peso allo- cations for the construction of the Atlantic Railroad, Local currency expendi- tures for the Railroad to May 31, 1960 totaled Pesos 252.8 million, all of which has been made available from time to time by Government appropriations. In 1960 the Government is to make available about Pesos 100 million. Total local currency cost for construction of the new railroad line will exceed the original estimates because: (i) the quantities of work were underestimated; and (ii) domestic prices and costs increased by about 80% between 1955 and 1960, D. Financial Aspects 38. The figures given above in paragraph 22 concerning the financial results of the CNR have shown continuing losses. The need for improved earnings and an adequate return is accentuated by the increase in the cost of the current project because of underestimation of the quantity of work and delay in construction. 39. The main reason for the past losses has been the failure of the CNR and the Government to raise tariffs consequent upon the domestic inflation which led to an increase in operating costs of the Railroad. Fixed charges  -9- have also risen because of the devaluation of the peso which has increased debt service on the present Bank loans from Pesos 7.6 million to more than Pesos 21 million. 40. One imoortant step to raise earnings has already been taken Tw-hen the Government approved a rate increase for freight traffic effective August 'O of the present year iThich according to the CNR would raise the revenue from freight by 30%. The ClR informed the Bank moreover that they would press for selective increases of the present low rates for passenger traffic. 41. No estimates of future revenues, based on the tariff structure in- troduced August 10, 1960, are yet available. Though the result of the tariff increase and the entering into service of the At'.antic Railroad should bring in substantial additional revenues, depreciation charges will have to be brought up to a more realistic level and delayed maintenance and wage increases will raise operating costs. In order for CNR to be put in a sound financial position in which it would earn a return on its investment and be able to meet its financial obligations, tT