Tanzania - Railways Restructuring Project

Documnat of The World Bank FOR OFFICIAL USE ONLY Rqpwt NO. P-5521-TA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 56.1 MILLION EQUIVALENT TO THE UNITED REPUBLIC OF TANZANIA FOR A RAILWAYS RESTRUCTURING PROJECT MAY 24, 1991 1hiS document has a rstricted distribution and maY be used by recpiens only in the performanc of heir offical Auties. Its contents may not otherwie be disbMed withot World Bank autoriation.  CURRENCY EOUIVALENT Currency Unit - Tanzanian Shilling TSh 1.0 - US$0.005 US$ 1.0 - TSh 194 (as of March 1991) WEIGHTS AND MEASURES 1 meter (m) 3.2808 feet (ft) 1 kilometer (km) 8 0.6214 miles (mi) 1 metric ton (tonnes) 1.023 short tons GLOSSARY OF ABBREVIATIONS AfDF - African Development Fund CIDA - Canadian International Development Agency DANIDA - Danish International Development Agency EDF = European Development Fund EEC - European Economic Community EP Emergency Rehabilitation Program for TRC ERP - Economic Recovery Program ICB - International Competitive Bidding KfW = Kreditanstalt fur Wiederaufbau LIB - Limited International Bidding MOU - Memorandum of Understanding ODA - Overseas Development Agency TRC = Tanzania Railways Corporation WFP - World Food Program FISCAL YEAR January 1 to December 31  FOR OMCIAL USE ONLY TANZANIA RAILWAYS RESTRUCTURING PROJECT CREDIT AND PROJECT SUM4ARY Borrowers United Republic of Tansania Beneficiary, Tanzania Railvays Corporation (TRC) Amounts SDR 56.1 million (US$76.0 million equivalent) Termss Standard, with 40 years maturity On-Lending Terms: The Government would on-lend to TRC at a fized rate of 11? for a term of 20 years, including a 5-year grace period. The foreign exchange risk would be borne by TRC. Financing Plans Local Foreign Total (US$ Million) TRC 109.6 -- 109.6 IDA -- 76.0 76.0 AfDF -- 31.2 31.2 ED? -- 18.0 18.0 cID& 3.0 7.3 10.3 KfV -- 18.3 18.3 ODA -- 8.5 8.5 VIP 2.0 1.3 3.3 Total 114.6 160.6 275.2 Economic Rate of Return: 181 Staff Appraisal Report: Report No. 9449-TA. MfDS IBRD No. 22878 This document has a restricted distribution and may be used by recipients only in the peiforman, e of their official duties. Its contents may not otherwise be disclosed without World Bank at; ".-"ition.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A RAILWAYS RESTRUCTURING PROJECT 1. The following memorandum and recommendation on a proposed Credit to Tanzania for SDR 56.1 million (US$76.0 million, equivalent) are submitted for your approval. The proposed Credit would be on standard IDA terms with 40 years maturity, and would assist in financing the restructuring of the operations and organization and the rehabilitation of the assets of Tanzania Railways Corporation (TRC), which is a major part of the transport network of Tanzania and the region. The total project cost is US$275.2 million and will be parallel financed by AfDF (US$31.2 million), CIDA (US$10.3 million), EDF (US$18.0 million), XfW (US$18.3 million), ODA (US$8.5 million) and WFP (US$3.3 million). TRC would finance US$109.6 million (96S) of the local costs of the project out of its cashflows. The proposed IDA Credit would be passed on to TRC at a fixed interest rate of 11?, repayable over 20 years, including a grace period of five years. TRC will bear the foreign exchange risk. 2. Background. TRC enjoys a strategic geographic location in Tanzania. The TRC system links virtually all the major urban centers of Tanzania, traverses parts of the country accounting for over 402 of agricultural output and most of the country's exports and is a major artery for transit traffic from the neighboring landlocked countries of Burundi, Rwanda, Uganda and the eastern part of Zaire. It is, under efficient operating conditions, the most cost-effective means of transport of bulky goods over the long distances that are characteristic of Tanzania's exports and of major inputs for agriculture and industry such as petroleum products, cement and fertilizer. However, utilization of its capacity is only about 5O0 of what it can achieve under reasonably efficient operating conditions. From a peak of about 1.6 million tons of freight traffic in the early 19709, it has declined to about 0.9 million tons currently, despite considerable investments in locomotives and wagons. Similarly, passenger movements increased sharply between 1981 and 1983 as a result of substantial investments in passen- ger coaches, but its effective capacity has declined sharply since then to pre- 1981 levels. As the Tanzanian economy has responded positively to the substantial improvements in economic management instituted since 1986 under the Economic Recovery Program (ERP), TRC's poor performance has become an increasing constraint on economic growth. Significant stockpiles of cotton for export, for which road transport is unfeasible and uneconomic, have been built up and a large proportion of other export traffic, as well as bulk inputs like fertilizer and fuel, have been diverted to roads. The total cost to the economy of stockholding and diversion of traffic that an effectively performing railways would have been able to handle is currently estimated at US$40 million per annum. Also, Tanzania can earn potentially US$55 million to US$75 million (12Z-18Z of current export earnings) from transit traffic compared to about US$25 million currently. The cost- competitiveness of Tanzania as a transit country and thus its ability to realize this potential depends critically on TRC's operating effectiveness. In addition to its unsatisfactory operating performance, TRC's financial performance has been poor. Its assets are currently valued, on a gross replacement cost basis, at about US$550 million equivalent, but it earns little return on this and is incapable of maintaining it in good condition, let alone provide for its replacement. Although, mandated to be run as a commercial organization, TRC has been more or less technically bankrupt since 1986. It is now also insolvent with major suppliers threatening to stop supplying essential operating inputs unless overdue credits are settled.  3. The main causes of TRC's poor operating performance aret (a) lack of effective maintenance systems and capabilities which htss led to sharp deterioration in the condition of its assets: (b) poor management of traffic operations which has resulted in severe underutilization of available assets; (c) an organizational structure which severely constrains effective decision-making and under which little authority is delegated to line managers; (d) significant overmanning which taxes the capacity of a small management team to exercise effective control over staff productivity; and (e) severe erosion of workers' earnings which has seri- ously undermined discipline and handicaps TRC's ability to recruit skilled staff. Exacerbating these deficiencies is a highly ineffective system for the regulation of TRC activities. Firstly, there is no performance expectation of TRC. The Railways Act provides that TRC should earn a reasonable rate of return on its assets to be specified by Government. No rate has ever been specified. Secondly. TRC has limited and ambiguous powers to perform effectively. The Railways Act provides that TRC should have minor powers over its tariff levels and structure, its organizational structure and manpower levels; major powers over both its price and cost structure are granted in the Act to Government. This has resulted in few and generally delayed increases in its tariffs and has inhibited its management from undertaking needed restructuring of its costs. Finally, TRC's Board operates under the same institutional constraints as TRC management, is selected more for interests represented than competency and consequently is ineffectual. TRC's poor financial performance is due to three main causes: (a) high variable costs and the underutilization of its capacity due to inefficient operations; (b) low unit tariffs due to tight controls on its tariffs; and (c) the persistent and increasing losses incurred by the roads and hotel and catering services operated by it. As a result of these factors, TRC's total contribution margin has been insufficient to cover its fixed operating costs and debt service obligations. 4. Government recognizes the deficiencies both in its system for regulating TRC operations and in TRC's management and operations and supports a comprehensive restructuring program to address these weaknesses under which (1) the legal framework governing TRC's operations would be clarified to provide TRC with clear overall commercial objectives and unambiguous powers to achieve these objectives; (ii) the internal organization of TRC would be restructured to support a new performance orientation; and (iii) the backlog of deferred maintenance evident in all classes of railways assets would be made good to prevent their total loss or avoid their significantly more expensive replacement. Specific important actions taken to date to implement this strategy includes (a) the approval by Government of average increases in freight tariffs and passenger fares of 702 and 38S, respectively, in March 1991, to start the process of restoring the level of tariffs and fares to full cost recovery levels; (b) the decision by Government in March 1991 that TRC divests itself of any responsibility for the management or operation of the loss-making roads services and hotels and catering services in order to focus on the railways service; (d) a significant start by TRC on reducing the level of overmanning through the retrenchment of 112 of the total labor force over the last six-month of 1990 followed by the issuance of termination notices to another 5? of its workforce in the first six months of 1992; (e) the institution of operational objectives and targets for the system's managers and a successful start on the first phase of a program to improve operating efficiency; (f) the issue by Government of a Ministerial Directive and the execution of a Memorandum of Understanding (MoU) or performance contract between Government and TRC setting TRC clear financial and service objectives and granting it the following powers to achieve these objectives: ti) to adjust its tariffs with such frequency and magnitude as it considers commercially necessary; (Ui) to make investments it  considers appropriate subject only to an overall debt-to-equity limitation and submission of economic and financial justification to Government for any investment in excess of US$2 million equivalent; (iv) to restructure its internal organization as it considers to be commercially appropriate, except if this involves creation of new non-railways entities or amalgamation with an unrelated entity; (v) to reduce its staff by any amount it considers appropriate to achieve its efficiency and comuercial objectives; and (vi) to pay salaries, bonuses and incentives payments as it considers commercially prudent, without reference to Government. 5. TRC has enjoyed considerable donor support since its establishment in 1977. The key donors active in TRC have been AfDB, Belgium, CIDA, DANIDA, the EEC, KfW and ODA. The Bank Group's first involvement in TRC was in 1986, when it prepared a report that formed the basis for donor co-ordination in assisting to rehabilitate TRC's assets under an Emergency Rehabilitation Program (EP). The EP was designed to increase TRC's effective capacity to support the expected growth in output under the ERP . The extensive external assistance to TRC has had little effect in arresting the secular decline in its performance largely because such support has not been conditioned on measures to change the regulatory framework for TRC operations and has focussed on supporting the maintenance and acquisition of physical assets rather than their effective utilization. 6. Proiect Objectives and Rationale for IDA Involvements The main objectives of the project are to (i) strengthen the organization of TRC, eliminate regulatory bottlenecks to its effective operations and set it on a path of a commercially viable entity; and (ii) rehabilitate infrastructural assets, replace obsolete and uneconomic operational assets and provide limited new investments consistent with the prospects for growth in traffic. IDA has played a leading role in assisting Government to formulate this strategy, which is based on the lessons learnt from both the EP and the Bank Group's experience with railways projects in the region in the last decade. IDA's continued role in the Implementation of the project, particularly its institutional dimensions and in co-ordination of the donors, is viewed as pivotal to its success by both the Government and the donors. 7. Project Description: The proposed project would consist of (a) rehabilitation of track, locomotives, telecommunications systems, wagons aud coaches and replacement of life-expired maintenance equipment, computer equipment, coaches and vehicles; (c) organizational support and training to strengthen management systems and staff capacity in all functional areas; and td) support for improvements in the working environment for the TRC workforce. The total cost of the project is estimated at US$275.2 million, with a foreign exchange component of US$160.6 million (58Z). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and the disbursement schedule of the proposed IDA Credit are shown in Schedule B. A timetable of key processing events is shown in Schedule C. The status of Bank Group operations in Tanzania is presented in Schedule D. A map (IBRD Map 22878) is also attached. The Staff Appraisal Report, No. 9449-TA dated May 24, 1991 is also attached. 8. Actions Agreed. During negotiations, agreement was reached with Government and TRC that: (a) TRC shall earn a rate of return on its total capital employed of at least 15 in its fiscal years 1992, 1993 and 1994 and at least 20X for each fiscal year thereafter; (b) all investments outside of the project in excess of US$2.0 million equivalent be implemented only after consultation with IDA; (c) TRC shall review annually with IDA, by October 31, its investment plans for the ensuing fiscal years, ensuring that all items in such plans are subject to a prior economic  and financial justification; (d) TRC shall furnish annually by not later than November 30, a plan for the scrapping of wagons for the following year and implement such plan taking IDA's views into account; (e) TRC's accounts receivables be no greater than 45 days of annual revenues in any of its fiscal years during the project period and that it submits to IDA, semi-annually, an aged analysis of its accounts receivable; (f) by December 31, 1992, TRC shall have leased out its hotels and franchised the catering services on its trains and shall also have completed the transfer of operational, managerial and financial responsibility for its roads services tc an independent operator; (g) TRC shall review annually with IDA the rehabilitation program for locomotives, the management development program and the program for supervisory level staff development and support; (h) TRC shall contract out the operation and management of the quarry to be established under the project; (i) TRC shall adopt, by January 31, 1992, a policy on the commercial use of its surplus land satisfactory to IDA; (j) TRC shall carry out with Government and IDA a mid-term review of project implementation by December 31, 1993. The following were agreed as conditions of Credit Effectiveness: (a) execution of the subsidiary Loan Agreement; (b) TRC's tariffs have been increased by a cumulative BOZ2 (c) TRC has prepared and is making satisfactory progress in the implementation of action plans to improve maintenance and train operations; (d) Government has appointed a new Board of Directors for TRC; and (e) TRC has executed contracts for the leasing of the hotels and the assets of the roads services and the franchising of the catering services. 9. Justification anl Risks: The project, by addressing the underlying reasons for TRC's poor operating and financial performance will enable it to subsequently increase the utilization of its capacity, lower its unit cost, earn a good return on its assets and be well-placed to be financially self-sustaining and pay dividends on Government's substantial equity interest in it. The economy would benefit directly through lower transport costs for long distance movements and the potential for greater generation of foreign currency through TRC's increased capacity to handle transit traffic reliably and efficiently. The major risk is that TRC's management, after a decade of total lack of accountability for effective use of its assets, may not be able to achieve the improvements in managerial efficiency envisaged under the project thereby reducing the volume of traffic that it can carry. The program of management strengthening envisaged under the project would go some way towards mitigating this risk. However, the only durable insurance against this risk would be Government's commitment to hold TRC management accountable for the monitorable performance objectives of the strategy and to take effective remedial actions if these are not met. 10. Recoumendation. I am satisfied that the proposed Credit complies with the Articles of Agreement of the International Development Association and recommend that the Executive Directors approve it. Barber B. Conable President Attachments Washington D.C. May 24, 1991  SCHEDL A TANZANTA RAILWAYS RESTRUCTURING PROJECT Proiect Cost Summary Estimated Costss Local Foreign Total USS Million Track Rehabilitation 50.5 24.8 75.3 Bridge Strengthening 13.1 11.6 24.7 Quarry 0.3 3.6 3.9 Plant Maintenance Depot 1.6 4.4 6.0 Locomotives Rehabilitation 0.8 8.4 9.2 Wagons 0.9 4.9 5.8 Passenger Coaches 1.0 10.1 11.1 Maintenance/Accident Equipment 1.4 14.4 15.8 Signals & Telecoms 2.1 2.5 4.6 Service Vehicles 0.5 4.7 5.2 Office Equipment 0.4 3.5 3.9 Technical Assistance 5.2 13.9 19.1 Training 1.0 6.5 7.5 Organizational Support 1.0 2.5 3.5 Track Rehabilitation Support 2.1 0.9 3.0 Studies 0.3 0.6 0.9 Total Base Costs 82.2 117.3 199.5 Physical Contingencies 12.3 17.4 29.7 Price Contingencies 20.1 25.9 46.0 TOTAL COSTS 114.6 160.6 275.2 Financing Plan: Local Foreign Total (US$ million) TRC 109.6 -- 109.6 IDA -- 76.0 76.0 AfDF -- 31.2 31.2 EDF -- 18.0 18.0 CIDA 3.0 7.3 10.3 KfW -- 18.3 18.3 ODA -- 8.5 8.5 VWP 2.0 1.3 3.3 Total 114.6 160.6 275.2  SCHEDULE J Page 1 of 2 TANZANIA RAILWAYS RESTRUCTURING PROJECT Procurement Method (US$ Million) (figures In parentheses are the amounts financed by IDA). Procurement Method Other Prolect leament ICB 11 LIB 2/ Other Donor Method 3/ Total Works A. Permanent Way -- -- 40.0 40.0 (Quarries. Bridge Strengthening) B. Signals and Telecoms 6.4 -- -- 6.4 (3.5) (3.5) Goods A. Track Materials 34.8 70.9 105.7 (34.8) (34.8) D. Plant Maintenance Depot 6.2 -- 2.2 8.4 (6.2) (6.2) C. Locomotives -- -- -- 12.0 12.0 D. Rolling Stock -- -- -- 22.6 22.6 E. Maintenance Equipment -- -- -- 22.3 22.3 F. Service Vehicles 4.6 -- 2.7 7.3 (4.2) (4.2)