Colombia - National Railroads Rehabilitation Project

RESTRICTED Fi E copy Report No. P-3Z3 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE FERROCARRILES NACIONALES DE COLOMBIA June 6, 1963  INTENIATOIJAL BAIK FOR RECOCNSTRUCTION AND DEV]LOPI:1 T REPORT A^iD RECOiITNDATIONS OF THE PRESIDENT TO THE EXL.CIUTIVE IJiiECTORS O1\1 A FF0?CPOSE LOAM TO THE FERROCARRILES ]\1, C7TONALLS DE COLOL""'h 1. I submit the following report and recommendations on a proposed loan, of an amount in various currencies equivalent to $30 million, to Ferrocarriles Nacionales de Colombia (Colombian National Railroads - C5TJR) to assist in financing the first two years of a five year project for the rehabilitation of CNRe PART I: HISTORICAL 2, The Bank hasmade three loans totalling $4603 million for the construction of the Atlantic Railroad, for rehabilitation of the Fundacion - Santa hiarta line, and for motive power and rolling stock for the Atlantic Railroad. The first loan (68 CO) amounting to $25 million, wasmade to the Government in 1952 and the second and third loans (119 CO and 267 CO), amounting to $1509 million and $5.4 million, wzere made to the Colombian National Railroads in 1955 and in 1960 respectively. 3. In 1961 the Atlantic Railroad was opened to through traffic. In the same year, the General Transportation Survey, sponsored jointly by the Govern- ment and the Bank, recommended a 10-year railroad rehabilitation program which the cNR adopted as its program. Tile CNR subsequently asked the Bank to assiz Q it in financing the first 2 years of the 10-year program. Bank missions visited Colombia in June/July 1961 and in July 1962 to appraise the project. 4. Formal negotiations began in Washington on April 3, 1963. The Colombian Government was represented by Dr. Carlos Obando V., Minister of Public W-1orks, and by Dr. Ignacio i'Iesa-Salazar, Minister Counselor of the Colombian Enbassy, The Borrotrer was represented by Dr. Luciano Elejalde. General Mianager of the CNRO 5e The proposed loan would increase the Bank's lending in Colombia from $27809 m4llion to $308.9 million net of cancellations. The status of previous Bank loans is as follows: As of May 31, 1963 ($ million) Total loans net of cancellation / ................ 278.9 of which has been repaid 5co*@oe*eo 7.6 Total now outstanding ...................... . ...,e 221.3 Amount sold * 12,0 of which has been repaid .......0.... 8.3 3.7 Net amount held by Bank ................,..... 217.6 1/ Includes $84.8 million undisbursed and the $8.8 million to CVC-CHIDRAL, signed on June 3 and not yet effective.  In 1961 a $19.5 million IDA credit was extended for the national highway program in conjunction w-Ith a Bank loan for the same project. 6. Other loans for nrojects in Colombia which are likely to be pre- sented soon are: a loan of $30 million for expansion of the Paz del Rio steel plant and one of $5 million for expansion of the Cospique thermal elect;ic plant near Cartagena. 14e are also studying projects for the ex- pansion of generating capacity of the CVC and Medellin power systems and for the national telecornmunications program. PART II: DESCRITPTION OF THE PROPOSED LOAN 7. The main features of the proposed loan are as follows: BORRaOER: Ferrocarriles Nacionales de Colombia (CNR). GUARANTOR: Republic of Colombia. AMIOUNT: The equivalent in various currencies of $30 million. PURPOSE: To assist in financing the acquisition of about 1,150 freight cars, 37 diesel locomo- tives, rails and steel for bridges, and other railroad equipment and materials needed to rehabilitate the railroads and expand its carrying capacity. INTEREST RATE: 5-% per annum. COMiITIENT CHARGE: 3/4 of 1% per annum. TERiI AITD A,O0TIZATION: 20 years, including 37- years grace. Semi- annual installments from November 1, 1966 to May 1, 1933. PART III: LEGAL INSTRUIENTS ATID LEGAL AUTHORITY 8. A draft Loan Agreement between the Bank and CNR (No. 1) and a draft Guarantee Agreement between the Republic of Colombia and the Bank (No. 2) are attached. 9. The Guarantee Agreement is in the usual form, and includes a provision of funds covenant (Section 2.02) and a rate covenant (Section 3.o6). In a letter (No. 3) the Government agrees to take all steps neces- sary to enable CNR to adjust its rates and fares without prior approval by the Superintendencia de Regulacion Economica (the rate regulating agency); in the meantime, the Government undertakes that-it will cause the Superintendencia to authorize the CIR, from time to time, to adjust its tariffs to provide increases in revenues up to 25% when needed to cover  - 3 - increases in wages and other costs. The Superintendencia has granted the initial authorization5 10 The Loan Agreement follows the usual form of Bank loan agreements with railroad enterprises. lle The report of the Committee provided for in Article 3, Section 4(iii) of the Articles of Agreement of the Bank is attached (No. 4)' PART IV: APPRAISAL OF THE PROPOSED LOAN 12. A detailed appraisal of the project (Report No. TO-351b) is attached (No, 5)e 130 The proposed loan will finance equipment and engineering services during the first two years (1963-64) of a 5-year project (1963-67) for the rehabilitation of the CNR. The 5-year project is considered to be the mini- mum investment program necessary to rehabilitate the CNR system and to provide the capacity for handling expected traffic during 1963-67. The first two years of the 5-year project have been selected for Bank financing taking into consideration the greater certainty of C1R's equipment needs in this phase and CNR's present capacity to absorb new equipment and to rehabilitate its system. 14. With the opening of the Atlantic Railroad to through traffic in 1961, and the transfer of the existing regional railroads to the CNR, Colombia has achieved an integrated rail system. Rail transport provides an essential service in Colombia since there is a large volume of import, export and inter-regional freight vjhich can be carried at less cost to the economy by rail than by other means of transport. At present because of shortage of rolling stock and traction, the CNR has been unable to handle all the traffic offered. Provided the Railroads have adequate equipment, freight traffic is expected to increase rapidly in coming years, perhiaps doubling in the next 10 years. 15. The higher traffic volume and the operating economies directly attributable to the rehabilitation (particularly the dieselization) should enable CNR to reduce unit operating costs. Assuming tariffs are adjusted to compensate for increases in wages and costs of materials, operating economies should enable the Railways steadily to improve their financial position. In February 1963 the CNR put into effect increases of about 50% in passenger fares, and about 35$ in freight rates. Moreover, the Government has taken steps to make possible further adjustments in CURts tariffs as necessary to compensate for further increases in wages and other costs. According to present estimates there would be a net operating revenue in 1964, and a net income (after depreciation and interest) in 1967. Ihe financial improvement should enable the Railroads to rapidly reduce their demands upon the Government budget for funds to help finance their investment program. Debt service is expected to be covered by earnings 1.2 times in 1964, increasing to 1.4 times in 1968.  - - Arrangements for Financing the Project 16. The cost of the project in the first two years is $35.6 million, including contingencies, of which $30 million -w-ould be covered by the pro- posed Bank loan; the balance would be covered by the CNR with the assistance of the Government. The cost of the remaining three years of the project is $38.h million, exclusive of contingencies, and the Government is obliga- ted to provide funds, if needed, to finance its completion. However, we expect the Railroads to seek a further loan in late 1964 or 1965 to finance the foreign e'change cost of completing the project, now estimated at about $27 million equivalent0 Borrower 173 The CITR is an autonomous entity of which all capitall stock is owned by the Governmient0 Its five-man Board of Directors consists of the Ainister of Public Works, Chairman, with the other members appointed by the President of the Republic from lists submitted by groups representing trade and industry. CNR is managed by a General Miianager appointed by the Board, To assist it in carrying out the Proj ct, the CNR will obtain the services of specialized consultants in the fields of diesel locomotive and rolling stock maintenance. Procurement 18a All major items of equipment will be procured on the basis of international competitive bidding0 190 The proposed loan would include $4.l million for rails and steel for bridges. The rails, and some of the steel for bridges, can be pro- duced locally by the Colombian steel mill, Acerias Paz del Rio, which is expected to bid on these items. At the request of the Colombian Government it is proposed to permit such items to be procured frorm Paz del Rio and financed under the loan provided that the cost w=ould not exceed the lowest qualified foreign bid c.i.f. port of entry plus an allowance of 15% for customs duty, Economic Situation 20. A report "Current Economic Position and Prospects of Colombiall (WH-126a) is attached (No. 6)o 21. In early 1962 a Bank mission reviewed Colombiats development program. In its report (I-IH-119a and b, June 21 and August 3, 1962) the mission concluded that the targets of the program were reasonable and at- tainable. In the letter transmitting the report to the Government of Colombia, the Bank emphasized that in order to provide a financial basis for the program, the Government needed to take measures to restrain import demand and to increase tax revenue.  22. In November 1962 the Government introo'uced a new foreign exchange system under uhich the exchange rate applicable to imports of commodities was increased from 6.70 to 9.00 pesos per USSpl and the rate applicable to coffee exports and funds converted by petroleum companies was set at 7.10 pesos per USSl. The differential between these rates, to-ether with in- creases in receipts from ad valorem customs duties, is expected to increase Government revenues by about 600 million pesos in 1963 (i.e., by an a-rount equal to 280. of 1962 revenues). The Consress ',as approved increases in beer and gambling taxes, with revenues earmarked for the provinces and municipalities. The Government has proposed, and Congress is now considering in special session, additional tax measures which would increase National Government revenues by a further 300 mlllion pesos a year. One of them - an increase in the gasoline tax - is in an advanced state of consideration by the Congress and final passage is expected shortly. 23. The growth of povernmental revenues in 1963 is being partially offset by rising expenditures f'or current government operations because of the substantial price advances and the wage increases authorized shortly after the exchange rate was adjusted. 'These increases have also cdiminished the effectiveness of the exchange rate adjustments in reducing import demand. The 1063 balance of payments is expected to show a substantial current ac- count deficit which is being financed by project and non-project external assistance. The Government intends to limit pressures on both prices and imports by curbing credit expansion as agreed under a standby arrangement writh the International N,'onetary F'und. 2h. Public investment has increased along the general lines of the Plan but has not reached projected levels. Lags havre occurred, particularly in the education, health and waterwlorks sectors. Under current fiscal plaars, the volume of public investment financed through the national budget in 1963 would be below the 1962 level but would not be financed by borrowing from the Central Bank, as occurred last year. Investments of autonomous public agencies and enterprises are expected to increase in 1963 as projected in the Plan. These enl-erprises have been permitted to adjust their tariffs upward when necessary to comDensate for cost increases and are on the whole in a relatively favorable position to continue with their investment plans. 25. The growth of gross domestic production during 1961 and 1962 (about 5'4 per annum) approached the 5.6;< target of the development plan. Prospects are favorable for private investments in agriculture and industry necessary for expandinp; exports and developing import substitutes. 26. In January 1963 a meeting was held under the Pank's auspices of a Consultative Group of governments and lending agencies to exchange information on the Colombian development plan and the external assistance needed to finance hige priority projects in it. Such projects, including those on which the Bank is working, could provide a basis for external loans of about :400 million in 1963 and 1964. External financing of these projects is possible without increasing external debt service appreciably above 12d of prospective foreign exchange earnings after 1064, provided a portion of these credits can be obtained on special terms, as now seems likely. In December 1962 total external public debt amounted to ^639 million. Service payments on this debt are ',103 million, or 16"" of foreign exchange earnings in 1963, and decline to about 11; in 15965 and 4; in 1970.  - 6 - 27* The outlook for continued economic growth in Colornbia is favorable, both as a result of the Governmentts public investment efforts concentrating on high priority projects and of the vigorous expansion of private manufacturing and agriculture. The Government is continuing a policy of monetary restraint and cautious external debt management0 Colombia should be able to service the proposed loan, as well as additional loans for high priority projects in the development program. Prospects of Fulfillment of Obligations 28. The management of CUqR should be able to exzcute the project satisfactorily, 29, The undertakings by the Government and the COUR with respect to maintenance of adequt-.- railway rates, and the pr.!ionloffunds covenant by the Goverm-ne:-t. gxn ssurances that the Crr !1 be ab.-