Report No. 9908-MAI Malawi Transport Sector Review Selected Issues (in Two Volumes) Volume Il: Working Papers August 10, 1992 Infrastructure Operations Division Southern Africa Department FOR OFFICIAL USE ONLY - Xis-docun*nt hias a restricted distribution and may be wedi by reipi>ents &d. in-the perfomance ~,f their 6fficial duties.-Its contents may not otherwise <~ be e~ without Worl Bank authoizatin. r ~ ~ ~ ~ ~ .ti CURRENCY EQUIVALENT (as of November 1. 1991) Currency Unit - Malavi Kwacha (NK) US$1.00 - MH 2.86 MR 1.00 - US$0.38 MH 1.00 - 100 Tambala GOVERNMENT OF HALAWI FISCAL YEAR April 1 to Harch 31 WEIGHTS AND MEASURES 1 kilogram (kg) - 2.2 lb 1 metric ton (mt) - 2,204.6 lb 1 liter (1) - 2.116 US pints I hectare (ha) - 2.471 acres 1 cubic meter (cm3) - 35.3 cubic feet 1 kilometer (km) - 0.621 miles GLOSSARY OF ABBREVIATIONS ABA - African Businessmen's Association ADMARC D Agriculture Development Marketing Board AFRAA - African Airlines Association AfDB - African Development Bank A"RAA - African Airlines Association BA * British Airways CPH-N - Caminho de Ferro-Norte, Mozambique DCA - Department of Civil Aviation DSS - Decision Support System DEHATT - Development of Halawi Traders Trust !>. - Directed Track Haintenance EPD - Economic Planning and Development Department GOM - Government of Malawi GSA - General Sales Agent IATA - International Air Transport Association INDEBANK - Investment and Development Bank of Malawi INDEFUND - Investment and Development Fund of Malawi RIA - Kamazu International Airport RLM - Royal Dutch Airlines LAM - Mozambique Airlines LFC - Leasing and Finance Company of Malawi LS - Lake Services MHS M Material Hanagement Systems MOP - Ministry of Finance MOTC - Ministry of Transport and Communications HOU - Memorandum of Understanding mOW - Ministry of Works MPF - Monthly Payment Factor MR - Malawi Railways HTIT - Ministry of Trade, Industry and Tourism NTC a Northern Transport Corridor NRZ - National Railways of Zimbabwe OAS - Operations Audit System OPC - Office of the President and Cabinet PCC - Petroleum Control Commission PR - Passenger Kilometers PRP - Prime Route Policy PVHO - Plant and Vehicle Hire Organization QAS - Quality Assurance System QM A Air Mlalvi RAP * Restructuring Action Plan ROC * Return on Capital Employed RSP - Road Service Permit UTA - Road Traffic Act RTC - Road Traffic Commission RTD - Road Traffic Department RTOA - Road Transport Operators Association SM - South African Airways TEU . Twenty Foot Equivalent Unit (containers) SM - Stagecoach Malawi. Ltd. tR - Tanzania Railways UNHCR * United Nations High Commissioner for Refugees ZR - Zambia Railways FOR OmFCIL USE ONLY MALAWI TRANSPORT SECTOR REVIEW - SELECTED ISSUES VOLUME 2 Table of Contents WORKING PAPER NO. 1 MALAWI RAILWAYS Page No. I *INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Background . . . . . . . . . . . . . . . . . . . . . . . 1 B. Past Operating Environment and MR's Response . . . . . . 5 C. Future Prospects and MR's Strategy . . . . . . . . . . . 8 D. Recommended Strategic Framework for Financial Viability . 9 II. ORGANIZATION AND RESOURCES .R.C.E................. . 9 A. The Railway System . . . . . . . . . . . . . . . . . . . 9 B. Structure and Regulation ................ 10 C. Organization, Management and Staffing . . . . . . . . . . 10 D. Physical Assets and Resources.. . . . . . . . 13 III. FINANCIAL AND OPERATIONAL PERFORMANCE . . . . . . . . . . . . 15 A. Financial Performance. ............. 15 B. Operational Performance . . . . . . . . . . . . . . . . . 18 C. Operational Efficiency . . . . . . . . . . . . . . . . . 21 IV. CORPORATE OBJECTIVES AND STRATEGY . . . . . . . . . . . . . . 21 A. Corporate Objective . . . . . . . . . . . . . . . . . . . 21 B. Strategy . . . . . . . . . . . . . . . . . . . . . . . . 22 V. RESTRUCTURING . . . . . . . . . . . . . . . . . . . . . . . . . 23 A. Business Portfolio . . . . . . . . . . . . . . . . 23 B. Business Potential and Marketing Strategy..... 26 C. Operations Restructuring . . . . . . . . . . . . . 27 D. Organization Restructuring . . . . . . . . . . . . 30 E. Staff Reduction . ... . . . . . . . 31 F. Assets Restructuring and Investments . . . . . . . 32 G. Financial Restructuring.. ............. 33 H. Privatization . . . . . . . . . . . . . . . . . . 34 I. Impact of Restructuring on MR Assets . . . . . . 34 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Page No. VI. MANAGEENCTFECTIVENESS.. 34 A. Systes lmprovement . . ................. 34 B. Operations Improvement and Efficiency Targets . . . . . . 35 C. Staff Development and Motivation ... . . . . . . . . . 36 VII. RAILWAY-GOVERNMNT UNDERSTANDING ............. 36 A. Obligations of th Railwys .............. 36 B. Obligations of th Government. ......... . ... 37 C. Meorandum of Understanding (HOU) .......... .. 38 VIII. PROJECTIONS AND ACTION PLAN. .......... ... .. 39 A. Financial Proections.................. 39 B. Restructuring Action Plan . . . . . . . . . . . . . . . . 45 C. Implementation Stratogy .............. . 45 ANNEXES 1. Halawi Railways Organization Structure (1988189) 2. Basic Data and Key Performance Indicators for the Malawi and Some Neighboring Railways 3. Malawi Railways Staff Levels and Staff Productivity (1975-1990) 4. Malawi Railways Operational Performance and Productivity Indicators (1975-1990) 5. Freight and Passenger Traffic on Malawi Railways (1975-1990) 6. Malawi Railways Organization Structure (1990) 7. Malawi Railways Network - Alignment and Gradients 8. Halawi Railways Permanent Way Details 9. Malawi Railways Locomotives - Inventory and Main Specifications 10. Malawi Railways Rolling Stock Inventory 11 Malawi Railways Financial History and Key Financial Indicators 12. Current Estimates of Halawi Railways Assets and Depreciation 13. Malawi Railways Commodity-wise Local Freight Traffic for 1989/90 1A, Malawi Railways Sectional Traffic Density Analysis for FY 1989/90 15. Malawi Railways Sectional Traffic Density Analysis for FY 1995 16. Malawi Railways Freight Handled at Different Stations (1989/90) 17. Malawi Railways (including Lake Services) Cost Structure and Trend (1985186-1989/90) 18. Malawi Railways Operational Performance Targets 19. Malawi Railways Operations Analysis and Assessment of Locomotives and Rolling Malawi Railways Stock Requirement 20. Malawi Railways Traffic Forecast - 1995 21. Malawi Railways International Traffic Forecast and Overseas & Nacala Share 22. Malawi Railways Overseas Traffic Forecast by Corridors - 1995 23. Malawi Railways Overseas Traffic Imbalance by Corridors and Wagon Types 24. Malawi Railways Recommended Organization Structure 25. Current Estimates of Malawi Railways' Usable Assets and Depreciation 26. Malawi Railways Operations Analysis -1985 High Case WORKING PAPER NO. 2 AIR MALAWI Page No. I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 82 II. CURRENT OPERATIONS ..................... 83 A . Overview . . . . . . . . . . . . * . * * * . * * 83 B. Air Malavi's International Air Passenger Market . . . . . 85 C. Air Malavi's Domestic Air Passenger Market . . . . . . . 91 III. FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . 92 A. Revenues . . . . . . . . . . . . . . . . . . . . . . . . 93 B. Operating Costs . . . . * * * * . . . . . * . . * . . 96 C. Route Profitability . . . . . . ... . . . . . 99 IV. ORGANIZATION AND STAFFINGD............. . . 102 A. Staffing and Functions by Department . . . . . . . . . . 106 B. Interline Accounting . . . . . . . . . . . . . . . . . . 108 V. CURRENT ISSUES . . . . . . . . . . . . . . . . . . . . . . . 110 A. Airline Autonomy .... . . . . . .................. . L1O B. Improved Viability of Existing Operations . . . . . . . 111 C. Aircraft Replacement . . . . . . . . . . . . . . . . . .111 VI. FINANCIAL FORECAST UNDER ALTERNATIVE SCENARIOS . . . . . . . 112 A. Traffic Forecast . ......... ......... . 112 B. Aircraft Replacement Scenarios . . . . . . . . . . . . . 113 C. Financial Comparison of Alternative Scenarios . . . . . . 116 VII. KAMUZU INTERNATIONAL AIRPORT ..N..A..RPO................ 119 ANNEXES 1. Aircraft Replacement Scenarios - Forecast Assumptions 2. Financial Projections of Jet Aircraft Purchase Scenarios WORKING PAPER NO. 3 ROAD FREIGHT TRANSPORT Page No. I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . 130 II. TRAFFIC NETWORK . . . . . . . . . . . . . . . . . . . . . . . 131 A. International . . . . . . . . . . . . . . . . . . . . . . 131 D. Domestic . . . . . . . . .. .... * . . .. .. .. . . . . 132 III. INDUSTRY STRUCTUREI .................... . . . 133 A. Institutional Framework. .. . . o . . . . . . . . . 133 B. Regulation . . . ....... ..... ............................. 134 C. Freight Operations . . . . . . . . . . . . . . . . . . . 137 IV. SUPPLY ......... . . . . . . . . . .*. .*. . . . . . 139 A. International . . . . . . . . . . . . . . . . . . . . . . 142 B. Domestic . . . . . . . . . . . . . . . . . . . . . . . . 145 V. DEMAND . . . . . . .... .............. ... . .... . .... .... . . lS0 A. International . . . . . . . . . . . . . . . . . . . . . . 150 B. Domestic . . . . ....... ................. ........... ....... . 150 VI. INDUSTRY SUPPORT NETWORK ................. . 151 A. Road Transport Operators Association (RTOA) . . . . . . . 151 B. Goods Vehicles . . . . . . . . . . . . . . . . . . . . . 151 C. Vehicle Parts . . . . . . . . . . . . . . . . . . . . . . 152 D. Tires . . . . . .. . . .... 153 E. Vehicle Repairs . .. . . . . . . ........ . . . 153 F. Petroleum Supply .................... 154 G. Insurance Companies ...... . . . .. . . . . . . . . . 154 B. Credit Facilities ...... . . . . . . . . . . . . . . . 155 VII. INDUSTRY PERFORMANCE .... . . . . . .................. . 156 A. International Operators .. ................ . 156 B. Domestic Operators . . . . . . . . . . . . . . . . . . . 166 VIII. ROAD TRANSPORT CONSTRAINTS . . . . . . . . . . . . . . . . 170 A. Ministry of Transport and Comomnications . . . . . . . . 170 B. International Transport. . . . . . . . . . . . . . * . . 171 C. Domestic Transport . . . . . . . . . . . . . . . . . . . 172 IX* RECO*OlNDATIONS . . . . . . ... . . . . . . . . . . . . . . . . 173 ANNEXES 1. Guidelines for Granting Exemptions for Foreign Haulage Vehicles to Ply Between Lilcngwe and Blantyre 2. Informal Own-Account Fleet Inventory 3. Calculations of Dry Cargo Domestic Road Transport Capacity 4. Malawi Import and Export by Border Post 5. Retail Prices in 1990 Malawi Kwacha for 6X Tractor, Obtained in Malavi, United Kingdom and the United States 6. Leasing Terms and Exchange Rates WORKING PAPER NO. 4 ROAD PASSENGER TRANSPORT Paae No. I* INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 187 A. Overview . . . . . . . . . . . . . . . . . . . . . . . . 187 D. The Passenger Transport Sutkector . . . . . . . . . . . . 187 TII STUCTURE . U C S . . . . . . . . . . . . . . . . . . . . . . 188 A. Bus Industry Structure ....... ....... 188 III. FINANCIALSASPECTS..................... 195 A. Financial Performance (19P5-1989) . . . . . . . . . . . . 195 IV. CONSTRAINTS . . . . . . . . . . . . . . ... 197 A. Regulation . . . . . . . . . . . . . . . . . . . . 197 B. Institutional Constraints . . . . . . . . . . . . . . . . 203 V. POSSIBLE SOLUTIONS ................ . ...... 205 A. Pollcy Issues . . . . . . . . . . . . . . . . . . . . . . 205 VI. SUMARY AND RECO0MENDATIONS .......... 212 A. . . . . . . . . . . . . . . ..... 212 B. Recomnended Actions . . . . . . . . . . . . . . . . . . . 213 MALAWI TRANSPORT SECTOR REVIEW - SELECTED ISSUES VOLUME 2 WORK:NG PAPER NO. 1 MALAWI RAILWAYS I. INTRODUCTION A. Background 1.1 The strategic role for Malawi Railways'(MR) lies in its ability to provide the shortest and most economical routes for Malawi's international traffic. While the reopening of the route to Beira is a long way off, the complete reopening of the Nacala line could occur as early as 1994, and the savings to the economy could be considerable. However, MR's current performance is poor and, even with full reopening of Nacala, likely to remain so unless steps are taken to improve MR's productivity and efficiency. MR needs to be radically restructured to make it commercially viable and thereby eliminate the growing drain on government resources. 1.2 From a competitive standpoint, and as far as local traffic is concerned, MR suffers from considerable disadvantages associated with its location and the pattern of traffic within Malawi. Located in the south, MR has access to a limited share of the country's freight traffic, mostly traffic with both origination and destination points along the railway network.l/ Freight traffic originating/terminating away from the railway network necessitates transshipment, which due to the accompanying delay, cost and wastage, makes use of the rail mode generally unattractive to the users. Furthermore, with a route length totalling 797 km, MR is one of the smallest railway systems in Africa and this small network is not evenly utilized.2/ Almost all of the active origin and destination points, such as Lilongwe, Salima, Chipoka, Balaka, Nkaya, Blantyre and Limbe, are located between Limbe and Lilongwe, constituting 60 percent of the total route length- The remaining 40 percent of the network, comprising the southern border (Border)-Limbe and Lilongwe-Mchinji sections, remains grossly underutilized. 11 The MR network, along with details of distances and altitudes, is given in Annex 1. 2/ Route lengths of some of the neighboring railway systems are: South Africa Transport System - 23,244 km, Hozambique Railways - 2988 km, National Railways of Zimbabwe - 2745 km, Kenya Railways - 2650 km, Tanzania Railways-2600 km, Zambia Railways- 1273 km, Botswana Railways - 705 km, Swaziland Railways - 457 km. 1.3 As a consequence, the average haul for local freight traffic on MR has been comparatively short, fluctuating between 180 and 260 km. The average passenger journey has also been generally less than 70 km. For such short hauls, the cost advantage of rail over road transport is at best marginal and, considering the many other attractJve features of the road mode, road tends to be preferred for the local traffic. This preference is reflected in MR's annual local freight and passenger traffic, which represent about 25-30 percent and 8 percent of the total, respectively. 1.4 The freight traffic and the route traffic density on MR, when compared with some of the neighboring railways, viz., the National Railways of Zimbabwe (NRZ), Zambia Railwayk (ZR) and Tanzania Railways (TR), are also very low. Comparative data tor MR, NRZ, ZR and TR, on route length, freight and passenger traffic, traffic density and ave-age freight haul, and passenger journey distance, for the years 1975 (reference year representing peak traffic) and 1989/20, is suamarized in Table 1.1 and Figures 1.1 and 1.2.3/ As shown, freight traffic on MR in 1989/90, comprised almost entirely of local traffic, was only 2 percent of that on NRZ and 5-6 percent of that on ZR and TR. Table 1.1 Malawi Railways' Freight Traffic (ntk) as a Percentaxe of that of Neighboring Railways Percentage of Percentage of Percentage of (NRZ) (ZR) (TR) (FY 1989/90) (FY 1989/90) (FY 1989/90) MR (FY 1988/89) 2 5 6 MR (FY 1975) 4 22 27 1.5 The disadvantages of MR's small scale of operations have been exacerbated by MR's complex organization structure and large work force. As a result, MR's staff productivity of 17,000 ntk/staff is very low, e.g., only 10, 22 and 30 percent of the staff productivity level achieved by NRZ, ZR and TR, respectively. Even these comparative indicators are overstated, as the referenced railways themselves are operating below the level of performance expected of them, and are in the process of implementing extensive restructuring programs to improve staff productivity. However, even if productivity on MR were improved, the small scale of domestic freight and passenger traffic would make it difficult for a railway system such as MR to be commercially viable. The level and nature of domestic freight and passenger traffic alene do not provide a justification, economic or commercial, for MR to continue. 31 Detailed data are given in Annex 2. lIiiIl ii1 jfJij]II iii 0 0~~~~~~~~~~~~~~~~~~~0t 3 | t . 1 . 1 1 . | rl t | 00 .. E s~ ~ ~ ~ ~ ~~ ~~~~~~.. .. .......................................... f . * i -. - 16~.................................... . ........................ .......................... ............ . .......... .......................... ......................... - 4 - 1.6 As indicated above, the strategic role for MR lies in its ability to provide through its linkage with the Mozambique Railways network, tne shortest and the mout economical routes for Malawi's international traffic.4/ The strategic importance of the routes to the ports of Beira and Nacala became evident after 1985, when, consequent to the closure of the routes due to continuing insurgent activity in Mozambique, all the Malawian international traffic had to be re-routed to the ports in South Africa and Tanxania. According to one estimate, the incremental cost to the Malawian economy of using the alternative routes amounted to about US$80 million per year. While the route to Beira remains closed, the rail route to Nacala was declared open to traffic in 1989 with resumption of skeleton services. Full potential of the route is expected to be achieved by 1993/94 after the complete rehabilitation of the railway network on the MHzambique side. Although the shift in international traffic to MR, subsequent to the full functioning of the Nacala corridor, is estimated to be only 30-40 percent of the pre-closure level, the savings to the Malawian economy could still be considerable and this remains the most convincing rationale for the continuation of KR. 1.7 In the past 10 years, the international traffic from/to the ports of Beira and Nacala has varied widely. Up to 1981, the level of international traffic remained within 15 percent of the peak level achieved in 1973, i.e., around 0.9 million tonnes. After 1981, with disruption of railway operations on the Mozambican railway network, the international traffic over these routes started declining and finally ceased in 1985. Until 1981, MR's operating ratio was below 100 and, based on this criterion, the financial performance of MR was considered to be satisfactory. After 1Z 1, the operating ratio gradually deteriorated and, by FY 1989/90, had reached a level of 131. The continuing high operating ratio means that the revenues generated by MR are not sufficient to cover even the operating costs; accordingly, MR does not now have the capacity to service its long and short-term loans, outstanding at MK 65 million, or to finance the replacement of its worn- out assets.5/ 1.8 If the deterioration in financial performance were attributable solely to the closure of the Beira/Nacala routes, then, with the resumption of traffic to Beira or Nacala, the financial position of MR could be expected to become nearly as sound as it was before the closure. However, this is not the case for two reasons: 4/ The distances to Beira and Nacala are 650 and 815 km., respectively, compared with distances from Blantyre to the ports of Durban by road/rail and Dar-es-Salasm by road/rail of 2,667 and 2,095 kilometers, respectively. 5/ Un -r an informal understanding, GOM, beginning 1985, agreed to waive interest on its loans to MR. Since then, no interest ca.rges on long- term loans have been reflected in the financial statements of MR, and the outstanding loans are exclusive of any accrued interest. (a) even though the operating ratios in the - 708 were below 100, the financial performance was not eL.lrely satisfactory (para. 1.9); and (b) all forecasts indicate that even after the reopening of the Nacala corridor, the international traffic level will not reach the pre-closure levels (Section V). B. Past Ogerating Environment and HR's Response 1.9 1975-1981: As indicated above, MR enjoyed ample traffic during the 19708, with freight traffic reaching its peak of around 1.35 million tonnes (250 million ntk) in 1973 and continuing within 15 percent of this peak up to 1981. This provided MR with an opportunity to achieve and then sustain a financially sound position, and to some extent MR succeeded. Operating ratios remained between 80 and 90 throughout the period, except 1979 when it was 95. The performance was better than that of many other railways in the region, which found it difficult to achieve an operating ratio of less than 100. However, MR's acceptable operating ratio diverted attention from the fact that MR was being progressively decapitalized. MR was charging only nominal depreciation calculated on the grossly-undervalued book value of assets, an amount which was totally inadequate to finance future replacement of assets. MR also had no debt-service obligations, as all past investments had been financed through grants or equity from the Government of Halawi (GOM). A correct accounting of the depreciation and the cosL of capital would have revealed the true losses and required MR to take appropriate corrective action. 1.10 The operating performance indicators during this period signalled the underlying deterioration of MRs (a) declining locomotive utilization, down from 250 locomotive kilometers per locomotive day-in- use in 1975 to 121 by 1981; (b) consistently poor wagon utilization, between 30-40 wagon kilometers per wagon day-in-use; (c) average net trailing loads per train continuing at a low level of around 225 tonnes, 50 percent or less of the hauling capacity of the locomotives; (d) average wagon load continuing at a low level of around 25 tonnes or about 60 percent of the wagon payload capacity; and (e) a 20 percent drop in staff productivity associated with a 16 percent increase in staff during the period 1975-1981 (Annex 3) despite a decline in traffic of about 8 percent (Annex 4). - 6 - 1.11 1981-1985s After 1981, the disruption of operations on the Mozambique Railways caused Malawian international and transit freight traffic to be increasingly re-routed to the ports of Durban and Dar-es- Salaam. Consequently, the traffic carried on MR started declining sharply and by 1985/86, with the complete closure of the routes to Nacala and Beira, had reached a level of around 0.40 million tonnes (96 million ntk), 40 percent of the 1975 level (Figure 1.3 and Annex 5). Until the total discontinuation of traffic to Nacala and Beira, there was considerable uncertainty and MR, expecting a resumption of operations on the Mozambican railways network, continued to retain all physical assets and most of the staff. Against a drop in traffic of 61 percent, staff strength was reduced by only 16 percent. The operating ratio increased to 107 in 1982 and has remained above 100 since then. 1.12 All other performance indicators also showed a sharp decline (Annex 4) during this period (Figure 1.4). In particular, locomotive utilization dropped to 66 locomotive kms per locomotive day-in-use, or 25 percent of the level of utilization during 1975. One reason for this sharp drop was the addition of 16 new locomotives to the fleet in 1980. In hindsight, the decision to invest in 16 new locomotives committed the MR to a large operating and maintenance cost for the future that it could ill afford with the declining traffic. 1.13 1985/86-1989/90: Freight traffic on MR. by this time limited to local traffic, dropped further from the level of 406,000 tonnes in FY 1985/86 to 335,000 tonnes in FY 1989/90. Uncertainty, understandable at the time, caused MR's response to this serious setback in the business environment to be inadequate. In particular: (a) MR did not take steps to reduce or redeploy its manpower, and as a result, staff productivity fell to 17,000 ntk/staff during FY 1989/90, or 28 percent of the level in 1975; (b) physical resources, such as surplus locomotives and wagons, were neither offered on hire to the neighboring railways like NRZ and ZR6/, nor mothballed. As a result, the limited cash available for maintenance had to be spent on maintaining an unnecessarily large fleet of locomotives and wagons and the condition of the entire fleet worsened; (c) despite the reduced utilization levels, the frequency of preventive maintenance was not altered and, as a result, even variable expenditures linked to operating performance levels were not reduced in any significant way; and (d) train operating schedules and frequencies were not modified, which caused the operating performance indicators during this period to be very poor, viz., average net trailing load of 106 tonnes, gross to net ratio of 3.16, average wagon payload of 19.9 tonnes, locomotive utilization of 82 locomotive kilometers per locomotive day-in-use, and wagon utilization of 19.3 wagon kilometers per wagon day-in-use. 6/ These railways were, throughout this period, in need of additional locomotives and wagons and were hiring them from South Africa. -7- MAWI RALWAS FIG 1.3 FRE11GIT AND PASSENGER TRAFFIC I ~~~~~~~~~~~~~~~~.. ................. .......... .. ; _ ~~~~~~~~~~~~~~~................. 6 , , * :". . I . V nz MALAWI RAILWAYS FIG 1.4 KEY PERFORMANE INDICATORS PCUtSTNW mltOltC -~~~~~-L a I, UU z \~~~~~A * ua wEu.c C. Future Prospects and MR's Strategy 1.14 In 1990, operations on the railway line from the Malawi border to the port of Nacala were resumed on a skeleton basis under heavy security protection and with considerable speed restrictions. With a program of limited rehabilitation of the track and easing of some speed restrictions, traffic on the Nacala corridor is expected to pick up. Full resumption of traffic is expected after the complete rehabilitation of the Mozambique Railways network after 1993. MR's expectations of freight traffic growth and the proposed action plan to achieve that level of traffic and exploit the opportunity to improve its financial performance are indicated in MR's Corporate Plan.7/ The Corporate Plan is based on the assumption that the freight traffic would reach a level of 0.9 million tonnes by 1994/95 and the passenger traffic would grow by 20 percent during the plan period. 1.15 Unfortunately the Corporate Plan appears to presume that railway operations cannot be self-sustaining and commercially viable and need to be subsidized. As a result the plan reflects: (a) a continuing lack of focus on the commercial viability of MR; (b) no evidence of an effective turnaround strategy; (c) heavy dependence on government subsidy and free capital grants for replacement of assets; (d) a continuation of the system of computing depreciation based on the book value of assets and treating the past loans as interest-free; (e) only a small change in the targets of productivity and efficiency proposed to be achieved, e.g., locomotive utilization 41 percent,8/ wagon utilization 45 wagon kms per wagon day and an average net train load of 209 tonnes; and (f) an intention to increase the staff, locomotive, wagons and other resources in preparation for handling the expected increase in traffic. Not surprisingly, despite the assumptions of the availability of free capital and earnings based on an unrealistically high traffic forecast, the operations at the end of the five-year plan period are shown to result in a net deficit of about MK one million. The real loss would be about MK 14 million if earnings were adjusted for a realistic freight traffic and depreciation based on replacement costs, and MK 34 million if the proposed investments were financed by coumercial loans instead of grants. 7/ MR's "Corporate Five Year Development Program" for the period 1990/91 to 1994/95 issued in May 1990. 8/ MR's definition of 'locomotive utilization' is based on the percentage of hours the locomotives, after becoming available to traffic, are utilized for the operation of trains. Even though this statistic is important, the more commonly used definition of locomotive utilization, i.e., locomotive kms per locomotive day-in-use, is a better indicator of overall locomotive productivity. While the data on locomotive kilometers per locomotive day-in-use is being maintained by MR, targets have not been indicated in the Corporate Plan. - 9 - D. Recommended Strategic Framework for Financial Viabilitr 1.16 The traffic forecasts (Section V) indicate that with the changed trading pattern, the international traffic on MR is unlikely to reach the 1975 level and would most optimistically be around 250,000 tonnes/year by 1995 and 400,000 tonnes/year by 2010 in the high growth scenario. Despite the prospects of such a modest increase in traffic and the continuing small scale of local freight operations and short freight haul, MR can still become an efficient and financially viable railway if it implements an appropriate turnaround strategy. Such a turnaround strategy would require: (a) committing MR to the objective of achieving comercial viability with "commercial viability being clearly defined (Section IV); (b) formulating and implementing a strategic plan involving appropriate restructuring of products and operations, organization and staff, physical resources, tariffs, and capital in line with realistic traffic forecasts and organizational goals (Section V); (c) improving overall management, systems and procedures, and enhancing productivity (Section VI); and (d) developing a clear understanding of the respective obligations and authority of .nd between MR and GOM (Section VII). II. ORGANIZATION AND RESOURCES A. The Railway System 2.1 MR is a 1067 mm gauge single line system with a route length of 797 km. The outline of the network comprising the main line of 696 km from Mchinji (Zambia-Malawi oorder) to Nsanje (Mozambique-Halawi border) and the branch line of 101 km from Nakaya to Nayuci (Mozambique- Malawi border on the eastern side) with details of stations en-route, distances from one another and terminal points, the altitude with a visual view of the nature of the gradients between various sections is given in Annex 1. 2.2 The maximum gradient, 2.27 percent uncompensated, exists on the southern border-Limbe section. The maximum on the Salima-Mchinji section is 1.9 percent compensated and on the Nakaya-Nayuci section is -one percent. The border-Salima section, apart from steep gradients, has sharp radii, the minimum being 111 m. 2.3 Important users of the railway services, accounting for about 80 percent of the total local freight traffic, are connected through dedicated private sidings to the major yards on the railway -10 - network at Limbo, Blantyre, and Lilongwe. The rest of the users need to bring the goods to common railway sidings through trucks. 2.4 The network has a total of about 90 stations, although only 13 of these handled more than 10,000 tonnos of freight traffic/year and only 25 handled more than 1000 tonnes of freight traffic/year or about two wagon loads/month. B. Structure and Regulation 2.5 Malawi Railways Limited, incorporated in the United Kingdom, is a wholly-owned subsidiary of the Malavi Railway Holdings Company, which is a statutory body incorporated in Malawi under the Malawi Railway Holdings Company Act. The responsibilities, authorities and operating constraints of the Malawi Railways Limited are generally prescribed in the Railways Act (cap 69.03). This Act regulates the construction, control, management and operation of the railways in Malawi. 2.6 Under the section on management, rules have been prescribed for ensuring safety of passengers; prohibiting smoking, drinking and other such practices causing public nuisance; carriage of dangerous and offensive goods and of passengers suffering from infectious diseases on trains; prevention of accidents; and penalties and liabilities of the railways and users under various situations. There are no specific restrictions in the Act pertaining to the setting of tariff rates, staff employment, organization or other matters of commercial interest. 2.7 Normally iM, as all limited companies, should be free to formulate policies in pursuance of its objectives, subject to its own articles of association and memorandum of understanding. However, being a parastatal, MR is subject to the control of the Ministry of Transport and Communication (MOTC), and the written or unwritten rules and procedures have been restrictive of the railway's authority and ability to respond quickly to the changing business and operating environment. Particularly restrictive are the powers of the railways to make changes in tariffs, goods classifications, rules for warehousing or retention of goods at stations/warehouses, staff complements, organization structure, and many other aspects of railway management. Cumbersome rules pertaining to imports and sanction of foreign exchange and of local loans have also tended to curtail the autonomy of the railways. C. Organization, Management and Staffing organization and Management 2.8 HR's current organizational structure is illustrated in Annez 6. The key features of the organizational structure and the management style are: (a) a functional departmentalization at the headquarters level, with all field staff reporting through defined channels to the functional heads at the headquarters and then to one controlling deputy general manager; - 11 - (b) functioning of two assistant general managers as advisors to the deputy general manager, for administration and technical services; (c) existence of many specialized independent departments on an advisory level dealing with collection and analysis of data, including Cost and Management Accounting, Statistics, Data Processing and Computerization, and Market Research; (d) a "tall" structure with 6 to 8 reporting and decision-making levels at the headquarters; (e) emphasis on formal channels of communication and formal ways of dealing with most issues; and (f) sharing of responsibility for operations for the rail and lake services divisions by a number of managerial staff. 2.9 A few changes in the organizational structure have been recommended in the Corporate Plan (Annex 3). One major change would entail creating four divisions at the top level - Lake Services, Rail Services, Finance and Administration, and Engineering and Supplies. However, not only would all the existing functional departments be retained, but also some new ones created by splitting the existing ones. All departments, existing or new, would be placed in the four divisions, except for the personnel and training departments and four small departments to be called branches - internal audit, medical, security, and planning - which would be placed directly under a deputy general manager. Under the proposal, the staff positions of the assistant general managers would also be abolished. Though the "organigram" shows the divisional managers to be reporting directly to the general manager and hence acting autonomously, the deputy general manager, by virtue of being placed in a level higher than the divisional managers, is in practice likely to act as an additional layer of authority. 2.10 The recommended change in the organization structure amounts to a regrouping of the existing departments and is far removed from the concept of divisionalization. Likely consequences of a departmentalized organization include: (a) an increase in the cost of staffing and administration in direct proportion to the number of departments; (b) departmental conflicts leading to delayed decisions, compromises or wasteful strategies; and (c) inversion of corporate objectives arising from undue emphasis on departmental objectives, and with demand for resources and budget allocations unrelated to the level of business and the earning potential of MR even on a long-term basis. The departments, by emphasizing their departmental objectives, have been able to justify and retain the staff and resources and the expenditure budgets almost at the same level as in 1975 despite a 60 percent decline in freight traffic. The departments have also succeeded in creating and sustaining specific dedicated facilities for maintaining their equipment. One central maintenance/manufacturing facility could provide all these services more economically in place of 7-8 such facilities being currently operated. - 12 - 2.11 A tall structure with too many organizational levels, while facilitating the upward mobility of the managerial staff, has few other merits to reconmmend it. Expensive staffing, long communication channels, excessive supervision, reduced delegation of authority tad resulting deterioration of morale, inaccessibility of top management to staff, greater reliance by the management on data and statistics than on observation exemplify the negative impact of a tall structure. The change recommended in the Corporate Plan would result in adding one more layer, that of the divisional manager, to the existing 6-8 levels. 2.12 The Larrent formal management style is the combined result of excessive functional departmentation, a tall structure with too many managerial staff, and excessive dependence on job analysis and detailed procedures. The resulting lack of motivation and tendency to adopt work-to-rule strategies as opposed to problem-solving have affected operational performance. Thus, poor performance on MR is not only attributable to financial and structural constraints, but also to an organization structure that results in inefficient and slow responses to problems arising during operations. 2.13 The Lake Services Division derives little benefit from reporting to and seeking decisions from the assistant general manager (projects) and other department heads at the headquarters. This is because the headquarters staff's main focus is on railway problems rather than the problems and the objectives of the lake services, and delays in decision-making are common. If at all, the managers are detracted from concentrating on railway operations. 2.14 The staff holding middle and top management positions are qualified and experienced, but are hampered in turning MR around for many reasons. First, the management lacks commitment to running MR as a commercial enterprise, and as reflected in the Corporate Plan, continues to operate under the assumption that railways can, at best, balance revenues with operating expenditure, with most of the capital inputs for replacement of assets and the resulting debt service obligations met by the Government. As a result, the majority of the investment decisions and many operating decisions are technically-driven rather than based on economic or financial justifications. Second, the management is frustrated by the lack of adequate capital and foreign exchange for spare parts, which is partly responsible for the railway's poor performance. This, however, has drawn attention away from what could be achieved with existing resources. Third, there is a feeling that the situation will correct itself after full rehabilitation of the Nacala corridor. Staffing and Staff Productivity 2.15 Staff productivity on MR is low compared with staff productivity on the neighboring railway systems. Even in 1975, the year of near-peak performance for MR, the staff productivity was only 20 percent of that currently achieved on NRZ and 45 percent of that on ZR. Annex 7 indicates overall and departmental staff strengths and staff productivity levels achieved by MR for the period 1975 to 1990. The inadequate response to the declining traffic is evident from the data - is - su=marized at Table 2.1. While traffic between 1975 and 1989/90 declined by 73 percent, total staff strength dropped by only 1 percent and the administrative staff increased by 57 percent during this period. As a consequence, staff productivity dropped by 72 percent (ntk/staff) and by 45 percent (ntk + passenger km)/staff). Table 2.1 Halawi Railways - Traffic Levels and Staff Productivity _Y 1975 FY 1982 YY 1989/90 Freight Traffic 252 181 69 (million ntk) Z change from 1975 -28 -73 Total Staff 4,054 4,995 3,998 Z change from 1975 23 -1 Admin Staff 567 1,050 890 Z change from 1975 85 57 Staff Productivity 62,161 36,236 17,259 (ntk/staff) Z change from 1975 -42 -72 Staff Productivity 84,000 56,000 46,000 ((ntk+pk)/staff) Z change from 1975 1 _ -33 -45 2.16 Three major actions that need to be taken as far as staff is concerned are: (a) staff reduction, and redistribution of job responsibilities and redefinition of job content among the remaining jobs/positions; (b) staff motivation, to ensure improved productivity and coammitment to reducing costs and recapturing export/import traffic; and (c) staff development, in areas of MR operations such as material management, maintenance management, cost analysis, and operations plannirg and control. D. Physical Assets and Resources Permanent Way 2.17 The stretch of 340 km (46 percent of the total) between the Border and Penga-Penga, a station on the Limbe-Salima section, is fitted with 30 kg/m rails and steel sleepers (except for 55 km of scattered length, which is fitted with wooden sleepers). The remaining sections, Nayuci-Nakaya and Penga-Penga-Mchinji, are fitted with 40/37 kglm rails and concrete sleepers. Except for the stretch fitted with 30 kg/m rails, the permissible axle load on the entire route is 18 tonnes and permissible speed 50 kmlh. For the section fitted with 30 kg/m rails, the permissible axle load is only 15 tonnes. Annex 8 presents details of rail weights, sleeper and ballast type, curvatures, gradients and permissible axle loads for different sections. - 14 - 2.18 The track is generally in good condition with very few speed restrictions and the few that exist are mostly on 55 km of the track fitted with wooden sleepers. The use of 40 kg/m rails on the Lilongve- Mchinji section of 104 km length with a very low traffic density, in preference to the busy sections between Limbe and Salima, appears to represent incorrect priorities. Interchanging the sections could prove to be of great advantage. 2.19 However, the track from the border to NampAtla on the way to Nacala is in bad condition, and though the traffic on the section has been resumed, average speeds are low due to speed restrictions that have been imposed. The few trains that are being run on the section have to be escorted by the security personnel from Malawi and Mozambique. In the mean time, minimal action towards repair of the track and removal of speed restrictions, comprising replacement of one out of every 4 sleepers and track fastenings, is in progress simultaneously from both the Nampula and Malawi ends by Mozambique and Malawi railways, respectively. When completed towards the end of 1991, trains will be permitted to run at moderate speeds. The systematic rehabilitation of the track with complete replacement of all damaged and rotten sleepers, worn-out rails, and missing and damaged fastenings has also commenced and is planned for completion by the end of 1993. Signalling 2.20 The rail network is fitted with a simple signalling system, and the train control is accomplished by the electro-mechanical key token block system. Once the key is given to the driver of a train and the section is blocked for the train, another key cannot be issued unless the original key is returned to the instrument on stations at either end of the section. Not many failures of the system have been reported. Given the current low traffic density and the expected traffic after resumption of normal operations, there is no need to replace the system with a more technologically advanced one. Motive Power 2.21 The motive power types and characteristics for both the main line and shunting operations are given in Annex 9. The permissible trailing loads for different types of locomotives on different sections of the system are also given in the Annex. MR has a total of 37 main line locomotives with an average age of 14 years, 16 locomotives having been introduced on MR only in 1980. Most of the main line locomotives are diesel-electric. Eight shunting locomotives in service are all diesel-hydraulic. The locomotives have been maintained according to the manufacturers' recommendations and the overall availability level has been kept high. Rolling Stock 2.22 The current holding of general-purpose and tank wagons is 875, and the types and the numbers are given in Annex 10. Of these, 623 are operational, 25 are trapped on the Mozambique railways network, and the rest are either under repair or awaiting repairs. According to MR - 15 - about 178 wagons will reach the end of their stipulated life In the next five years, i.e., by 1995. MR has 30 third class coaches, 26 of which would remain in service through 1995. Maintenance Infrastructure 2.23 MR possesses extensive facilities for the maitenance of locomotives, wagons, coaches, road motor vehicles, railway motor trolleys, locomotive and rolling stock wheels and electrical equipment. The railway also has facilities for the manufacture of spare parts, iron brake blocks, brass bearings, forged components, and machine parts. In addition, the railway has facilities for providing running repairs to coaches, wagons and locomotives. About 600 staff are employed in the manufacturing and maintenance facilities. 2.24 The maintenance facilities are generally in good condition, though there are demands from the functional managers for replacement of eristing equipment, procurement of new machines, cranes and equipment, and for creating facilities for new processes and extension of buaildings and sheds. The genesis of these demands lies in the many and varied perceptions of the managers and the supervibors regarding the departmental objectives and their own responsibilities, which may at times be at variance with the objectives of the enterprise as a whole. The technical and economic justifications for replacement/new procurement proposals, if they exist, are not always detailed or comprehensive. There is a basic need to curtail the size of the maintenance infrastructure and bring the same in accordance with the scale of activity on the railways. Effective and efficient utilization of the maintenance infrastructure and enhancing its productivity are as important as that for the operating assets. III. FINANCIAL AND OPERATIONAL PERFORMANCE A. Financial Performance Financial Ratios and Performance Indicators 3.1 All indicators (Table 3.1) point to a progressive deterioration in the financial performance of MR since 1982. The operating ratio increased by 40X between FY 1981 and FY 1985/86, and by another 8 percent up to FY 1989/90. The net deficit also increased during the last five years by about 65Z, and the profit marRin was less by 20 percent. Comparative data on financial performance for the five years starting FY 1985/86 is given in Annex 11. - 16 - Table 3.1 Malawi Railways - Actual and Adlusted Indicators of Finavcial Performance (MK million unless stated) Financial Performance FY 1985/86 FY 1989/90 I FY 1989/90 Indicator Actual Actual Adjusted Operating Ratio (Z) 125 131 242 Net Surplus/Deficit -4.6 -7.4 -28.3 OutputsCapital Employed (2) 16 18 4 Accumulated Loss -23 -44 -140 Fixed Assets 101 103 550 Current Assets 14 20 20 Capital Employed 115 123 570 Surplus required for 62 ROC 6.9 7.4 34.1 Depreciation 2.6 2.8 24.8 Net Profit Margin (X) -25 -30 -130 Note is Output is represented by revenues Note 2s ROC means return on capital employed Note 3: Depreciation is as accounted, except for FY 1989/90 adjusted where it is imputed 3.2 As discussed gbove, the financial statements of MR understate its poor performance because depreciation was computed on the basis of the book rather than replacement value, and the statements ignore the importance of earning a fair return on the capital employed (ROC). A broad assessment of the replacement of value of the fixed assets at the end of FY 1989/90 in 1990 prices (Annex 12) indicates the replacement value to be US$200 or MK 575 million, nearly six times the book value, and the corresponding depreciation to be MK 25 million, eight times that actually provided for. The financial performance indicators, adjusted for the replacement value of the assets and the corresponding depreciation for FY 1989/90 are also given in Table 3.1. These reveal an extremely poor financial performances operating ratio of 242 percent, net deficit for 1989/90 of MK 29 million, and a profit margin of -130 percent. The past depreciation policy therefore has left MR with no internal capacity to finance the replacement/rehabilitation of its assets. 3.3 Unlike a normal commercial enterprize, MR has not employed ROC as a measure of its financial and commercial performance, nor has it been required to be accountable on that basis. MR has been conscious of its obligation to service its debts, but not to generate a fair ROC. Even at a modest rate of return of 6 percent, MR could not be considered commercially viable, if the net surplus, after accounting for the operating expenses and replacement-value-based depreciation, were less than MR 34 million. Against this requirement, the adjusted net surplus for FY 1989/90 was MK -29 million. The net gap between the performance of MR and a commercially viable entity thus was as much as MK 63 million. With its actual net deficit, MR could not even service the outstanding loans, which at the end of FY 1989/90 amounted to MK 65 million. - 17 - 3.4 The output (revenues) to capital ratio, when computed using the replacement value of assets, becomes 4 percent in place of 22 percent based on the book value of assets. The under-utilization of fixed assets, as apparent from the poor output to capital ratio, is one of the main reasons for the adverse financial performance of MR. Although part of the reason for the ratio being low is the steady decline of sales (output) during the last 5 years, another is the excessive holding of assets by MR in relation to its business potential, and in particular the use of about 40 percent of the its assets for low revenue-yielding passenger and freight services (paras 3.10 and 3.11 and Annexes 13 to 16). 3.5 The accumulation of significant losses and inadequate depreciation necessitated: (a) frequent resort to long-term loans, currently outstanding at MR 65 million; (b) default in the payment of interest due on the outstanding loans; and (c) a cut-back on the procurement of locomotive spares, which in turn could affect the long- term reliability of locomotives. Moreover, MR currently has no capacity to rehabilitate/replace its assets and, according to the Corporate Plan, would need loans and grants to the extent of MK 200 million in the next five years. 3.6 Short-term Liquidity: The poor financial performance has severely curtailed the short-term liquidity of MR. As indicated in Annex lls (a) the current ratio dropped from 2.9 for FY 1985/86 to 1.41 for FY 1989/90; and (b) the acid test ratio dropped from 1.25 to 0.41. The position was made worse by: (a) the very high level of outstanding accounts receivables, equivalent to 91 days of sales; and (b) deterioration in the inventory:turnover ratio, which appears to have tied up cash in comparatively higher level of stocks than required for the level of operations and probably in low priority items, as according to MR, the more urgently required spares for locomotives continued to be in short supply. 3.7 Long-term solvency: With negative cash surplus, MR is in no position to service its debts. Even in 1994/95, the Corporate Plan projects a cash surplus that would be inadequate for debt servicing of the existing loans of MK 65 million and the future loans of MR 200 million. Subsidization 3.8 The poor financial performance of MR is resulting in its subsidization on a gradually increasing scale. Various subsidies to MR for the different years are indicated in Table 3.2. Without restructuring, the net gap in FY 1994/95, including the provision for a ROC of 6 percent, could be MK 67 million and probably more if traffic fails to materialize as expected or if the productivity targets are not achieved. With restructuring, the gap is expected to be restricted to MK 10 million, and although the results would not be fully satisfactory, HR would be on the path to commercial viability. - 18 - Table 3.2 Malawi Railways - Extent of Subsidization (MK 000) 1989/90 1989/90 1994/95 1994/95 Actual Adjusted Without With Restruc- Restruc- turing turing Operating Cash Surplus -3,416 -3,416 11,128 32,871 Depreciation 2,828 24,870 24,870 16,030 Net Operating Surplus -6,244 -28,286 -13,742 16,841 Fixed Assets 102,221 548,730 548,730 333,697 Current Assets 19,188 19,188 19,188 19,188 Capital Employed 121,409 567,918 567,918 352,885 Return on Capital 7,285 34,075 34,075 21,173 Future Loans 200,000 50,000 Interest on Loans e 1OX 20,000 5,000 Net Gap -13,529 -62,361 -67,817 -9,332 B. Operational Performance Freight and Passenger Traffic 3.9 Freight Traffic: Annex 5 indicates the freight and passenger traffic levels on MR for the years 1975 to 1990, in terms of tonnes and net tonne kilometers for the freight traffic and number of passengers and passenger kilometers for passenger traffic. The data in Annex 5 excludes departmental freight traffic. Commodity-wise traffic details for the year 1989/90 are given in Annex 13. It is clear thatt (a) the freight traffic, both in tonnes and ntk, has steadily declined since 1975, and in 1989/90 was only around 30 percent of the level in 1975; (b) even by 1981, before the routes to Nacala and Beira started showing signs of deteriorating reliability and security, the freight traffic had dropped by 20 percent to about 1 million tonnes presumably as a result of reducing share of overseas and a corresponding increase in the share of regional traffic in the imports/exports of Malawis (c) local traffic has been fluctuating, and after reaching a peak level of 482,000 tonnes during FY 1986/87, declined again to 335,000 tonnes during FY 1989/90, mainly due to the deteriorating quality of rail service. Declining quality of performance was evident in a sharp increase in the wagon turnaround. The decline in ntk was even more severe as the average haul declined from 215 to 200 km during this period. 3.10 Passenger Traffic: Since 1975, the passenger traffic has shown an overall increase of 41 percent in terms of the number of passengers, increasing from 1.2 million in 1975 to 1.7 million in 1990; and by 30 percent in terms of passenger kilometers, increasing from 88 million in 1975 to 115 million in 1990. The comparatively slow growth in passenger kilometers has been due to the average passenger journey reducing from 73 to 67 kilometers (Annex 5). - 19 - 3.11 Local Traffic Structures Data from 1989/90 (Annex 13) show that only 13 commodities (52 percent of all commodities carried by MR) accounted for 82 percent of the total freight traffic. For each of these commodities, the annual quantity offered exceeded 1.0,000 tonnes. These commodities were fertilizer, petrol, maize, beer, cement, diesel, clinker, empty bottles, tobacco and cotton seed, coal, cotton lint and ethanol. The remaining 10 items and other small miscellaneous items accounted for only 18 percent of the freight traffic. Most of the latter were offered in very small quantities, less than 5,000 tonnes per year and sometimes as low as 200 tonnes. Many of the same items also have a short average haul, ranging from 70 to 170 km. Such traffic, neither bulk nor long-distance, is responsible for the low average net train load of 106 tonnes and the average haul of around 200 km. Sectional Traffic Density 3.12 1989/90 Freight Traffic: The section density analysis (Annex 14) indicates that: (a) 48 percent of the route length on MR, between Limbe and Lilongwe, accounted for 88 percent of the freight traffic in ntk, the traffic density on this busy portion being 150,000 ntk/km; (b) the average traffic density on the remaining 52 percent of the route length was only 20,000 ntk/km; (c) the traffic density on the Border-Sankhulani section was only 4,000 ntk/km; and (d) the average traffic density for the whole network was only 87,000 ntk/km, which is low for a railway system.9/ 3.13 1995 Freight Traffic: Traffic density on the Nkaya-Nayuci section is currently low, but would probably be the highest when the route to Nacala becomes fully operational. The estimated ntk and traffic densities for various sections of MR for FY 1994/95, based on the traffic forecast (Section V), are given in Annex 15. The conclusions are the same: (a) 60 percent of the network, including the Nkaya-Nayuci section, would account for 95 percent of the freight traffic; and (b) the two main sections, viz., Lilongwe-Mchinji and Border-Limbe, with a total route length of 313 km (40 percent of the total route length), would carry only 5 percent of the total freight traffic. The traffic density on the two sections would be around 30,000 ntk/km. 3.14 With current traffic density of only 34,000 ntk/km, the relaying of the Lilongwe-Mchinji section with 40 kg rails and concrete sleepers with a speed potential of 80 km/hour, in preference to some of the high traffic-density sections between Limbe and Salima, shows the need for adequate economic analysis of investments. 3.15 Passenger Traffic: Annexes 14 and 15 also give details of passenger traffic in terms of passenger kilometers (PK) and the passenger traffic density on the different sections of MR. respectively, 9/ The average traffic densities on some of the neighboring railway systems are: 2.4 million for the National Railways of Zimbabwe, 1.05 million-for the Zambia Railways and 418,000 for the Tanzania Railways (Annex 2). - 20 - for the years 1989/90 and 1994/95. The passenger traffic density is the lowest on the Border-Sankhulani and Salima-Hchinji sections, which account for only 20 percent of the passenger traffic for both the years. Comparing with the freight traffic densities, passenger traffic density on the Sankhulani-Limbe section is comparatively high, while freight traffic density is one of the lowest. This indicates that the operating expenditure on this section is primarily incurred to maintain the passenger services. 3.16 Sectional Operating Ratios Givin the current decision- making process, only diesel fuel and part of the maintenance costs could be considered as variable, being proportional to the train kilometers. The remaining costs, about 70 percent of the total (Annex 17), are fixed in nature and have been considered as proportional to the route length. The train kilometers logged in different sections, the length of the different sections, the fixed and the variable costs, the ntk and the passenger kilometers and the corresponding freight and passenger revenues for FY 1989/90 are indicated in Table 3.3. The data have been taken from HR's records, but the costs have been adjusted for replacement-value-based depreciation. Based on this, the operating ratios for the different sections have been computed in the same table. As expected, the operating ratio for the Border-Limbe, Lilongwe-Mchinji and Nakaya-Nayuci sections is the worst at more than 500. The operating ratio on the Nakaya-Nayuci section would improve with the resumption of international traffic, but no change is expected in the traffic density on the other sections (Annex 15). The analysis confirms that operating these sections makes little commercial sense. Table 3.3 Malawi Railways - Sectional Operating Ratio (MK '000) LENGTH TKMS VAR. FIXED TOTAL NTK PK REV. OPTG. SECTION (km) (000) COST COST COST (mill.) (mill.) RATIO Border-Blantyre 209 101 1,932 8,986 10,928 3 20 1,455 751 Bantyre-Nkaya 79 190 3,635 3,400 7,035 19 32 4,955 142 Nkaya-Salima 181 224 4,285 7,791 12,076 24 31 5,835 207 Salima-Lilongwe 111 97 1,856 4,778 6,633 14 10 3,040 218 Llongw.-Mchinji 104 73 1,396 4,477 5,873 4 10 1,190 494 Nkaya-Nayuci 101 72 1,377 4,347 5,725 2 13 955 509 total 785 757 14,481 33,789 48,270 66 116 20,430 236 Totl Cost 48,270 Fibed Cost - 70% 33,789 Variae Cost 14,481 TariWf/NTK (MKI 0.19 Taff/PK (MIQ 0.05 _ _ _ _ Freight Traffic Handling at Stations 3.17 The network has a total of about 90 stations, of which 77 stations were commercially operative in 1989/90 with respect to freight traffic. Only 13 of these stations handled more than 10,000 tonnes of traffic, forwarded or received, during FY 1989/90, or equivalent to - 21 - about 20 wagon loads/month. Of these stations, 12 handled between 1.000 and 10,000 tonnes during the year, and the remaining 65 stations handled less than 1,000 tonnes or less than 2 wagon loads/month (Annex 16). This level of traffic is too i - for a station to operate on a commercial basis. Since passenger service is recommended to be phased out (paras 5.3 and 5.4), the stations with low commercial transactions need to be closed unless necessary for operational requirements. Once the freight service and operations are restructured, the requirement of commercially active stations would drop further. C. Operational Efficiency Asset Utilization 3.18 Locomotive utilization, measured as locomotive kilometers per locomotive day-in-use, has gradually dropped from around 250 in 1975 to 82 in 1989/90. Declining freight traffic, without corresponding drop in the number of locomotives on-line, is primarily responsible for this steep drop in the level of motive power utilization. There also is a strong correlation between the level of freight traffic in terms of ntk and the locomotive utilization, as the ntk dropped from 252 in 1975 to 69 in 1989/90. Similarly, wagon utilization, wagon km per wagon day-in- use, dropped from 30 in 1975 to 19 in 1989/90. The level of wagon utilization was low even in 1975, presumably because of the operation of a large number of mixed trains. With the operation being restricted to local traffic and the number of wagons being retained beyond the normal requirement, the utilization has dropped further. As mentioned earlier (para 3.2), the excess of assets has led to the poor financial performance of MR. Other Indicators 3.19 Average gross trailing load per train has dropped from 554 tonnes in 1975 to 335 tonnes in 1989/90. Even the trailing load of 554 tonnes is, for most of the sections on MR, much lower than the locomotive capacity of 1,200 tonnes. The gross:net ratio also increased by 30 percent during the 1975-1990 period from 2.43 to 3.16. As a consequence, the net trailing load per train has also dropped from an average of 228 tonnes to 106 tonnes. The main reasons for the increase in the grosssnet ratio have been: (a) decrease in the net payload per wagon from 24 to 20 tonnes; and (b) use of inappropriate wagons for different traffic streams. IV. CORPORATE OBJECTIVES AND STRATEGY *A. Corporate Objective 4.1 MR's corporate objectives and strategy, as outlined in its Corporate Plan, reflect a deep-rooted perception about the operation of railways in Africa, viz., win the prevailing industrial and commercial circumstances, the cost of meeting the country's rail transport requirements, quantitatively and qualitatively, cannot be fully met from - 22 - the railways' revenues at rates which would not have a major adverse impact on the country's economy'. Emanating out of this perception are the principles to guide MR's workings (a) MR would achieve predetermined performance indicators; (b) MR would meet all operating expenses out of its revenues and would make whatever contribution it can towards the cost of replacement of assets; and (c) GOM would finance MR's capital asset replacement projects through free grants, as well as eliminate the outstanding loans and bank overdrafts. Given this understanding, MR's corporate objectives have been defined as: (a) assessment and meeting of rail borne demand to the maximum extent permitted by the use of all available human and material resources; (b) development of these services in line with the country's developing transport needs; and (c) development of systems such as Responsibility Budgeting, Computerized Stores Recoupment, and Computerized Planning and Control. 4.2 The process of Malawian development cannot be served by subsidies that divert scarce resources away from their best productive use. MR, as any other commercial organization, needs to be and can be commercially viable, and many railways, including a number within Africa and the SADCC region such as Zimbabwe and Tanzania, have initiated the difficult but feasible process of restructuring themselves. However, for these railways and MR to turn around, all objectives pertaining to business development, productivity and efficiency improvement, reliability and staff and resource development must support the central objective. The linkage between these individual objectives and the commercial viability goal can then be used as a basis to appraise sub- objectives and individual strategies. Both the main and the sub- objectives also need to be stated in quantitative terms so as to make them effective as a means to direct or control departmental effort within the organization. The operational targets that could be instrumental in achieving the main objective, defined as a ROC of 6 percent within a reasonable time frame, are indicated in Annex 18. B. Strategy 4.3 The proposed turnaround strategy would have three distinct components: (i) restructuring of the railways; (ii) improving management effectiveness; and (iii) improving GOM-MR understanding. As a basic step, a thorough restructuring is essential, as improvements in operational efficiency and productivity would be overshadowed by current complex organization of MR, its over-staffing, the excess of physical assets, and the high-resource-consuming and low-revenue-generating services. The restructuring needs to cover MR's business portfolio and potential, operations, organization, human and physical resources, tariffs and all other pertinent aspects (Section V). Improving management effectiveness would involve revamping the important systems, improving staff motivation and morale, close monitoring of the achievement of operational targets, and staff training and development (Section VI). A strong GOM-MR focus on MR's commercial viability objectives and a clear understanding of each others' obligations and authority would also be important for the success of the turnaround strategy (Section VII). 23 - 4.4 Broad financial projections for the period up to PY 1994/95, given in Table 8.1 (see Section VII), indicate that without restructuring, the net gap (including a 6 percent ROC) during FY 1994/95 would be of the order of MK 67 million, while with restructuring and assuming that the operating targets are also achieved, the gap could be reduced to about MK 10 million. A proposed Action Plan for implementing the strategy is given in Table 8.2 (see Section VIII). V. RESTRUCTURING A. Business Portfolio 5.1 The services currently offered by MR include; (a) freight service for small, wagon or block loads between any station/railway sidings; (b) freight service for wagon and block loads from/to all private sidings; (c) all international traffic; (d) passenger service between all stations in first, second and third classes; and (e) departmental services for transportation of its own construction materials, fuel and spare parts. To facilitate provision of these services: (a) all the stations are kept operative, even though more than 70 percent of these stations handle less than two wagon loads/month (para 3.17); (b) the entire track length is maintained to specified standards, even though traffic density on more than 40 percent of the track is very low (paras 3.12 and 3.13); (c) locomotives are allowed to wait at outstations for long periods, mainly in accordance with mixed train schedules, leading to poor utilization of locomotives; (d) a large number of shunting locomotives are pressed into service at a number of locations to provide service to private sidings on a wagon by wagon basis; (e) a large number of mixed trains (currently about 90 percent) are operated to serve small stations and users offering small loads; and (f) a large number of maintenance workshops with extensive maintenance facilities are kept operative and functional. All these requirements add up to a large amount of capital in physical resources and staff. 5.2 A full cost-benefit analysis of these services has not been made by MR. It is, however, possible to assess the resources and operating and maintenance costs that could be avoided if a particular service were discontinued and the remaining services restructured. Based on this analysis (Annex 19), the main candidates for eventual discontinuation can be identified ast * all passenger services; * small loads from a majority of the way-side stations; * all regular service to/from stations on Border-Limbe and Lilongwe-Mchinji sections; * wagon loads to/from privatersidings. Passenger Services 5.3 All passenger traffic on MR is carried in mixed trains (carrynig both passengers and freight traffic), as the level of traffic does not justify operation of exclusive passenger trains. Mixed trains - 24 - are generally very slow, because of the need to pick up small freight loads from almost every station en-route. The train timings are also generally inconvenient for most of the passengers who have no alternative to chose from, there being only one train per day per section. As a result, the journey times are long.10/ Not surprisingly, surveys report that the passenger services are preferred only by a small percentage of passengers, only 8 percent of the total, and only for short journeys, the distance of an average journey being 65 km in 1989190. Passengers who choose to ride on MR do so either because of lack of capacity of the bus passenger service in Malawi or because it is often possible to carry heavy parcels free of charge on the trains. Once the bus industry is able to resolve its problems and the rail passengers are required to pay for their parcels, it is likely that much of the passenger traffic would shift to road. 5.4 The share of revenue from passenger services currently comprises 25 percent of total MR revenue, but is projected to drop to about 15 percent after the resumption of international traffic. Against this, a very high percentage of resources, such as coaches, locomotives, stations, track and staff, are required to operate these services. As a result, the average cost of operating the passenger service currently amounts to MK 0.29/pk against an average passenger tariff of MK 0.04/pk (Table 5.1). Passenger service thus contributes heavily to MR's losses. Even after restructuring and operational improvement, the incremental cost of passenger service would not be less than MK 0.10/pk against the current cost by road (on paved surfaces) of MK 0.03-0.04/pk (Table 5.2). If passenger services were discontinued, the freight services could be structured differently and much more efficiently. Table 5.1 Malawi Railways - Sectional Operating Ratio (MK '000) FREIGHT PASSENGER TOTAL TRAFFIC TRAFFIC Operating Cost 65,855 32,928 32,928 Traffic Units 169,664 115,394 ('000) Cost/Traffic Unit (MK) 0.19 0.29 Tariff/Traffic Unit (MK) Io_ 0.21 0.04 4 10/ For example, the journey time between Blantyre and Lilongwe is about 16 hours, whereas the journey by road would be about 4 hours. - 25 - Table 5.2 Malawi Railways -Incremental Cost of Passenger Traffic Units Yearly Cost/Amount Incremental Capital MR million 165 Depreciation MR million 7.4 Incremental Staff Numbers 300 Staff Cost MR million 1.456 Incremental TKMs '000 524 Incremental Fuel Cost MK million 2.385 Incremental Main. Cost MK million .88 Total Cost MK million 12.12 Total pks million 116 S ~~~~~~MK .104 Cost/pk _ Small Loads 5.5 An analysis of freight handled by different stations on MR (Annex 16) shows that only 17 stations out of the total of 77 (22 percent) handled 94 percent of the total traffic handled by the railways. As discussed, MR has to commit a disproportionately high percentage of resources to handle 6 percent of the freight traffic from the remaining 60 stations. The traffic, generally in smalls (less than wagon load), is in need of being discontinued. Services from/to Border-Limbe and Lilongwe-Mchinji Sections 5.6 The traffic density on these two sections is currently very low (Annex 14) and, according to the traffic forecasts (Annex 15), likely to remain so. In fact, the traffic density on the Lilongwe- Mchinji section is likely to become lower after the resumption of traffic on the Nacala line and import of POL from overseas. The cost of maintaining the track in the two sections is very high in relation to the income generated from these sections, as indicated by the operating ratio which is currently estimated to be 751 for the Border-Limbe section, and 494 for the Lilongwe-Mchinji section (Table 3.3). These sections need eventually to be abandoned and the assets disposed off. However, until a more definitive trend of traffic is available, operations on these sections could be continued but with a considerable reduction in the input of physical resources, manpower and materials. This reduction would be possible if these sections were operated as - 26 - sidings, which would implys (a) suspension of all scheduled freight and passenger services in these sections; (b) despatch of empty rakes only on demand from the users; (c) formation of train lengths strictly in accordance with the users' requirement and selection of locomotives of matching capacity; (d) operation of trains only as block trains; (e) insistence on prompt loading of wagons to enable the locomotives to return with the same full/empty load; (f) managing the sidings with the mzinimum level of operating and maintenance staff, maintenance expenditure, operating stations and other facilities; and (g) refusal of all traffic in small loads or occasional wagon loads. Wagon Loads from/to Private Sidings 5.7 The rail users should be encouraged to shift gradually from single wagon loads to full/partial block loads to reduce the heavy cost of shunting and wagon marshalling. This could require users to invest in additional facilities for warehousing, placement of block trains, and simultaneous loading of many wagons at a time, but in return should be offered reduced shunting and siding charges by MR. B. Business Potential and Marketing Strategy Domestic traffic 5.8 The local traffic on MR has remained below 400,000 tonnes, except for the year 1986/87. An unusually high volume of maize traffic in 1986/87 (140,000 tonnes) caused the traffic volume to be 480,000 tonnes. The domestic traffic is forecast to remain within the range of 300,000 and 350,000 tonnes due to: (a) a slight drop, on average, in domestic production, particularly maize (Annex 20); (b) road transport maintaining its major share of the domestic market of between 70-75 percent; (c) the origin/destination points for a large percentage of the small loads and short-haul traffic not being on the rail network, favoring road traffic; and (d) MR's strategy requiring it to concentrate on bulk traffic like, fertilizer, beer and minerals, clinker, coal, cotton lint and seed, maize, and tobacco, all above 10,000 tonnes/year in 1989/90. A traffic level of 350,000 tonnes for PY 1994/95 has been assumed for this analysis. International Traffic 11/ 5.9 Malawi's total exports and imports have steadily decreased in recent years, and the base year forecasts for 1990 indicate a total of 641,000 tonnes of imports and 193,000 tonnes of exports (Annex 21). The level of exports has dropped mainly due to a significant decrease in the surplus of maize, sugar and groundnuts. The level of imports is constrained by the availability of foreign exchange. In the high growth scenario, with an assumption of an average economic growth of 4 percent per annum and with maize and groundnuts returning to the export circuit, 111 Most of the information and conclusions pertaining to the international traffic are based on the working paper on traffic forecasting of the Transport Sector Review. - 27 - exports ore estimated to reach a level of 323,000 tonnes by 2010 and imports a level of 937,000 tonnes. The commodity details are given in Annexes 21 and 22. 5.10 The overseas share of exports/imports in the base year is estimated to be 44 percent for imports and 79 percent for exports. Of the overseas share, MR's share is estimated to be 60 percent for both imports and exports, or 26 percent of total imports and 46 percent of total exports (Annex 22). MR's share of the overseas traffic will be restricted to 250,000 tonnes in 1995, as Nacala corridor is programmed to be completed only by 1993 and some time will be required to resolve the teething problems. Even after the corridor begins to function normally, the level of traffic would be much lower than 900,000 tonnes actually achieved in 1975 due to: (a) the overall level of exports/imports having declined as mentioned above; (b) the share of regional traffic having increased in the recent past; (c) a number of alternative competing routes, such as Durban, Dar-Es-Salaam, and the Northern Transport Corridor (NTC), having been established since 1975 and currently having surplus capacity; and (d) the GOM's policy of keeping all the routes active at least for vital commodities such as fertilizer, diesel and petrol. Even in the high growth scenario, the share of international traffic on MR by 2010 would be less than 400,000 tonnes. An international traffic level of 334,000 for FY 1994/95 has been assumed for the financial and capacity analysis of MR. This estimate is 30 percent higher than the forecast indicated in Annex 22 and is considered feasible after the quality of freight service improves as a result of restructuring and operations improvement. 5.11 There is also a major imbalance of overseas traffic on all routes, imports exceeding exports (Annex 23). A similar imbalance exists for the regional export/import traffic as well. Since a major share of the regional traffic would move by road from/to Malawi, the combined imbalance would leave considerable truck capacity faced with empty backhauls towards South Africa. It is likely that substantial tariff concessions would be offered by the truck operators to attract some of the export traffic, and for MR to retain the traffic allocated above would require development of an active marketing strategy and a pragmatic tariff policy. C. Operations Restructuring 5.12 Currently, MR is operating mostly mixed trains, and occasionally block or through freight trains. During 1989190, out of the total of 749,949 locomotive kilometers for commercial traffic, 695,408 (94 percent) were logged against mixed trains. The mixed trains, having to meet the requirements of both the passenger and freight traffic, end up: (a) following the timetables suited to passenger traffic, with unavoidably long idle periods for locomotives at the terminals and with stops at almost every station to pick up passengers; and (b) taking a long time at some of the stations for dropping and attaching wagons. The resulting operating statistics are extremely poor -- average net train load of 105 tonnes (equivalent to two large-sized or three medium-sized trucks), gross train load of 334 tonnes, and utilization of locomotive hours of only 33 percent. The - 28 - normal advantages that favor trains over trucks for high volume and heavy traffic are completely lost. Block Trains 5.13 All international traffic should be moved using block trains. Most of MR's traffic originates/tenminates at Lilongwe, Blantyre, Salima, and Bangula for sugar. A train hauled by one of MR's high-capacity locomotives can normally have a gross load of 1270 tonnes,12/ and if the wagons are fully loaded to their designed payload capacity of 40 tonnes, each train should have a net payload of 800 tonnes. Also assuming a turnaround period of 10 days and a working period of 360 days/year, 36 round trip journeys are possible with one block rake, and one train of 20 wagons can carry 28,800 tonnes of traffic per year or, say, 25,000 tonnes. Out of the total estimated international traffic of 334,000 tonnes/year, the imports would account for 230,000 tonnes requiring 9-10 block rakes in service with not more than one loaded train leaving Malawi/Nacala per day. The exports, being less than the imports, would be carried on the return trip with about 50 percent of the trains running empty, providing built-in extra capacity for additional export traffic to the extent of 100,000 tonnes/year. Tank, covered, high-sided, low-sided, and container wagons could be formed into fixed block rakes for the transportation of POL, sugar, wheat, maize, tobacco, fertilizer, salt, tea and general goods. 5.14 Similarly, all bulk goods within Halawi could be transported in block trains if the rail users were connected to the rail network through private sidings. The traffic most amenable to block rake operation would be fertilizer, coal, tobacco, clinker, maize, beer and minerals, cement, cotton lint and seed. The quantities to be moved are generally more than 10,000 tonnes per year and would require about 12-15 trains/year at a full train-load of 800 tonnes net or one train per month or in three weeks. Analysis shows (Annex 13) that 12 commodities, all with a traffic level of more than 10,000 tonnes/year, account for 80 percent of the total local traffic, and this 80 percent of the traffic is amenable to block-train operation. However, the planned block train operation would require the users to create additional capacity for storage and material handling. In the intermediate stage, part blocks could be offered. Some of the small load traffic would need to be abandoned by the railways, the balance requiring pick-up type of service. Yard Operations 5.15 With a majority of freight trains planned to be operated as block trains, the yard operations would also need to be restructured. The trains, instead of terminating in the yards, could be taken straight to the unloading/loading locations within the rail users' premises. Much of the work currently being done in the yards would become 12/ In some sections, such as Nakaya-Blantyre, a consist of two locomotives may be required for trains moving to Blantyre because of stiff gradients. - 29 - redundant, as would the shunting locomotives. The staff and the facilities in the yards would also need to be appropriately curtailed. Some yards would need to be closed and a few, such as Nakaya, may need to be expanded. Track Maintenance 5.16 Currently, track maintenance is carried out by gangs of 10- 12 staff, each gang being responsible for about 10 km of track length. the total number of gangs being 78 with a total staff strength for track maintenance of 800. Given MR's low traffic density, the most appropriate form of track maintenance would be the Directed Track Maintenance (DTM), whereby the track is maintained as required by its condition rather on a pre-planned basis. Each gang, with the help of a diesel engine operated gang-trolley, can inspect a track length of 100 km by inspecting and repairing, if necessary, 10-20 kms of track everyday and the rest on an urgent basis, if required. The entire track maintenance program (excluding the Lilongwe-Mchinji and Blantyre-Border sections) would require a provision of four to five trolleys and a staff of about 50. Two additional gangs could be nominated to maintain the track on the sections relegated to siding status. Locomotive and Rolling Stock Maintenance 5.17 Different locomotive maintenance schedules, including major overhauls, are currently based on hours between successive maintenance schedules rather than the kilometers earned. With the low locomotive utilization levels on MR, sometimes with only 30 percent of available locomotive hours being used for train operations, this maintenance policy invariably results in excessive maintenance; hence the maintenance schedules linked to kilometers earned. Similarly, the wagon utilization level is low and the current maintenance policy leads to over maintenance. However, since it is impossible to log individual wago,n kilometers, the periodicity of maintenance schedules for different types of wagons would need to be modified depending upon the wagon design, the average utilization level for the wagon type, type of commodities loaded and wagon age. Train examination rules would also need to be changed in accordance with the changed operations. Block rake consists could be examined less frequently without any loss of reliability, but with considerable reduction in wagon delays. This in turn would increase the rate of wagon utilization. Rationalization of Maintenance Facilities 5.18 Separate workshops and maintenance facilities have been established in MR for undertaking the maintenance of various assets, including locomotives, rolling stock, track equipment and trolleys, bridges, and for the manufacture of brake blocks, forgings, machined components and other spare parts. The workload of these workshops is comparatively small and with restructuring could be further reduced. All of these workshops possess a number of common manufacturing, testing, and material handling equipment, as well as departments/groups for production planning, scheduling and control; inspection and testing; material management, financial and cost accounting. Consolidation of - 30 - these facilities, at least of the overlapping facilities, would lead to increased utilization of the equipment and personnel and reduced costs. D. Organization Restructuring 5.19 Organization restructuring, aimed at improving decision- making processes and organizational behavior, and reducing the overall cost of staffing, is an important element of the turnaround strategy. This would comprise three main actions: (a) effective divisionalization at headquarters; (b) functional regrouping at the operating level; and (c) introduction of appropriate systems and procedures. The recommended organization structure is indicated in Annex 24. 5.20 Effective divisionalizations In order to derive the intended benefits from the creation of five main divisions -- lake services, rail services, engineering and supplies, personnel and support functions, and finance and administration -- it would be necessary to link the operational and financial performance objectives of each division to the overall company objectives and goals. Within the broad framework of agreed divisional objectives, the divisions would have to be given adequate freedom to take their own operational decisions. By focusing on organizational rather than departmental goals, the divisions in turn would be expected to the steps necessary to improve productivity and reduce costs. 5.21 To enable these expectations to be achieved: (i) the departments and branches at the headquarters level should be abolished, and the divisions allocated appropriate managerial, technical and support staff for planning and monitoring the operations pertaining to their division; (ii) the internal divisional organization should avoid a hierarchical structure, but instead provide for close supervision and every member of the division having a well defined role with specific responsibility and authority; (iii) the number of total staff in every division should be kept small in line with the small scale of the restructured operations, perhaps not more than 20 in each division and not more than a total of 80-100 at the headquarters level including support staff; (iv) clear performance objectives should be identified for every division to facilitate divisional planning and performance review; and (v) the MR railways system being small, geographical divisionalization at the operating level should be avoided. 5.22 Functional regrouping at the operating level: Grouping of staff on rigid departmental lines is, for a small railways like MR, neither necessary nor cost-effective. The abolition of the departments at the headquarters level could facilitate the regrouping of staff on a rational rather than strictly departmental basis. In particular: (i) all maintenance activities, currently organized under 6-8 separate groups under different departments and sub-departments, are particularly amenable to being organized as one group under the engineering and supplies division. Througn sharing of specialized skills, machines, plant, tools, space, and management and supervisory staff, considerable economies of scale can be achieved; and (ii) for very small work- stations, the staff should be trained to discharge more than one function. - 31 - 5.23 Systems and procedures: Systems and procedures need to be redefined in accordance with and supportive of the restructured organization. The system design should also enable more programmed decision-making with respect to operations. E. Staff Reduction 5.24 The commercial viability of MR depends on a substantial increase in staff productivity, and this increase would be impossible without a large reduction in the staff levels to about 1000. Staff reduction would be possible across the entire railway system after restructuring as a result of: (a) intensive training of staff, resulting in improved efficiency and capability; (b) introduction of motivational packages in most of the departments; and (c) the availability of improved office equipment, such as computers, communications and goods tracking systems. Apart from the above, specific possibilities for reducing staff in every department include: (a) Headauarters and Administrative staff: from about 890 to 230, mainly by adopting a simpler divisional type of organization structure; removing overlap of responsibilities and excessive supervision; reducing accounting, finance, personnel, computer, supplies staff as a direct consequence of the reduction in the overall staff and fixed assets; making effective use of comput6rs for office work; rationalizing and simplifying procedures and office systems; and reducing staff involved in tasks connected with passenger service operations; (b) Civil Engineering staff: from 1510 to 250, as a result of the introduction of directed track maintenance (para 5.16); relegation of the Lilongwe-Mchinji and Border-Limbe sections to the status of sidings (para 5.5); reduction of staff and of offices and residential houses, and in turn, maintenance staff; and rationalization of maintenance facilities through creation of one maintenance center (para 5.18); (c) Transportation staff: from 861 to 215, as a result of the discontinuation of passenger services (para 5.3); discontinuation of the freight traffic in small loads (para 5.5); relegation of the Lilongwe-Mchinji and Border-Limbe sections to siding status (para 5.6); operation of block and through trains, with three times the current freight being handled by 20 percent fewer trains (see Table 8.1 in Section VIII); closure of commercially non- viable stations; and improved locomotive and wagon utilization (Annex 18): (d) Mechanical Engineering staff: from 646 to 220 as a result of reduction in the total holding of locomotives and wagons (Annex 25); discontinuation of the passenger services; operation of less trains; reduction and rationalization of locomotive and freight stock variety; revised maintenance policy (para 5.17), and rationalization of maintenance facilities (para 5.18). - 32 - F. Assets Restructuring and Investments 5.25 Once the business portfolio is identified and operations are restructured, the utilization of locomotives and wagons would increase considerably. Improved management (Section VI) should lead to further enhancement of locomotive and wagon utilization levels, as well as higher verage wagon payloads and locomotive trailing loads, and more reliable operations. The requirement of locomotives and wagons for traffic use, based on the enhanced norms of efficiency and productivity, and for the estimated forecasts is estimated to be: (a) locomotives (Hain Line) - 8 (b) Locomotives (Shuntlng) - 8 (b) Tank wagons - 117 (c) Covered wagons - 225 (d) Open wagons - 145 (e) Container wagons - 80 The detailed worksheet is given in Annex 19. The underlying assumptions of wagon payloads, train loads, gross to net ratio, locomotive and wagon availability and utilization, seasonality, operating efficiency and local and international forecast factors are given in Annex 26. The assessment of the wagon requirement is also based on the assumption that all wagons for Malawian traffic, even while in Mozambique, would be made available by MR. 5.26 MR's holding of locomotives and wagons is much higher than required. As a result, MR does not need to invest in any new locomotives and wagons, and the existing fleet and use of locomotives and wagons needs to be rationalized through: (a) premature retiring of all old, inefficient and obsolete wagons, particularly the short and plain-bearing wagons; (b) designation of wagons according to their capacities and design for specific streams of traffic; (c) hiring out of wagons and locomotives to other railway systems if possible; (d) holding of surplus wagons and locomotives in good order by rotation until the surplus has replaced retired assets or is required for additional traffic. 5.27 New Investment: However, new investments would be required for: (a) rehabilitation and upgrading of some of the locomotives and wagons; (b) rehabilitation and upgrading of a part of the track between Lilongwe and Blantyre; (c) procurement of gang trolleys and related equipment to facilitate introduction of DTM; (d) rehabilitation/replacement of machinery and plant in maintenance workshops; (e) procurement of quality assurance equipment; and (f) strengthening communication and computer systems. Given the already large asset base, all investment proposals would need to be evaluated in terms of their contribution to the main corporate objective of commercial viability. The estimated level of investment should not exceed MK 50 million, including the cost of restructuring and payment of severance pay to the redundant staff. - 33 - G. Financial Restructuring Tariff RestructurinR 5.28 Local traffic is highly competitive and the tariff policy must take into account the capability and willingness of rail users to pay. Thus the possibility of complete cost recovery would increase with the restructuring of railways and consequent improvement in the quality of service. Determination of the full cost-recovery tariff for different components of the service portfolio offered by MR -- wagon loads, block train loads, small loads, dedicated train operation, service to the users' premises etc. -- requires a correct assessment of costs incurred for these services. For international traffic, a user's selection of route and mode would be influenced by the actual costs of loading/ unloading, rail/road transportation, port handling, storage and shipping, tne perceived costs of delay during transit and risk of damage. Even though the Nacala corridor offers a shorter distance, the perceived costs of delay during transit and at the port of Nacala may continue to be high. Until full efficiency can be achieved, tariff increases will have to be limited. This analysis assumes an upper limit of 80 percent of the long-distance transport cost by road/rail and a tariff of MR 0.3/ntk. Revaluation of Assets 5.29 Assets must be frequently revalued for MR to accurately compute depreciation and the replacement value of the capital employed. As indicted, the book value is only about 20-25 percent of the current replacement value of the assets and the depreciation charge is also correspondingly low. Capitalization 5.30 MR's proposals for increasing the share capital appears logical when viewed in the light of acceptable debtsequity ratios for commercial enterprises. However, the assumption that the conversion of loans to equity would enable MR to avoid debt service obligations, makes the proposal questionable. If the main objective of earning an acceptable return on capital employed is maintained, the debtsequity ratio can be determined more rationally. Financial and Cost Accounting 5.31 A raw financial and cost accounting system needs to be in place to enable accurate determination of the cost of all activities and services, and of the important ratios and indices that could be used by management to arrive at optimal decisions. The system would also help in identifying the variable costs and their relationship to the units of performance or other influencing variables. - 34 - H. Privatization 5.32 A number of activities, because of their small scale of operation on MR, can be off-loaded to other enterprises in an open market. Some activities that could be considered for privatization and subsequent cost reduction without adversely affecting MR's performance, safety or reliability would be: (a) manufacture of castings, forgings, and machined parts, etc.; (b) maintenance of road vehicles, cranes, compressors and other items of machinery and plant; (c) computer services; (d) weed removal on track; and (e) maintenance of office and residential buildings. I. Impact of Restructuring on MR Assets 5.33 As a result of the different restructuring strategies, the replacement value of the usable assets on MR would drop from the current level of US$200 million or MK 575 million (Annex 12) to US$122 million or MK 350 million (Annex 25). While disposal of the redundant assets would be a formidable problem and a considerable amount might finally have to be written off, the retention of only usable assets by MR would provide MR an opportunity to reduce its maintenance and depreciation costs and enhance its capacity to earn the expected ROC. VI. MANAGEMENT EFFECTIVENESS A. Systems Improvement 6.1 Systems for direction and control would have to be redesigned and significantly improved for the benefits of restructuring to be achieved. High priority for redesign would be given to the following: (a) Decision Support System; (b) Material Management System; (c) Operations Audit System; and (d) Quality Assurance System. Decision Suppo-t System (DSS) 6.2 MR has been regularly issuing a compendium of statistics for the last 20 years or more, and these statistics have served a useful purpose in facilitating analysis of trends of operational performance. The compendium is based on data that are collected regularly and in some detail, i.e., separately for each locomotive and wagon type, sections, stations and commodities. However, the information is not being used to facilitate optimal decision-making, direction or control. 6.3 An appropriate DSS design must recognize that: (a) almost the same information would be used for decision-making on a daily/weekly/monthly and longer-term basis; (b) the requirement of information, e.g., speed, accuracy, comprehensiveness, and detail, would be different for different levels of management; (c) daily decisions, generally taken by lower-level staff, need to be programmed, while longer-term decisions need a more analytical and innovative approach. - 35 - An appropriate DSS needs to be in place to facilitate evaluation of the impact of restructuring and other strategies on performance and enable timely course correction. Material Management System (MKS) 6.4 An inadequate supply of spares, a direct result of inadequate availability of funds, appears to have been the main cause of delayed, infrequent and unsatisfactory maintenance of locomotives, and consequently for almost all the problems of the railways. on the one hand, the locomotive reliability has been below expectations, and on the other hand, the locomotives are being over maintained (para 5.17) leading to consumption of more spares than usually recommended by the manufacturers, though no detailed analysis has ever been made. The problem of spare parts supply may, in fact, be the lack of ar efficient MMS. Accurate assessment of the spare parts requirements, timely procurement, controlled use, frequent material variance analysis, particularly of the more expensive items, are among the aspects of the MKS that need to be developed to ensure that the maintenance of locomotives remains cost-effective. Operations Audit System (OAS) 6.5 Because of the small scale of operations, the break-even traffic level is high, and any slippage in the level of operating efficiency would adversely affect performance. A regular system of auditing operations is necessary for analyzing costs, asset utilization, and effectiveness of maintenance. The audits would also be aimed at identifying the causes of variance. Quality Assurance System (QAS) 6.6 Poor reliability of locomotives and rolling stock is a main cause of their low utilization, in turn leading to a large increase in the requirement of these assets for the current operations. Continued poor reliability and low utilization of locomotives and wagons would lead to an excessively high investment in locomotives and wagons for the estimated traffic in the coming years. Frequent failures of the locomotives and the rolling stock also result in high maintenance costs and commitment of maintenance facilities and staff. Installing and implementing an appropriate QAS on MR should be accorded high priority. B. Operations Improvement and Efficiency Targets 6.7 Improved targets of operational performance, resulting from restructuring and redesign of systems, need to be established to enable monitoring by management as well as facilitating regular operational audits. The areas of performance for which targets need to be set, along with recommended targets are given in Annex 18. These targets pertain to locomotive and rolling stock availability, reliability and utilization, wagon payloads, locomotive trailing loads, yard detention, percentage empty running, gross:net ratio, and percentage of block train operation. - 36 - C. Staff Development and Motivation 6.8 Staff motivation, commitment and involvement also are essential for the turnaround of MR. After the rationalization of staff strength, intensive and effective programs aimed at staff development and motivation need to be implemented. This would include: (a) staff training in all disciplines; (b) implementation of appropriate incentive schemes; (c) delegation of decision-making authority; (d) setting up of challenging targets and corresponding rewards; (e) making the remuneration packages more attractive; and (f) converting the present predominantly bureaucratic organization to a more informal group-based one as recommended in Annex 24. VII RAILWAY-GOVERNMENT UNDERSTANDING A. Obligations of the Railways 7.1 The obligations of MR. both as a commercial entity and as a parastatal responsible for its performance to the government, need to be clearly defined. The broad framework for the key result areas would be: (i) Profitability: MR would generate income from its operations adequate to: (a) meet all its operational expenses; (b) finance all replacement, rehabilitation and upgrading of its assets; and (c) have a balance which represents an acceptable return on the capital employed in MR, considered as 6 percent for the restructuring period, to be used for servicing debt, payment of dividends on equity capital, while keeping adequate reserves for tiding over fluctuations in operations; (ii) Productivity: Profitability would be ensured not by exploiting the monopoly position of MR on the Nacala route but by ensuring the most productive use of all the physical and human resources employed by MR and achieving the operational performance and productivity targets given in Annex 18; (iii) Market Share: Through a combination of lower and special tariffs, quality of service and market research, MR would increase its market share for the freight traffic that offers a distinct commercial and economic advantage over the other modes of transport; the special tariffs and arrangements would be aimed at increased utilization, at only a small incremental cost, of empty-return trains and containers, fixed assets and resources; (iv) Customer Satisfaction: MR would maximize customer satisfaction mainly through: (a) improved punctuality of passenger trains as long as these are operated; (b) minimizing transit time for freight traffic; (c) minimizing loss, damage, pilferage and wastage of goods while under - 37 - storage, transit or transhipment with MR; (d) prompt settling of genuine users' claims; (e) reduction of the waiting period for appropriate types of wagons/block rakes on demand; and (f) providing prompt information on the status of the users' goods, wagons or containers; (v) Staff Motivation and Morale: The staff morale and commitment to MR would be improved through a variety of policies and management actions includingt (a) implementation of intensive staff training and development programs; (b) improving the payment scales of the staff; (c) rewarding hard-working, innovative and efficient staff through appropriately designed incentive schemes; (d) organizational redecign aimed at enhanced participation of the staff in the decision-making process within MR; and (e) improved retirement package aimed at staff retention and avoiding staff turnover; (vi) Upgrading Technology: Subject to financial and economic feasibility, all investment decisions would be aimed at modernization and upgrading technology. In particular: (a) future wagon designs would aim at a gross load of 72 tonnes or a net payload of 54 tonnes to fully exploit the permissible axle load of 18 tonnes; (b) the locomotives would have the capacity of hauling longer trains of 1200 tonnes even on sections with steep gradients; and (c) information and decision support systems would be progressively computerized; (vii) Concern for Environment: MR would actively participate in meeting the important societal objectives, particularly those pertaining to the improvement of the environment through weed control on the track and railway property; appropriate disposal of lubricants, greases, chemical residues; discontinuation of environmentally degrading and otherwise harmful chemicals and products and implementing other items on the agenda. (viii) Malawi-Mozambique Coordination: Growth in international traffic via Nacala would depend on the total quality of service to the user. Since 70 percent of the route to Nacala lies within the control of Mozambique Railways, it must operate at an equally high level of efficiency and reliability. MR would maintain a close coordination with Mozambique Railways at the operating as well as the top management level, and resolve all problems expeditiously. B. Obligations of the Government 7.2 GOM, both in its capacity as the government and as the sole shareholder of MR, would meet its obligations to provide a healthy competitive environment for the transport sector aimed at improving the overall efficiency and productivity of the sector. In particular GOM woulds - 38 - (i) make it possible for the different modes of transport to compete on equitable ground, and to that end, implement adequate cost-recovery measures for road use and discontinue subsidizing the railways; (ii) make foreign exchange accessible to all modes on the basis of agreed and uniform rules; (iii) once the MR board has been constituted, leave the board free to make all important decisions regarding investments, pricing, business and operational activities, staff regulation, and other matters aimed at achieving MR's objectives in all key result areas, at least after a general agreement on these objectives has been arrived at; (iv) permit MR to select its business portfolio and not require the undertaking of financially non-viable operations, including continuation of passenger services or transportation of food grains and fertilizer at reduced rates; if such operations are required, make explicit arrangements for pricing and appropriate levels of cost recovery; (v) leave MR free, subject to reasonable regulations, to dispose of its uneconomic assets, privatize part of its operations and activities on the basis of acceptable criteria of economic/financial feasibility; (vi) resolve all problems with the Government of Mozambique, if required, to ensure that the international traffic is not adversely affected by political issues; and (vii) assist MR through short-term loans for meeting its cash requirements during the period of restructuring. C. Memorandum of Understanding (MOU) 7.3 An MOU signed between MR and GOM, including all obligations and the rights of both MR and GOM, would facilitate: (a) a clear understanding of the expectations-and problems on both sides; (b) formalization of the roles, objectives, targets, and action plans; (c) reconciling any differences in perceptions, modality or details regarding the objectives, obligations, powers and procedures; and (d) monitoring of the performance of MR and causes of shortfalls, particularly if due to GOM. To enable the MOU to be signed, MR would prepare, at the earliest, a revised Restructuring and Corporate Plan. - 39 - VIII. PROJECTIONS AND ACTION PLAN A. Financial Projections 8.1 The financial projections indicated at Table 8.1 are indicative of only broad orders of magnitude and are not meant to serve as reference data for the purpose of control, monitoring or decision- making. The main purpose is to focus on the impact of the restructuring plan on the financial performance of MR and the adverse implications of continuing without restructuring. 8.2 Assumptionss Financial projections have buen made under two scenarios, one without restructuring (WR) and the other with restructuring (R). In both scenarios it is assumed that: (a) the freight traffic would be restricted as forecast (paras 5.8 and 5.9); and (b) depreciation would be based on the replacement rather than book value of the assets. However, the assumptions regarding the level of resources to be deployed and fresh investments to be made differ in the two scenarios. The WR scenario assumes that in accordance with MR's Corporate Plan: (a) the currently held physical and human resources would be continued to be utilized more or less in full, and accordingly the depreciation as well as the ROC would be based on the replacement value of the total assets (Annex 12); (b) fresh investments of about MK 200 million would be made during the 1990/91-1994/95 period for the rehabilitation of existing and procurement of new assets; (c) the passenger traffic and the tariff would be maintained at the current level. For the R scenario, it is assumed that: (a) the usable assets would be curtailed (Annex 25) and depreciation and ROC would be based on the replacement value of the remaining assets; and (b) investment in the rehabilitation of assets would be restricted to funds available within MR, and fresh investments would be restricted to MK 50 million inclusive of the requirements for meeting the cost of restructuring. 8.3 The specific assumptions made with regard to the different financial years in both the scenarios are as follows: (a) FY 1990/91 is already over and since no specific action was taken by the management towards staff reduction or any other change, the financial results for this year have been assumed to be similar to FY 1989/90 except for the depreciation having been charged on the basis of the replacement value of the fixed assets (Annex 12); (b) during FY 1991/92, minor operational improvements would be made and staff would be reduced to some extent through attrition; (c) the restructuring plan would be implemented in three years starting FY 1992/93. Based on these assumptions, the financial projections for all the years after FY 1992/93 reflect the impact of restructuring. To facilitate comparative evaluation, the financial projections for FY 1994/95 have also been made for the WR scenario. MAnAWI RAILWAYS INCOME AND EXPENDITURE PROJECTIONS AunU (ooo) unless stated) - | EActual Adjusted MR Corporate Plan" With Restructurhng Reference/ Units Share 1989190 1989190 1990/91 1991192 1994195 1990293 1993/94 1994/95 Remaks 1 1 2 3 4 5 6 A. INCOME Fright Trafic Frlght Trall (Loca-Tones 321 321 321 321 334 325.3333 329.6666 334 Freght Traf (Inter)Tonnes 14 14 14 14 351 215 283 351 Freight Trafflic (otal-Tonn.s 335 335 335 335 685 540 612 685 NTI (Local 62219 62219 63575 64931 69000 66288 67644 69000 Annex 5 & 19 NTK Ontomallonal 2829 2829 2829 2829 100000 61132 80566 100000 Annex 5 & 19 NTIC (rota 65048 65048 66404 67760 169000 127419 148210 169000 RateNT( (L) MK 0.18 0.18 0.21 0.21 0.21 0.21 0.21 0.21 Rate NTK () MK 0.11 0.11 0.25 0.3 0.3 0.3 0.3 0.3 kIcom Freight (L) 11316 11316 13174 13455 14299 13736 14017 14299 Income Freight I 307 307 707 849 30000 18339 24170 30000 Income Freight (1) 11623 11623 13882 14304 44299 32076 38187 44299 a- Passenger Traffic Pass KM 115469 115469 115469 115469 115469 46188 23094 0 Annex 5 RatelPK MK 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 hcom Pass. 4470 4470 4470 4470 4470 1788 894 0 Other Income 3891 3891 3000 3000 3000 3000 3000 3000 Totad Income 19984 19984 21352 21774 51769 36864 42081 47299 Annex 11 Ig rE 0b l. S. EXPENDITURE (X -Transportation No. aat 861 861 774 861 541 378 2tS Anx 6fr xt SE Chl Enghnet No. 1510 1510 1 1359 tS10 951 665 250 Annex QTex1 SE - Mch. En _wd No. 646 648 646 Sal 646 408 2B4 220 Anex6,frxt SE *T_1.cmmnlaln No. 91 91 91 ai 91 56 39 45 Annex 6SText SE * Admliiontaon No. 890 890 890 801 890 560 392 230 Arnex 6)Text SE Told stad No. 3998 3998 3998 3596 3998 2514 1758 960 6/Text 5E Std''elahod Exp 12942 12942 112942 17461 19413 12207 853 4661 Aiix 17 Thi Lkm Fuel ConsumpUon Shar 8shw TOld Loco kinn 1.00 998 998 1006 1013 1573 707 582 457 Olw Loco knn 0.14 144 144 145 146 227 102 84 66 Told Train Lkms 0.86 84 854 860 867 1346 605 498 391 Freilt Train Lkns 0.51 0.44 439 439 443 446 692 417 389 360 Annex 19 Pass. Train Lkms 0.43 0.37 372 372 375 378 587 149 74 0 Depat. Tran Lkms 0.04 0.04 42 42 42 43 66 38 35 31 Fuel costJLoco kcm MK 5.20 5.20 5.20 5.20 5.20 8.34 8.75 9.38 Fuel Cost 5193 5193 5232 5271 8184 5893 s509 4289 Annex 17 Malntenunce Losnodvs HoUdW O No. 45 45 40 35 45 30 25 20 Annex 9 and 19 Wagon Hoklin No. 875 875 814 757 875 704 655 624 Annex 10 and 19 CoachHoling No. 30 30 30 30 30 12 6 0 EqFhn'dut FkSHold No. 1925 1925 1764 1607 1925 1364 1185 1024 Maintnance Exp. 2551 2551 3038 4258 5102 2349 2041 1765 Ovarboada Adinirtrauon 865 865 1001 1001 2214 1001 1001 1001 nn" 17 wagon lnteclwge 0 0 0 0 0 0 0 0 Ann" 17 FrcYy WVhkices 591 591 684 684 1963 684 684 684 Annex 17 Told 1456 1456 1685 1685 4177 1685 1685 1685 Annax 17 Other Expemditure 1259 1259 1384 1523 3765 1675 1843 2027 Annex 17 Told OjeraUinp ExPendbture I I_ 23400 23400 24282 30198 40640 23809 19194 14427 I r_ P. Operalku Surplu -3416 -3416 -20 8424 11128 13055 22887 32871 Us"bl Ase Va" 102221 548730 548730 548730 548730 333697 333697 333697 Anex 12 end 19 DeprekAt 2828 24870 24870 24870 24870 16030 16030 16030 Annex 12 end 19 C. NET SURPLUSIDEFICIT 46244 -282 -2780o 33284 -13742 -2875 6857 16841 D. RETURN ON CAPITAL Fbiod Asets 102221 548730 548730 548730 5487 333697 333697 333697 x 12 nd 19 Curnl Assets 19188 19188 19188 I8188 19188 19188 19188 19188 Annex 11 4. To Assets 121409 567918 567918 567918 567918 352885 352885 352885 Raoe of Rebm #600 6.00 6.00 6.00 8.00 6.00 6.00 8.00 Assumed Surpl Reqrd 7285 34075 34075 34075 34075 21173 21173 21173 E. ADDMONAL FUNDS REQC CLur. Funds Reqd -carp plan 0 500 200000 20 3X00 50000 hlerm4 an Adi. La 0 5000 20000 2000 3000 5000 F. NET GAP .13529 42381 61875 -72369 467817 -28148 -17318 -9332 G. OPERATING RATIO 131 242 114 139 127 108 84 64 * A4usted far replacenient value of assts and correspondng deprelaiown ^' Ad)nW for replkmatt valu of assets nd correspondng depecIaion. restic traffic forecast nd kwreased taiff It" 80r t'2 CD - 43 - 8.4 All costs and income projections are at FY 1989/90 prices. Assumptions and adjustments made for different elements of income and expenditure are as follows: (a) Freight Traffic: Freight traffic levels are based on the traffic forecast indicated in Annexes 20 to 23, adjusted as indicated in para 5.10, with the ntk calculated on the basis of origin-destination information for each commodity; the forecasts are considerabl lower than the Corporate Plan forecasts. (b) Passenger Traffic: Even in the WR scenario, no passenger traffic growth has been assumed; for the R scenario, the passenger traffic has been assumed to be brought to zero by FY 1994195 by discontinuation of the trains on different routes in two stages: ti) where parallel bus routes are available; and (ii) for other routes. (c) Freight Tariff: A marginal (16 percent) increase in the local freight tariffs has been assumed to be effected gradually over the restructuring period; the current average freight rates for the international traffic are not clearly established and have been derived based on the willingness of the users to pay for the Nacala route in comparison to the alternative of using the longer routes. The selected tariffs would result in the overall cost of transport by rail to Nacala to be not more than 80 percent of the cost by other routes to reflect the foregone benefit of convenience in using the road transport and the more reliable service expected on the established routes. However, the tariffs need to be more accurately determined. (d) Passenger Tariff: Passenger tariffs have been kept constant. (e) Staff Costs: Staff levels for the WR option have been kept the same, but have been reduced gradually for the R option to about 25 percent of the current level, as discussed in Section V-E. Starting with FY 1991/92, the average staff emoluments have been assumed at 150 percent of the current rates in real terms to account for increase in wages and incentive allowances aimed at motivating the staff. (f) Fuel Costs: Even though the ntk are projected to increase gradually, the train kms would, in the R option, show a sharp reduction on account of the plan to run fully loaded block trains with a gross load of 1200 tonnes in place of the current average of 335 tonnes. However, the fuel consumption has been considered as proportional to gross tonne kilometers, but adjustments have been made for a sharp drop in the gross to net ratio as a result of the expected increase in the average payload of the wagons from the current level of 19 to 38 tonnes. -44 - (C) Maintenance Costs Three adjustments/assumptions have been made towards assessing maintenance costs (i) maintenance cost has been considered as proportional to the holding of the locomotives and the rolling stock; (ii) the unit cost of maintenance has been increased to 130 percent of the current level to compensate for the possible deferment of maintenance due to the shortage of cash resulting in an apparent reduced cost of miintenance; and (iii) since disaggregated data on maintenance cost is not available, the equivalent units have been used with one locomotive being considered equal to 20 units, one coach to 5 units, and one wagon to 1 unit. (h) Depreciation: Starting in FY 1990/91, the replacement value of usable assets has been used for calculating depreciation; the calculations for the replacement value of the current assets and the level of depreciation are given at Annex 12, and for the year 1992/93 for the R option at Annex 25. (i) Other Costs and Overheads: These costs for the R option have been retained at the current level, as any increase because of volume of business would be compensated by the steep reduction in the level of manpower; for the WR option, the values indicated in the Corporate Plan have been used. (j) Provision for Return on Capital: The return has been calculated at a rate of 6 percent on total capital, i.e., fixed as per Annexes 12 and 25, and current assets as at Annex 11. (k) Interest on loans for fresh investment: It is assumed that the funds for fresh investments would be raised through loans with an interest rate of 10 percent (commercial rates in Malawi are actually higher) and therefore until 1995, addit-onal interest has been assumed for both the scenarios. 8.5 The projections presented in Table 8.1 would need to be refined on the basis of more detailed data and may, as a result, undergo some change. However. the basic conclusions would remain valid, viz., a severe restructuring is essential to put MR on the path to becoming financially viable, even though the operations on MR will probably not yield a 6 percent ROC by 1994/95. Without the proposed restructuring, an annual subsidy of MK 60 to 70 million inclusive of the foregone ROC, equivalent to almost 120 percent of the total revenues of MR and about 30 percent of the overall deficit in the GOM budget, would be unavoidable. In fact, with a view to achieving the expected ROC, the restructuring strategy would need to be deepened and intensified after 1994/95, particularly in the areas of business development and increasing MR's share of the freight market and of the utilization of major assets. - 45 - B. Restructuring Action Plan 8.6 A Restructuring Action Plan (RAP), in broad terms, is indicated in Table 8.2. A more detailed RAP would need to be established by MR on the basis of detailed work to be undertaken by the MR divisions and by outside consultants, if necessary. The detailed RAP should preferably be ready by the end of 1991/92 so that its implementation could commence by the beginning of 1992/93, with full implementation by 1994/95. Even while the detailed RAP is under preparation, implementation of a number of actions recommended in Table 8.2, particularly concerning operations improvement, organization restructuring and staff reduction, could be initiated during the current financial year. C. Implementation Strategy 8.7 Full realization of the anticipated benefits would require sustained effort on two frontss (a) effective implementation of RAP; and (b) effective management of redundant assets and surplus staff. It would be preferable for the management of redundant resources to be undertaken by an independent cell, specifically created for this purpose to avoid loss of focus on the restructuring effort. The appropriate action in the case of physical assets could comprise their sale, hiring out, moth-balling or scrappln.g, and in the case of surplus staff their early retirement or resettlement in alternative employment, including self-employment after retraining with assistance from MR. - 46 - TABLE 8.2 RESTRUCTUlUNG ACTION PLAN Ar d Worm ReckmnnRded Ah on com p C_omJed _usins _. Olecontinue passenger To avoid losses as average FY 1902193 R.sucturng svies from route where pasengr journey is ort parallei bus srvices are and ooe/pk is much higher avaiable In Phase I. than of the road mode. II. Discontinue pasnger FY 1903/94 services from remaining routes In Phase II. il. Stop accepting small loads To avoid loss from the FY 1901/92 from other than main uneconomic operations - originating and destination small loads. stationm. IV. Discontinue all normal sarvices To eliminate sectons with FY 1992/9 on Sorder-Umbe secion. very poor traffic density. v. Discontinue all service on . To eliminate sections wih FY 1W2/99 Ulongwe-Mchinji section. very poor traffic deity. vI. Discontinue wagon-load . To avoid high cost of FY 1991/92 service fom/to private sidings. servicing private sidings on a single wagon basis. 2. Buskes 1. Concentrate on bulk traffic; . To improve average freight FY 1991/92 Development and uLers having private sidings haul and obtain more NTKs Marketng Strategy and block train operations. with less/same tonnage. iI. Offer incentives for faster . To improve wagon FY 1991/92 loadinglunloading of trains and turnaround. loading of wagons to their full capacity. 3. O __ipatios I. Gradually inrease the share of . To increase productivity of FY 1993194 Resruchuing block, through and dedicated locomotives and all other trains. assat. iH. Terminate trains in the uers . To avoid freight train delays. FY 1tO1/92 prem se instead of railway yards as far as possble. Oi. Switch over to Directed Track . To enable staff reducton and FY 1192l93 Maintenance. Improve trck quality. IV. Maintenance of locomotives to . To reduce maintenance cost FY 1991/92 be based on kms and riot and improve locomotive hours. relabiHty. - 47 - TABLE 8.2 (Cont 'd.) Ana d R nrm Ro mnded Acto Ca*e*PURpM Compltbn 4. Resource i Resarit th usable asm on To reduce maintenance and FY 1902/93 Rational MR to tho in Annx 25. opeating ct and impre Il Oprte te flet of assets, utiization locomotives and wagons required and seIl/hire ouVmothball. iL Reeict invetmen to the To reduce depreciation FY 1994/96 minimum, charges and improve rtun on captl employed. Iv. Close commremlaly inviable To reduce operatig cos. fY 1994/9 stations v. Consolidt mantenane To attin advantages of FY 1904/9 worshop and faciliti. increased scal of opeati and reduce costs. 5. Organization I Conduct a detaied To define the positkin to be FY 1991/92 R ucuing reorganization and redgn abcoiished/mrged. study. iL Implemnt recommended To reduce costs and Improve FY 1992/93 Organization Design. management ffectivenes. S. Staff Reducton L Gradually reduce stff as per Cost reduction and FY 1994/ Annex 18 finally to 100. productivity improvemen 7. Fknnca L Tarff resuurig after interl To improve revenues FY 199IS Resrctrig study. iL Rluation of asss To ensure adequacy of FY 1991/92 employed on MR. depreciaton for replacment of asset. iiL Improved costng system to To Improve profitiity and FY 1991/92 enabl beter control d asst opersting ratio. utilization and other impoa ratios as per Arnne 18. 8. Sysem I Desgn and implement the To improve management FY Ig=3 Imp rvem fobowing: and effectiveness in aW - DecisAin Support System aspoes of management. - Material Maagemet System - Opeaing Audit, - Qualiky Assuance System. . Op ions L Achiev Opains To bcrese _me and man. FY 15;I Improvemen Targets as per power productivity. Anex 1a. 10. Staf Develpmet i Organize a Manpower Study. To improve stff productiy t FY 1992190 a MotMatin iL Implement an approprite HRO package. IL Implement an appmpriate incww scheme. 1t. Railay- i MR and GOM to sign a To impov undestning d FY 1991/92 Govenmnt Memorandum d the long-term objectives d Underntanding Undeatanding MR and faciitate th* achievement - 48 - TABLE 8.2 CContd.) Am d PAt.faidi clanepCm oda 12. ImIwnw_tion L Caindue a hti4evl. To avoId sippge hi Fie FY l991/92 satelgy committee for coo,ddhinting th Impmntation oI du hIip.m.Wtton of Va Remuctrhi Action Plan. RamutA AWon Plm. i. ConstUg a cal fr wuglng . To enbh reducton of staff Y 9so4/9 staff ud asset reducton and asse i an effuc nt _ _ _ _ Pmgmm. _ _ _ _ __. MALi RAILWAS ORGAUATION STRMTWIE (U8WS) r~~~~~~~~~- -- n aarl I HaI I
Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Malawi - Transport sector review : selected issues (Vol. 2 of 2) : Working papers
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