Sudan - Second Railway Project

RESTRICTED FiLe BVE YI Report No. P-464 ~~~~IL This report was prepared for use within the Bank and its afflliated organizations. They do'not accept responsibility for its accuracy or completeness. The report moy not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCIION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE SUDAN December 16, 1965  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOIMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING A PROPOSED LOAN FROM THE BANK TO THE REPUBLIC OF THE SUDAN 1. I submit herewith the following report and recommendation on a proposed loan from the Bank in an amount in various currencies equiva- lent to $31 million to the Republic of the Sudan to finance part of the foreign exchange cost of a program for the expansion and improvement of the facilities of the Sudan Railways. The Railways are state-owned and operated under the direction of the Ministry of Communications. PART I - HISTORICAL 2. In 1958 the Bank made a loan of $39 million equivalent to finance part of the Railways capital investment program for the period July 1958 - June 1960. This loan, now fully disbursed, helped to finance the extension of the Railways' services to the west and south of the country and the modernization of its capital equipment. But a number of organizational and operating problems remained. In 1962 the Bank com- missioned SOFRERAIL of Paris, France, to study the operations and future prospects of the Railways. The Government and the Railways have taken full advantage of the recommendations of that mission. The Railways' capital investment program for July 1961 - June 1964 was financed with the assistance of a loan of $19.6 million equivalent from the Kuwait Fund for Arab Economic Development. Early in 1964 the Government re- quested Bank assistance in the financing of the Railways' current Seven- Year Capital Development Program which is an integral part of the Govern- ment's Ten-Year Plan for Social and Economic Development. Following a Bank appraisal in M4ay 1964, the Bank opened negotiations in September 1964 for a loan for the first three years of the Program. 3. Formal negotiations were concluded in Wlashington on October 5, 1964. The Borrower was represented by His Excellency Abdel Rahim Mirghani, Under-Secretary for Economic Planning, Ministry of Finance and Economics and Mr. Ali Rida, General Manager, Sudan Railways. The sudden overthrow of the Government in the latter part of October 1964 and the change of the Constitution of the Republic of the Sudan meant that for the time being the loan could not be put forward. After a period of transition a new government was formed in the summer of 1965, based on the outcome of elections held in the northern provinces of the country. The Transi- tional Constitution which has been adopted provides for an adequate legal basis for signature and ratification by the Sudan of the proposed Loan Agreement. The new government has now been in power for six months and the present situation in the Sudan is sufficiently settled to justify the expectation that the proposed project will be adequately carried out.  - 2 - 4. The proposed loan would be the fourth loan to the Sudan and would increase the total amount of Bank loans to the Sudan to $105 million. Besides the Bank loans, Sudan has received from the Association a credit of $13 million for the Roseires Irrigation Project. The status, as of November 30, 1965, of the loans and credit already made is as fo'lows- Amount (US$ million) Year Borrower Purpose Bank loans IDA credit Undisbursed 1958 Sudan Sudan Railways 39.0 1960 Sudan Managil Irrigation 1565 - 1961 Sudan Roseires Irrigation 19.5 13.0 12.5 Total 74.0 of which has been repaid 7.3 Total now outstanding 66.7 Amount sold 4.1 of which has been repaid 300 1.1 Total now held 65.6 13.0 Total undisbursed 8.1 4.4 5. At present two Bank missions are in the Sudan, one to appraise an electric power project and the other to appraise a land clearance and mechanized agriculture project in the Gedaref and Nuba iMountains areas. The Government has submitted to Bank/IDA an irrigation project (Rahad) which would be a part of P.hase II of the Roseires Irrigation Project currently being financed by Bank/IDA jointly with the Federal Republic of Germany and has also asked the Association for assistance in the preparation and financing of an education project. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: The Republic of the Sudan Beneficiary: Sudan Railways Loan Amount: Equivalent in various currencies to $3l million Purpose: To finance the foreign exchange cost of diesel locomotives, rolling stock, rails and accessories, river and har- bor craft, cranes, cargo handling equipment, machinery and construction materials.  -3 - Amortization: In 41 semi-annual payments beginning August 15, 1970 and ending August 15, 1990. Interest Rate: 5M; per annum Commitment Charge: 3/8 of 1% per annum. PART III - THE PROJECT 7. A detailed appraisal of the project (TO-443c) is attached (No.1). 8. The Railways, which are now part of the Ministry of Communci- cations, operate all of the rail, river and port services in the Sudan. The Railways' capital development program, as revised in April 1964, is projected to June 1971. Its total estimated cost is $56 million, of which $38 million would be in foreign exchange. Almost 90% of the presently planned investment would occur between July 1965 and June 1968, which is the basis for the proposed project. Conditional on the availability of funds, further major works, especially extension of the lines further to the south and to the west, are under consideration for inclusion in the later years of the program. The program is technically and financially sound and standards of maintenance and operating efficiency have sub- stantially improved since the time the first loan was made. 9. The present project consists of further dieselization on the main lines, replacement of obsolete steam shunting locomotives by diesel shunters and modest expansion of the rolling stock and modernization of existing rolling stock. In addition, the Khartoum-Port Sudan line will be relaid with 90-lb rail, allowing higher operating speeds and hence greater traffic density and the more efficient use of rolling stock. To improve the operations in Port Sudan harbor, the procurement of cranes and light cargo handling equipment is necessary and to take care of peak shipping traffic, additional tugs, barges and pontoons are required. 10. The total cost of the project is estimated at $47 million, of which $32 million would consist of imported goods and equipment. The proceeds of the proposed Bank loan would cover all but $1 million of these imports and would be equivalent to 66% of the total cost of the project. While the Railways have accummulated substantial credit balances in their accounts with the Government, the execution of the project would create a drain on the foreign exchange resources of the economy and justify the provision of foreign exchange from a Bank loan. The proceeds of the loan will constitute a debt of the Railways to the Government and will make it possible to reduce the capital investment of the Government in the Railways. The capital structure of the Rail- ways will nevertheless still remain conservative, the ratio of debt to equity being 1:2 by 1967 when the project is completed. 11. The Railways will finance out of their own resources the local expenditures and the $1 million in foreign expenditures not covered by the Bank loan. These foreign expenditures cover a great number of small items as well as the completion of two berths in Port Sudan on which work is already far advanced.  - 4 - 12. The Gov6rnment intends to reorganize the Railways as a body corporate to perform the railway functions now being carried out within the Ministry of Communications. A Bill to this effect has been prepared and is now under consideration by the appropriate Government authorities. At the present time the Railways' accounts do not adequately distinguish between current and capital transactions in the Railways' financial relations with the Government. As a step towards complete autonomy for the Railways the accounting system will be modified with effect from July 1, 1966, so as to reflect more accurately the Government's permanent investment in the Railways on the one hand, and the Railways' current cash position on the other. At the same time the interest rate paid by the Railways on the Government investment will be increased from L4% to 6-1/2% per annum, which is more in line with the cost of capital in the Sudan. 13. The Railways have operated consistently at a profit after making adequate allowances for depreciation and are expected to continue to do so in the future. Poor cotton crops in the last two years, reflected after a time lag in a reduced demand for imports and hence in the t'.a2fic offered the Railways, indicates that the operating ratio in 1966/67 will deteriorate to 86 from an average of 69 in thne last five years. After 1966/67, however, the ratio is estimated to improve to 76 by 1970/71. 114. The Railways intend to procure all major items of equipment and supplies on the basis of international competitive bidding as set forth in the "Guidelines relating to Procurement under WArorld Bank Loans and IDA Credits" issued June 5, 1964. PART IV - LEGAL INSTRU1ENTS AND AUTHORITY 15. The draft Loan Agreement between the Republic of the Sudan and the Bank is being circulated separately to the Executive Directors. It is substantially in the same form as was used for the first loan for the Sudan Railways. 16. The Loan Agreement will be subject to ratification by Sudan's Constituent Assembly. 17. The Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank is also being circulated separately to the Executive Directors.  PART V - THE ECONOMY 18. A "Memorandum on the Economic Situation in the Sudan", (AF-4Oa),of November 29, 1965, has been circulated separately. The memorandum concludes that the basic economic position remains sound despite the deterioration in Sudan's international financial position in the last two years and the current tight financial position. 19. Sudan is in the fifth year of its Ten-Year Economic Develop- ment Plan (1961/62-1970/71) which provides for an increase of GDP and per capita income by average annual rates of 5.2% and 2.25%, respectively. In the first three years of the Plan (1961/62-1963/64) total gross in- vestment amounted to