Mexico - Railway Sector Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14708 PROJECT COMPLETION REPORT MEXICO RAILWAY SECTOR PROJECT (LOAN 2575-ME) JUNE 27, 1995 Infrastructure Division Country Department II Latin America and the Caribbean Region 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.  ivMEXICO PROJECT COMNIPLETION REPORT RAILWAY SECTOR PROJECT (Loan 2575-MIE) Currency Equivalents Ctirreiicy UJnit = Peso (MexS) US$1.00 - Mex$25 in December1982 = NMex$ 150 in December 19S3 = Mex$S 68 in December 19S4 = Mex$257 in December 1985 = Mex$612 in December 1986 = MexS1378 in December 1987 = Mex$2273 in December 1988 - MexS2461 in December 1989 = Mex$2813 in December 1990 = Mex$3018 in December 1991 = Nex$3 100 in December 1992 = Mex$3360 in December 1993 Fiscal Year Jannary I to December 31 Wei2hts And Measures Metric British/US Equivalent I meter (m) 3.28 feet (R) I kilometer (kIm) 0.62 mile (mi) I kilogram (kg) 2.20 pounds (lb) I metric ton (m ton) = 2.205 pounds (lb) I liter (1) = 0.27 gallon (gal) I hectare (ha) = 2.47 acres  FOR OFFICIAL USE ONLY Abbreviations BANOBRAS National Bank for Public Works and Services Banco Nacionlal de O bras y Servicios P,;blicos CIF Cost, Insurance, Freight CN National Coach Construction Company Cotnstrciotra Nacional CONASUPO National Council of Popular Subsistence CTC Centralized Traffic Control DGP Directorate General for Planning of SCT Direcci6ti Genreral de Planeacid& DGT Directorate General for Tariffs Direcci&i General de Tarifas DGVF Directorate General for Rail Infrastructure Direcci&t Gelieral de Vias Ferreas ERR Economic Rate of Return FNMI National Railways of Mexico Ferrocarriles Nacionales de Me;xico FUS Ferrocarriles Unidos del Sureste IVA Value Added Tax InlpiLesto sobre Valor Agregado LTVC Long-Term Variable Costs N de M Mexico Central Railways Nacio,iales de Mexico This document has a restricted distribution and may be used by recipients only in the performance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  Abbreviations NAFINSA National Finance Bank Naciotial Fintiaciera, S. N. C. OCS Operational Control System PENIEX Mexican Petroleum Company Peirdleos Mexicanos SCT Secretariat of Communications and Transport Secrelaria de Comunicaciones y Dransporne SHCP Secretariat of Finance and Public Credit Secrelaria de Haciencda y Credilo Piiblico SPP Secretariat of Programming and Budgeting Secrelaria de Prog7avnacio6l y Pireswpuesto STVC Short-Term Variable Costs  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. )ffice of Director-General Operations Evaluation June 27, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Mexico Railway Sector Project (Loan 2575-ME) Attached is the Project Completion Report (PCR) on the Mexico: Railway Sector project (Loan 2575 - ME, approved in FY85). The Loan for $300 million was closed on June 14, 1994, two years behind schedule. An undisbursed balance of about $4.62 million was canceled. The PCR was prepared by the Latin American and the Caribbean Regional Office, with Part II contributed by the Borrower. The Loan, the fifth to the Mexican railway system, was to assist the railways efforts to: (a) improve their carrying capacity through investments; (b) improve their operating efficiency by better use of equipment and human resources; (c) promote financial self-sufficiency through restructuring tariffs and rationalizing the debt structure; (d) strengthen commercial practices, and (e) upgrade investment planning methods. A predecessor railway project, thanks to tariff adjustments and increases in traffic, had improved the railways' finances. The Railway Sector project suffered from a drop in traffic as deregulation of road transport in 1989 led to a diversion of railway customers to the road; at the same time, while the railways carried out substantial tariff increases, they were insufficient to match the hyperinflation during the period, when the peso devalued by more than ten times vis-A-vis the American dollar. As a result, the railways' financial performance actually deteriorated. During implementation, in response to the changed economic conditions, physical investments were scaled down and reoriented to strengthening maintenance and rehabilitation of track as well as locomotives and rolling stock, rather than to providing new capacity. These investments, combined with substantial reductions in railway personnel towards the latter part of the project, helped in meeting most of the operational efficiency targets. The reduction in labor force, as well as other operational and commercial improvements were largely the result of a major program of railway reform which was enacted in 1991, and which supported project objectives. The PCR is comprehensive but omits to mention what was done, if anything, to improve investment planning methods. The reevaluated economic rate of return for the project is calculated at 21 percent. The project had mixed results: the major financial objectives were not achieved; a sensible reallocation of investments led to an overall economic return which is probably acceptable; implementation of the program of reform in parallel with and supporting the project, helped improved operational efficiency and launched new initiatives for restructuring the railways. The project outcome is rated as marginally satisfactory, its sustainability as uncertain and the institutional development as modest. The project may be audited. Attachment 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.1   MIEXICO PROJECT CONIPLETION REPORT RAILWAY SECTOR PROJECT (2575-NME) TABLE OF CONTENTS PREFACE ................. ..i EVALUATION SUMMARY .ii PART I: PROJECT REVIEW FRONI BANK'S PERSPECTIVE .I Project Identity ..............I Background ........, ... I Project Objectives and Description ...........................3 Project Design and Organization .4 Project Implementation .7 Project Results .10 Sustainability. 15 Bank Performance. 15 Borrower Performance .16 Project Relationships .16 Consulting Services .16 Project Documentation and Data .17 PART II: PROJECT REVIEW FROMNI BORROWER'S PERSPECTIVE 18 Evaluation of the Bank's Performance and Lessons Learned .18 Self Evaluation of FNM's Performance .19 Project Relationships. 2 1 Evaluation of Performance of Banobras .21 PART III: STATISTICAL DATA .22 TABLE 1: Related Loans .22 TABLE 2: Project Timetable .23 TABLE 3: Comparison Between Appraisal Estimates & Actual Costs .24 TABLE 4: Cost Comparison (Telecommunications & New Infrastructure) .25 TABLE 5: Project Financing Details .26 TABLE 6: Loan Disbursements .27  TABLE 7: Use of Bank Resources (Staff Inputs) .. ................................... 2S TABLE 8: Mission Data .2................................................ 29 TABLE 9: Compliance with Loan Covenants .30 TABLE 10: Compliance with Operational and Investment Tarets. 3 5 TABLE I 1: Economic Re-Evaluation .36 TABLE 12: FNM Financial Results, 19S4 through 1993 .37 CHART 1: FNM Working and Operating Ratios .40 CHART 2: FNM Revenues, Costs and Financial Results .41 CHART 3: FNM Evolution of Tariffs .42 CHART 4: FNM Evolution of Freight and Passenger Rates .43 CHART 5: FNM Freight Traffic and Rates .44 MAPS: IBRD 18767 - Railroads - S.C.T. Infrastructure Works IBRD 18768 - N. de M. Track Works 1985  PREFACE This is the Project Completion Report (PCR) for the Railway Sector Project in Mexico, for which Loan 2575-ME in the amount of $300 million was approved on June 11, 1985. The loan was closed on June 15, 1994, two years behind schedule, by when $295,382,809.97 had been disbursed and $4,617,190.03 had been canceled. The PCR was prepared by the Infrastructure Division of the Latin America and the Caribbean Region, Country Department II (Preface Evaluation Summary and Parts I and III). The Borrower's Report of Project Completion is incorporated as Part II. This PCR is based, inter-alia, on the Staff Appraisal Report, the Loan, Guarantee and Project Agreements, Supervision Reports, correspondence between the Bank and the Borrower, internal Bank Memoranda, reports/data received from the Borrower, and information available from the Project Files.   - i - MIEXICO PROJECT COMPLETION REPORT RAILWAY SECTOR PROJECT (Loan 2575-ME) EVALUATION SUMMARY Obiectives (i) The main physical and operational objective of the project, the improvement of the railway operating efficiency through higher productivity of equipment and human resources, was to a large extent achieved. However, the financial objectives were not achieved (para. 6.01), partly because traffic and tariffs did not increase as predicted (paras. 6.05 and 6.06) and partly because of the adverse effects of incorporating other weak-performing railway units into the national railway system (para. 6.02). Implementation and Results (ii) Implementation of the project was adversely affected by various structural changes undergone by the Mexican economy, including increased competition from a deregulated road transport, resulting in lower railway traffic (para. 6.01). These difficulties forced FNNM and the Government to launch a far reaching restructuring program, which reinforced the objectives of the project and brought about economies in staff and improvements in operating methods. During the course of the project, substantial cuts were made in the investment program, although these changes were too little and too late to make a continuation of FNM's structure and relationship with the Government sustainable. Instead, greater emphasis was placed on the maintenance of existing infrastructure and equipment. The overall re-evaluated Economic Rate of Return (ERR) of the project is 21.2% compared with 16% to 56% for the various subprojects determined at Appraisal (para. 6.08). Sustainability (iii) Despite reductions in investments, most of the essential components of the project were implemented, although on a more modest scale than the one envisaged at appraisal. A sustainable basis was established for maintaining railway equipment and infrastructure. However, the failure to resolve the financial problems faced by the railway makes its continuation on its present basis unsustainable. The Government plans to concession the railway and make it largely independent of Government funding for both operations and  - ill - investment. These changes do not alter the expectation that the projected level of net benefits from the project will be achieved (para. 7.01). Findings and Lessons Learned (iv) The period of implementation of this project (1985-1994) was a period of considerable economic difficulties for Mexico. For the railway system, it was a period of tumultuous change, starting with the unification of all railway operations into one railway system. This created a concentration of economic, financial and operational problems which the Government and FNM never completely resolved. A performance audit of the Fourth Railway Project pointed out that deep structural change was required, with a need for shifting from a production-oriented state-owned railway to a commercially oriented and privately operated enterprise. This change should have been made at the time of unification. Pursuing this objective, the Bank supported the "Programa de Cambio Estructural" (PCE) or Program for Structural Change and appraised a Railway Restructuring Project in 1993. This project would have supported the railway during the period of transition, but the project did not materialize when the Government decided to accelerate the privatization process. (v) Nonetheless, the PCE began to show immediate results in increased efficiency, reflected in financial improvements for the first time in more than four years (para. 6.18). Despite these improvements, progress was too slow for the Secretariat of Finance (SHCP), which, in 1994, contracted consultants to review how railway services could most effectively and efficiently be provided. The new Congress that took office in December 1994 already approved a Constitutional reform that would enable the privatization of the railway and announced its intention to restructure it in the immediate future (para. 6.18). (vi) In the past two decades, railways in the US, UK, France, Sweden, Japan, New Zealand, Colombia and Argentina have undergone a fundamental restructuring process, not only to recast their relationship with Government, but also to change the manner of conducting their business. Railway restructuring, however, is a complicated and contentious process. Critical policy decisions and their implementation can be productive only if these emanate from a consensus within a country. In Mexico, the problems of reforming the Collective Labor Agreements and staff downsizing have already been tackled, and private sector involvement in the various railway operations is being increasingly sought. However, the restructuring effort is now entering a critical phase in which the Bank is working closely with the Mexican Government to prepare and implement the privatization of FNM. (vii) The unification of the railways, the deregulation of the tracking industry and the Government's push for privatizing the railway were not and could not have been foreseen at appraisal. However, using a sector format in the project contributed to making possible adapting the project's scope and components as the environment changed.  MEXICO PROJECT COMlPLETION REPORT RAILWAY SECTOR PROJECT (Loan 2575-ME) PART I PROJECT REVIEW FROMNl BANK'S PERSPECTIVE I. Project Identity Project Name: Railway Sector Project Loan Number: 2575-ME Loan Amount: $300 million Project Cost at Appraisal: $2,354.4 million Actual Project Cost: $2,147.4 million RVP Unit: Latin America and the Caribbean Region Country: Mexico Sector: Transport Subsector: Railways 11. Backlround 2.01 Mexico has developed an extensive transport network, which comprises over 200,000 km of roads (including 67,000 km of paved and over 80,000 km of rural roads, with the rest being state and local unpaved roads); about 26,000 knm of railways (all except 300 km being standard gauge); some 33 ports, of which 13 serve international traffic; about 50 airports capable of handling medium or larger size aircraft; and over 20,000 km of pipelines for crude oil, refined products and gas. For the ten years prior to 1982, traffic on the nation's roads grew by 10% annually, with road traffic by the end of the period representing an estimated 48% of total traffic in ton-km and over 90% in passenger-km. Railway freight traffic, representing about 14% of total ton-km, experienced a growth of 7% annually in the same period. Even more significant growth rates were registered by coastal shipping and pipelines because of increased oil production, resulting in estimated shares of 15% and 21% respectively. After only limited growth prior to 1977, the ports registered average annual increases of almost 17% in cargo tons handled after 1977. In passenger transport, domestic aviation traffic increased by over 17% annually, with total passenger-km generally equal to that of the railways. 2.02 During the 1960s and early 1970s, substantial amounts were invested in transport, particularly roads, railways and aviation, with the transport sector receiving about 20% of all public investment. With the trunk network generally in place, emphasis shifted to operational improvements and pricing, and using transport investment to foster the development of outlying areas, especially through the extensive rural roads construction  2 program of the mid- 1 970s. Transport investment declined to 9% of all public investment. This investment policy, however, proved to be untenable with the surge of economic activity in the late 1970s, which was accompanied by accelerated growth in traffic in all modes. Between 1978 and 1981, serious port and rail bottlenecks emerged, clearly affecting the operation of basic industries and the conduct of international trade. Consequently, in 1977, the Government launched an important industrial ports development program and a major track improvement and modernization plan for the railways. While the highways' share of transport sector investments declined from 68% in 1977 to 44% in 1984, the railways' share grew from 39% to 42%. Although there were instances of premature investment and some works suffered from poor programming, the overall response of the Government to the situation in those years was appropriate. 2.03 In 1985, when this Project was appraised, all transport agencies were incorporated under the Secretariat for Communications and Transport (SCT). A Subsecretariat for infrastructure in SCT handled infrastructure development for almost all transport, and a Subsecretariat for Operations had responsibility for operational, regulatory and tariff matters. A Directorate General for Planning (DGP), which reported directly to the Secretary, was in charge of overall planning and budget preparation. Planning units within the various modal directorates were responsible for identifying and proposing capital investments and for providing technical details required for the analysis of such investments. DGP, in turn, had the responsibility for carrying out the economic feasibility analysis and providing a multimodal and consistent analytic framework for the preparation of the medium and long-term investment programs. With the recent institutional reorganization of the sector, SCT had been upgrading its planning procedures and criteria, with the Bank providing assistance to this effort under various transport loans. In addition to SCT, the old Secretariat for Programming and Budgeting (SPP - now absorbed by SHCP), played an important role in ensuring consistent modal planning. The Directorate for Public Infrastructure of SPP approved the proposed SCT investments and operating budgets and conducted a serious review of all major investments in the sector. 2.04 To carry out the sector's price and operational regulation, SCT and the Secretariat of Finance (SHCP) shared responsibilities. SCT, through its Directorate General for Tariffs (DGT), made the final decision with regard to pricing of transport services provided by private operators, such as trucking companies and private port operating firms. For quasi-public enterprises, such as the railways and public port operating entities, DGT reviewed and made recommendations to the Pricing Unit of SHCP for final decisions. Other types of regulation of transport services were carried out by various directorates in SCT under the Subsecretary of Operations. Since October 1994, the railways have been free to set their own tariffs and fares, subject to any rationally negotiated agreements with labor interests. 2.05 The Bank had an extensive involvement in the Mexican transport sector. Nine highway loans had been made, focusing on the trunk network, the first in 1960 and the ninth (a Second Highway Sector Project - Loan 2428-ME) in 1984. There were four Railway loans, with the Fourth Railway Project (Loan 1929-ME) in execution at the time of appraisal of this Project. In addition, there had been four port loans, including a port preparation loan in 1981 (Loan 1964-ME), the Lizaro Cirdenas Industrial Port Project (Loan 2450-ME) and the Ports Rehabilitation Project (Loan 2946-ME). For air transport,  3 an airport loan (Loan 1022-ME) was made in 1974 and completed in 1982. The four Bank Railway projects, one for Ferrocarril del Pacifico and three for NdeM, helped to finance important rehabilitation and modernization works, such as track renovation, strengthening of bridges and the purchase of locomotives, rolling stock and other equipment. The first loan (103-ME) of US$61 million for Ferrocarril del Pacifico was made in 1954, and the works were completed successfuilly in the late 1950s. The second loan (825-ME) of US$75 million for the rehabilitation of NdeM was made in 1972 and completed in 1977. The third Railway loan (1232) for US$100 million was made in 1976 and completed in 1982, and the fourth loan (1929-ME) was made in 1980 for US$150 million and completed in 1986. None of the earlier Railway projects were directed at financing major infrastructure works under SCT. 2.06 As a follow-up of the Fourth Railway Project, the Government of Mexico initially proposed two Railway loans, one for the NdeM and the other for the SCT, to take care of new construction and realignment works. However, a Bank identification mission in 1983, as well as Sector Study Note proposed one loan with two components for the NdeM and SCT. In October 1983, the first Project Brief detailed the proposed investments on NdeM and under the aegis of the SCT, the former to improve NdeM's services, and the latter to finance complementary projects to improve Railway capacity by double-tracking, electrification and realignment and regrading'. A preparation mission visited Mexico in March 1984, and revised Project briefs were prepared in August 1984 and October 1984, expanding the Project and the issues. Following an Appraisal Mission in October 1984, the Issues paper highlighted the principal issues as financial (the railways' debt and financial position), the need for adequate and appropriate tariff increases, the railway's passenger services, and the SCT's investment program. During the following missions, a Plan of Action and an Investment Plan for 1985 were agreed, and it was decided that the Project would follow a sector (time-slice) approach, whereby the first year (1985)'s program was evaluated in detail, and the subsequent years' investments would be reviewed and agreed through annual reviews. These would take into account the latest trends in rail traffic and the country's economy. III. Proiect Obiectives and Description 3,01 The Railxvay Sector Project (Fifth Railway Project) was designed to support the continued improvement of the Mexican railways and to broaden Bank participation in NIeMico's transport sector, following on the Fourth Railway Project (1929-ME), the Second Highway Sector Project (2428-ME) and the Lazaro Cardenas Industrial Port Project (2450-NE). The Project would provide assistance to help finance the 1985-1988 time-slice of the NdeM and SCT Railway investment programs, and, by including the financing for SCT works, it would represent a wider involvement than that under previous railway projects. The long-standing relationship between NdeM, SCT and the Bank, and the experience gained through a series of consecutive transport projects, made it possible to apply a sector loan format to this Project, assigning the responsibility for appraising ' Man) lines, wvhich wcre constructed in the ninctccnth century, had sharp curvcs and gradicnts w-hich wcre bccoming rcstrictive %%ith the larger locomotives and wagons. It w%as ncccssary to opcn out thc curvcs and relicvc thc gradients to improve spccds and assct utilization.  4 investment commitments beyond the first year to the staff of NdeM and SCT, based on detailed procedures agreed with the Bank. 3.02 The overall objective of the Project was to support Government and Railway efforts to implement a Plan of Action, which would: (a) improve Railway traffic carrying capacity through a balanced investment program; (b) continue improvements in Railway operating efficiency through higher productivity of equipment and human resources; (c) promote financial self-sufficiency for Railway services with tariffs appropriately related to Railway costs and a rationalized debt structure; (d) strengthen commercial practices for Railway services; and (e) upgrade planning methods for assessing Railway infrastructure requirements. IV. Proiect Desien and Organization 4.01 The total NdeM and SCT Railway investment program for 1985-1988 (para. 4.02) was estimated to cost US$2,354 million equivalent (including physical and price contingencies), of which NdeM represented US$1,325 million equivalent and SCT US$1,029 million equivalent. The foreign exchange cost of the total program, including the indirect foreign exchange for SCT rail infrastructure civil works, was estimated at US$849 million equivalent, of which NdeM represented US$457 million equivalent and SCT US$392 million equivalent. A detailed analysis of the 1985 investment proposals and a more general review of the proposals for subsequent years were carried out. It was confirmed at negotiations that, by November of each year, beginning in 1985, NdeM and SCT would prepare, for Bank comment, an updated four-year investment program with a detailed breakdown for the following year based upon agreed technical and economic criteria. No investment was to be included unless it had an estimated rate of return of at least 12%.  5 4.02 Railway Investment Program 1985-1988 (USS millions equivalent) .................... ................................................ ................... ... ....... .............. ... .................................... NdeMI Investment Local Foreign Total ............................................ . . . . . .. . . . . .. ... . -. .........................................;;.;..;;;;;........p .;.;;;..;.. . .. .;;;.. .. . .... ... Civil Works 197.1 - 197.1 Rails - 71.5 71.5 Equipment/Machinery 77.5 155.8 233.3 Locomotives/Wagons 372.9 173.2 546.1 Passenger Coaches 94.4 14.0 108.4 Administration/Technical Support 37.1 2.0 39.1 Sub-Total 779.0 416.5 1,195.5 SCT Investmenit Civil Works 490.8 260.7 751.5 Rails - 79.9 79.9 Equipment - 9.8 9.8 Administration/Technical Support 73.8 1.4 75.2 Sub-Total 564.6 351.8 916.4 Total Baseline Costs 1,343.6 768.3 2,111.9 Price Contingencies 161.6 80.9 242.5 TOTAL COSTS 1,505.2 849.2 2,354.4 4.03 It was proposed that, out of the total of estimated S2,354.40 million, $44.5 million would be financed from the then ongoing Loan (1929-ME), $300.00 million from the proposed loan ($150 million each for NdeM & SCT), S273.9 million from Suppliers' Credits and Commercial Banks, and $1,736 million from the Government's own resources. 4.04 NdeiVI Investment Program (a) General. The NdeM program for the period 1985 through 1988 was about US$300 million equivalent per year (in 1985 prices), compared with about US$370 million equivalent in the 1980-1982 period, with a direct foreign exchange component of about 34%. The composition of the program, summarized in the following paragraphs, shows that the investments were to be weighted heavily toward track maintenance and rehabilitation, with all track- related investments reaching 28% of total investments. (b) Track. The track rehabilitation program with new rail was expected to cover an average of 360 km per year at an average cost per km of about US$150,000 equivalent (in mid-1985 prices) (Map IBRD 18768). Track rehabilitation on lower traffic density lines with recovered rail would cover 223 km per year over the same period at an average cost per Km of US$30,000 equivalent. In addition, NdeM planned to purchase about US$71 million equivalent worth of track maintenance machinery (in mid-1985 prices), about 45% of it in 1985, as part of its plans to mechanize track maintenance.  6 (c) Signalin.g. With the objective of providing CTC on heavily used single-lines, a plan foreseen in the Fourth Railway Project but inadequately implemented because of lack of financial resources, NdeM proposed the following works in 1985: completion of CTC works in hand between Guadalajara and Irapuato (250 km); installation of CTC between San Luis Potosi and Benjamin Mendez (345 km); and completion of the study for providing CTC between Lecheria and Veracruz (404 km) as well as initiating the purchase of materials. In addition, the 1985 budget provided for the renovation and modernization of the over-aged car control and signaling equipment in the Valle de Mexico marshaling yard, to serve the longer and heavier cars now in use. The continuation of CTC works in 1986-198S was likely to be confined to the completion of the above-mentioned works. (d) Telecommunications. Under the Third and Fourth Railway Projects, NdeM was in the process of making an analysis of the combined Telecommunications and Operational Control System installed over the network. Work in 1985 to 1988 would comprise extension of the telecommunications system to the former FUS Railway and, later, to the other three Railways - Pacifico, Chihuahua and Sonora-Baja California. The main work for 1985 comprised purchasing additional VHF radios for 700 locomotives and for track and train crews, as well as extending telephone exchange and teleprinter facilities. (e) Motive Power. As efficiency, particularly locomotive availability, was expected to improve during the implementation of the Plan of Action, NdeM would minimize its locomotive purchases. In 1985 and 1986, about 20 new locomotives were expected to be acquired each year at a cost of US$1.2 million per unit (US$24m). Also, 20 existing locomotives were scheduled for rehabilitation each year, at a cost of US$230,000 per unit. NdeM was also expected to build up its locomotive spare parts inventory, which had been depleted in previous years. (f) Rolling Stock. Based on the traffic forecasts and the target indices for wagon turnaround, NdeM intended to purchase 460 wagons in 1985 and an additional 1,500 wagons per year from 1986 to 1988 at an average unit cost of US$65,000 equivalent. The Railway expected to rehabilitate 700 wagons in 1985 and a similar number annually thereafter, at an average unit cost of US$35,000 equivalent. Furthermore, NdeM had initiated the purchase of 330 passenger coaches, beginning with 30 first-class special coaches in 1985, at an average cost of US$500,000 equivalent each. These purchases would be reviewed, as the Bank did not consider them justified. 4.05 SCT Investment Program. (a) The SCT program was about US$230million equivalent (in 1985 prices), with a direct and indirect foreign exchange content of about 38%. About 67% of the line works and electrification investments in the 1985-1988 program were directed at completing ongoing works. The main items in the program included:  7 (i) completion of double-tracking, with electrification, on the Mexico City-Queretaro-Irapuato line; (ii) regrading and realignment of the Mexico City-Veracruz line and of sections between Veracruz and Coatzacoalcos; (iii) completion of a new line between Guadalajara and Monterrey to facilitate direct movement between Manzanillo and Monterrey, and the construction of appropriate bypasses around Guadalajara; (iv) construction of rail bypasses at Monterrey and Saltillo; and (v) completion of track realignments between Mexico City and Lazaro Cardenas. (b) Tentative provision was also made for the continuation of a new line between Veracruz and Tampico and the construction of a new line between Mexico City and Tampico. Major investment in these subprojects, except for contracts which had already been initiated, was postponed pending further studies, and limited budgetary resources were directed toward advancing works already nearing completion. There was also a provision in later years for major yard investment, depending upon the results of the proposed studies. Some of these rather over-ambitious programs were later eliminated, after detailed studies (para. 5.02 ). (c) DGVF also proposed acquiring specialized machinery in order to carry out the construction program effectively. This would require a total of about US$10 million equivalent (in 1985 prices) between 1986 and 1988. Plan of Action 4.06 To complement the Investment Program, the railways and the Government, in consultation with the Bank, established a series of operational and financial targets to be achieved during the Project period 1985-1988, as well as the major steps to be taken to achieve the goals agreed upon. The Project was programmed for completion in 1991. V. Project Implementation Loan Effectiveness and Project Start-up 5.01 The Project was appraised in October 1984, negotiated in April 1985 (after a post- appraisal mission), and approved by the Board in June 1985. The Loan Agreement was signed in July 1985 and became effective in February 1986. In the meanwhile, there were two supervision missions, one in July 1985 and the other in September 1985, which reported the start-up of Project activities. The last of these missions was concerned mainly with the consequences of an earthquake (8.1 on the Richter scale) which had its  epicenter near the Pacific Coast, close to the border between the States of Michoacan and Guerrero. The earthquake and subsequent aftershocks caused severe damage in Mexico City, Jalisco, Michoacan, Colima and Guerrero, particularly in the Lazaro Cardenas Port area (which is also a rail terminal for the Port and the Steel plant). The mission found that damag,e to Project related rail works was marginal. Fcllowing missions reviewed investments in 1985 and the planned investments in 1986. In general, the level of FNM investments in 1985 was maintained in 1986, but SCT significantly reduced its infrastructure investments and concentrated on completing existing projects. Bank missions also recommended that a study be conducted on operations in the extensive Valle de Mexico marshaling yard, to reevaluate the need for proposed investments, and advised that the problems in the Monterrey and Coatzacoales yards could also be solved by minor works and operational changes rather than major investments. Project Execution 5.02 The adoption of the Sector format for this Project permitted annual reviews of and adjustments to planned projects. This indeed proved very useful. In the first place, the expectations of the traffic increases foreseen at appraisal did not materialize. Secondly, the unification of the other Railway systems (Ferrocarril del Chihuahua-Pacifico, Ferrocarril del Pacifico and the Sonora Baja) in 1987 and the conversion of Nacionales de Mexico (NdeM) into Ferrocarriles Nacionales de Mexico (FNM), changed substantially the character of NdeM, as the amalgamated railways were less efficient, carried less traffic, were more over staffed, and were in generally poorer financial condition than NdeM. As a result, substantive changes had to made in the Investment Program and to the financial targets. By 1989, it was no longer considered necessary or desirable to keep infrastructure investment separate from railway operations and maintenance, so the Direcci6n General de Vias Ferreas (DGVF), responsible for the construction program of the SCT, was transferred to FNM. This move represented an important change in philosophy, with railway infrastructure investment being seen as related to the efficiency of railway operations rather than to economic development. A first result was further cuts in the new investment program in favor of track conservation works, procurement of spare parts, and additional equipment and machinery for repairs and maintenance of track, locomotives and rolling stock. Another significant development associated with the same change of philosophy was the virtual elimination of the passenger coach acquisition program for money-losing passenger services. 5.03 The slower rate of investment extended the span of the Project from 1985 to 1993, with greater emphasis on track maintenance and repair and rehabilitation of locomotives and wagons. In accordance with this trend, 3,611 km of track were rehabilitated with new rail in 1985-1993, instead of the 1,923 km foreseen at appraisal for 1985-1988. As for rehabilitation with second hand rails, 2,145 km were completed in 1985-1993, rather than 1, 1 16 km foreseen at appraisal. On the other hand, several of SCT works were deleted or substantially reduced, only $39.1 million of the $150 million originally set aside for SCT was used by them. The balance of $1 10.9 million was transferred to FNM to finance extended track conservation works, track machinery, spare parts for locomotives, and machinery to modernize maintenance workshops.  9 5.04 Except for the 1985 investments, which were evaluated at appraisal, the other investments were to be undertaken only after detailed evaluation taking into account the evolving needs of the economy. Project execution illustrates an increase in track conservation works, larger investments in spare parts, machinery and equipment, as well as cuts in the new construction works initially included in the investments to be made by SCT. In general, the individual investments over the nine-year period 1985-1993 costed less than the investments estimated at appraisal for the four year 1985-1988 period (para. 5.05). Project Costs 5.05 Analysis of Project costs was complicated not only because of the relatively high and fluctuating inflation rates but also because the parity between the dollar and the Mexican Peso varied considerably during the Project period. A comparison between the Appraisal Estimates and the Actual Costs (in US$) is given in Tables 3 and 4 (Part III). The estimated and Actual Financing Plan is given in Table 5 (Part III). With all the changes that were made, actual investments in 1985-1993 were $2,147.4 million, less than the appraisal estimate of $2,354.6 million for the four-year period 1985-1988. The local costs of the Project were $1,409.4 million instead of $1,535.3 million and the foreign exchange costs $738.0 million instead of $819.3 million estimated at appraisal. Regarding the Bank loan, $4.6 million were canceled out of a total of $300 million. 5.06 The main features of Project implementation were: a) Lack of economic growth, a change in economic structure, and increased and unforeseen competition from deregulated road transport made it possible to reduce substantially planned new investments for a lower level of rail traffic. Financial constraints slowed the completion of those projects that were implemented; b) the Project was actually completed in 1993; c) a large number of SCT infrastructure works were canceled, and the scarce resources available to the FNM, were concentrated on a stronger maintenance and conservation program, aimed at rehabilitating track, motive power and rolling stock. Disbursements 5.07 Table 6 (Part III) gives the position of the estimated and actual Schedule of Disbursements. Disbursements actually started in 1986 soon after the loan became effective and by the end of 1987 about $68 million were disbursed against $1 11 million foreseen. The shortfall occurred mainly due to the reduction of the SCT investment program and the spacing out of the investments over a longer period. By the end of 1988, $118.8 million were disbursed; by 1990, $206.3 million; reaching $295 million by the end of 1993. The Loan Closing date was extended once on June 26, 1992 to June 30, 1993.  10 The last disbursement was made on May 31, 1994 and the loan was closed on June 15, 1994, with $295,382,809.97 disbursed and $4,617,190.03 canceled. VI. Proiect Results Project Objectives 6.01 The main objective of the Project, the improvement of Railway operating efficiency through higher productivity of equipment and human resources, was achieved to a large extent, although the forecasted financial improvements did not materialize. Provision of additional capacity, considered important by the Government at the time of appraisal, became largely irrelevant as rail traffic diminished throughout the Project. Nonetheless, compliance with the operational and investment targets of the Project was substantial (Table No. 10, Part III). Targets of locomotive utilization and locomotive availability were largely achieved due to the reinforced program for rehabilitation and procurement of spare parts. Freight car availability also improved as did average wagon load. Wagon turn-around deteriorated, due to the drop in traffic and an ingress of foreign cars. Staff productivity2, which was 644,134 in 1985, fell steadily to 478,583 in 1991, due to lower freight and passenger traffic. When the PCE kicked in, with reductions in staff, economies in cost, and improvements in train operations (Para. 6.02), staff productivity rose again to 665,080 in 1992 and to 698,674 in 1993. 6.02 The absorption of the Chihuahua, Pacifico and Sonora Baja Railways and the Sleeping Car Company (Servicios de Coches Dormitorios) by FNM in 1987, followed by the transfer of SCT's Railway Infrastructure Directorate (Direcci6n General de Vias Ferreas) increased the Railway network from 20,287 km to 26,399 km. This absorption was associated with a significant increase in staff and no appreciable increase in traffic, with the result that staff productivity fell from 750,000 in 1987 to 575,965 in 1988 and to a low of 478,581 in 1991. In January 1991, the Government appointed a new Director General, and a number of department heads and senior officers were also changed. One of the first acts of the new administration was to table a proposal for a significant restructuring of the Railway, entitled 'Programa de Cambio Estructural" (PCE). This Program reinforced the objectives of the Bank-financed Project and implied a change in FNM's orientation from a production-oriented railway to that of a commercial enterprise. To this end, the following measures were taken: (a) modifying the collective labor agreement to bring about better staff utilization; (b) implementing a voluntary retirement program to reduce labor force by more than 30% in two years; (c) organizational reform and administrative modernization to strengthen the enterprise's commercial functions. A competitive pricing policy was introduced so that, by the end of the Project, more than 90% of freight was being carried under negotiated contracts rather than at published tariffs; - Mcasured as the sum of ton kms and pass kms per cmploycc.  I1 (d) modernizing operations, by updating technology; (e) canceling unprofitable passenger services, closing redundant installations, and selling some redundant assets; (f) encouraging private sector participation in railway activities, particularly track, locomotive and wagon maintenance. 6.03 Following the PCE, 22,450 staff positions were eliminated by the end of 1993. Also by 1993, a new management structure of the enterprise was introduced; the train order system was replaced by CDT (Control Directo de Trafico) over the most densely used parts of the network, and by radio control elsewhere; and the inefficient manual wagon, control system was replaced by a computerized system, SICOTRA (Sistema Integral de Control de Transportes). In addition, FNM discontinued less-than-carload traffic and most uneconomic passenger services; introduced private sector participation in yard operations and in maintenance of motive power and rolling stock; and improved track maintenance by greater mechanization and introducing 'hy-rail" trucks for track inspection and repairs. Traffic 6.04 The project was conceived on the basis of providing physical capacity for the expected increase in'traffic and improving the financial results of the railway, as economies of scale became more apparent. Two projections of traffic were made in the SAR, a higher rate for infrastructure and operations planning and a lower rate for economic and financial evaluations. Even the lower rate turned out to be very optimistic, although the assumed figures were reasonable at the time they were projected. 6.05 Traffic failed to keep up with expectations and instead of economies of scale there was diseconomies, as traffic declined faster than costs could be cut. Financial targets were not met, and indeed the financial results of the railway continued to get worse throughout the course of the Project, despite superficial attempts by the Government to try to control them. The railway was adversely affected by the above mentioned macroeconomic and structural changes, a reversal in the competitive situation of the railway relative to other transport modes, and the Government's interference in setting rail tariffs. These factors, together with the railway's failure to take timely actions to control costs (particularly labor), were the principal causes contributing to the railway's poor financial performance. 6.06 The lower freight traffic projections included in the SAR were based on a detailed consideration of each of the main products carried by the railway and or interviews with representatives of its principal clients. The resulting projections considered a 3.5% growth per year in ton km over the life of the project, compared with an achieved growth of about 3.2% over the previous fifteen years. Although the SAR contained no explicit forecasts on economic growth, the assumed traffic growth rate must have been based on an assumption of even higher economic growth, such as about a 5% annual growth in GDP in both 1984 and 1985. But, rather than growing, total GDP in 1988 was almost identical to that of 1985, with declines in the agricultural and mining sectors, which had  12 been expected to provide for most of the growth in rail traffic. In addition, traffic projections failed to take into account the structural change in Mexican industry that came about half way through the life of the project. One of the policies of the new administration that took office in 198S was to reduce the size of the public sector involvement in the economy. Many state industries that had been 'baptive" to the railway were privatized and became responsible for their own transportation choices. 6.07 The changes mentioned in paras. 6.02 and 6.05 occurred at the same time that the Government was implementing a road transport deregulation policy which also had significant consequences for the railway. The road transport industry was characterized by over regulation and inefficiency in the early and mid 1980s. Realizing the negative impact of this inefficiency on economic growth, the new Government deregulated road freight and passenger transport in 1989, with dramatic results. The for-hire road vehicle fleet increased by more than 50% in less than two years and there was a widely recognized improvement in the quality and range of services offered, even though transport tariffs were reduced only slightly. The railways were unable to respond effectively or quickly enough to these changes. There was an immediate and significant reduction in rail transport of many agricultural and industrialized products. The volume of freight traffic started to fall at the inception of the project, after a period of twenty years of almost uninterrupted growth. The reduction in freight traffic from 1985 to 1986, largely attributable to a 40% increase in real tariffs and partly attributable to the privatization of the industrial sector, was more than 10%, the highest recorded annual'reduction in recent history. There was a similar reduction in 1989-1991, largely attributable to increased competition from deregulated road transport. Behind both of these large reductions, there was the beginning of a longer-term trend of reducing rail freight, due mostly to a poorer quality of service. Although only the last of the causes just cited was directly attributable to the railway itself, responsibility for the failure to respond in time and in scale to all these environmental changes should be assigned to railway management. Rates and tariffs 6.08 The 40% increase in real freight rates from 1985 to 1986 was a culmination of five years of continuous increases in real rates after fifteen years of decline. Financial projections in the SAR had assumed a 2% annual average increase in freight tariffs, so the 40% increase in 1985 was far greater than expected. The increase, was supported by the cost analyses reported in the SAR, which indicated that most rail freight rates were 50% too low to recover working costs and were even further below competing road rates. The response to the loss of traffic was to allow freight rates to fall in real terms throughout the remainder of the project period, so that by 1993, rates were less than 80% of those in 1984. The two Operating Agreements that were in force from mid-1985 until 1987 failed to identify responsibility for setting railway freight rates and were unclear even as to what was the objective of tariff policy. 6.09 Passenger tariffs increased in real terms until 1988, then gradually declined until 1993. By the end of the project period, passenger tariffs were about 35% higher in real terms than they had been in 1984, but at about US I cent per passenger km, they were still inadequate even to cover marginal costs.  13 Financial results 6.10 FNM failed to satisfy the financial performance criteria of the project. Moreover, the financial situation of the railway was a continual concern to both the railway and the Government. FNM could not manage to improve its financial performance despite implementing all the conventional policies to do so. In the end, the Government has concluded that FNM's problems are irresolvable without a complete restructuring of the railway, including separating railway operations from direct Government intervention and finance. 6.11 The working and operating ratios had been improving in the three years prior to project implementation, and this improvement was maintained in the first year of the project, thanks to the large real freight rate increase. Expected growth in traffic and increasing real tariffs, combined with control over cost increases, were expected to lead to a continued improvement in financial results. The working and operating ratios of 0.76 and 1.08 in 1984 were expected to improve to 0.70 and 0.94, respectively, by 1988. 6.12 However, failure to maintain real freight rates, together with a continuing decline in traffic and a failure to control costs after 1986, resulted in a rapidly worsening financial picture. By 1988, the working and operating ratios had reached 1.26 and 1.54, respectively, and by 1992, they had reached 1.58 and 1.89. The small annual operating surplus observed in 1983 and 1984 disappeared in 1985, and annual deficits increased to almost US$800 million by 1992. The Government was aware of the worsening result but for macroeconomic considerations was not prepared to take the measures that would have improved the situation. 6.13 Railway operating costs increased significantly in 1985, with a 40% increase in real labor unit costs followed by a further 23% and 21% in 1987 and 1988, respectively. The last two increases coincided with the absorption by FNM of other state railways and SCT's rail infrastructure unit. Although FNM's weakening financial situation was, in part, a result of consolidating the financial results of all the federal Government's railway activities, there was too little attention by the Government to the consequences of this consolidation on the railway's performance and its ability to control labor costs. An Operating Agreement made between the Government and the railway in 1985 was abandoned foMlowing the first round of railway unification, and the second Operating Agreement (19S3) was not renewed after its first (unsuccessful) year. There was a write of 50% of the railway's long-term debt in the First Agreement and a further write off in u;e second. Under both Agreements, the Government accepted to allow tariff increases, but these were not implemented for fear of losing traffic, as it had occurred in 1985. 6.14 By 1992, the Government realized that more dramatic action was necessary and encouraged FNM to develop its Plan for Structural Change (PCE). This was designed to bring about needed staff reductions through voluntary redundancies and other cost reductions through investing in technology and contracting and concessioning ancillary services ('butsourcing'). The scope of these changes was limited by an unwillingness to contemplate a change in the federal constitution, without which the railway (considered a strategic asset), with its infrastructure development, maintenance and use, would have remained under the Government 's direct control.  14 6.15 Memory of the traffic losses following the 19S5 increases, combined with a tripartite agreement between the Government, unions and industrialists that Government taxes and tariffs (including those of the railway) would not be increased, resulted in a continued decline in real tariffs, even after the railway had the apparent freedom to determine its own rates. By the end of 1993, more than 90% of rail freight was being transported under contracts rather than at published rates. These contracts involved tariffs lower than those published, but there were no counterpart agreements with the railway clients that would have allowed reductions in operating costs to offset the lower tariffs. 6.16 In spite of the above, the PCE began to show results in increased efficiency that were in turn reflected in improved financial results. The working and operating ratios improved to 1.33 and 1.65, respectively, and the operating deficit diminished to less than US$600 million. This financial improvement was too little and too slow to satisfy the Government and was not reflected in operating improvements to satisfy the railway's major clients. In the last year of the project, the Secretariat of Finance contracted consultants to review how railway services could most effectively and efficiently be provided, notwithstanding the constitutional constraint that existed at the time. One of the first acts of the new Government that took office at the end of 1994 was to start the process of removing that constraint and to announce its intention of restructuring the railway. 6.17 The consultants' report indicated that the railway's freight operations were close to financial viability and that this result could best be achieved by dividing the railway into three regions to be operated independently and concessioned as quickly as possible. New uncommercial services, including those for passengers, would only be provided. if an Operating Agreement were to be made between the concessionaires and either the Federal or the relevant State Governments. Unfu'nded pension obligations would be assumed by the Federal Government, if these arose when the railway was still under its direct financial control. Additionally, there would be a further write off of the railway's accumulated debt. Economic Re-Evaluation 6.18 At appraisal, a set of economic evaluation procedures and guidelines were prepared by FNM and SCT in consultation with the Bank. These guidelines were applied in analyzing investment commitments for 1985, whether or not Bank financing was involved, and further applied in annual updating of the investment program. The principal economic benefits of the rail investments were: (i) savings in rail operating costs as track conditions improved and train delays were reduced; and (ii) savings from preventing a diversion of traffic to higher-cost road transport, by ensuring sufficient capacity for existing and future traffic levels. The evaluation showed that the 1985 investments had estimated rates of return well above 12% and indicated the economic feasibility of the 1986-1988 investments. Some of the other SCT works did not appear well justified and most of these investments were deleted during implementation (para. 5.02). 6.19 The Economic Re-evaluation has used the same methodology as that in the SAR, although there has been some refinement, in view of the better availability of data for track  15 works, particularly in relation to accident cost reductions and track maintenance costs. Traffic did not increase as forecasted and important adjustments were made in the procurement of locomotive and rolling stock, not only because of the fall in traffic, but also to spread out investments over the longer Project period. The re-evaluated ERRs are detailed in Table 11, Part III, and are summarized below: Sub-Proiect SAR IRR Track Rehabilitation with new rail - 16.7% Procurement of Hy-Rail Trucks - 92.7% Re-alignment Potrero Paso del Macho 45% 17.0% CTC-Irapuato to Guadalajara - 35.9% CTC-San Luis Potosi to Benjamin Mendez 34% 35.4% Purchase of Locomotives - 41.9% Rehabilitation of Locomotives 74% 43.8% Procurement of wagons 33% 24.1% Rehabilitation of wagons - 28.0% Project average n.a. 21.2% VII. Sustainability 7.01 Although this project was implemented during a difficult period of economic adjustment and reorganization, most of the essential components of the project were executed, although on a scale substantially more modest than envisaged at appraisal. A suitable basis has been established for railway equipment and infrastructure maintenance. This, together with institutional reforms introduced during the project period, augers well for the realization of the full potential benefits of the project. It is fair to expect that the level of net benefits throughout the economic life of the project would remain acceptable. Resolution of the present financial problems of the railway by the proposed fundamental restructuring and privatization would not change this conclusion. Despite these financial problems, improvements in operational efficiency and maintenance practices are themselves sustainable, and are likely to provide a better starting point for the newly restructured railways than would have been the case without the project. vm. Bank Performance 8.01 The Bank spent nearly 154 staff-weeks to prepare and appraise the project including 323 person-days in the field (Tables 8A and 8B). A total of 181 staff-weeks was spent on supervision, including 338 person-days in the field. This was a well-prepared project that was adequately monitored. However, the project as implemented was substantially changed during the delayed implementation (para. 5.02). It is significant, though, that when circumstances changed and the Borrower had to curtail or postpone investment, the Bank responded by assisting in re-ordering project priorities and in reducing investments to the minimum required. The project's Sector format, requiring annual reviews, greatly helped in this process. As a result, the project implemented was  16 considerably leaner than the project appraised, and one that was certainly more meaningful under the changed circumstances. IX. BorroNver Performance 9.01 During project implementation, the railway underwent far-reaching changes. Through the merger with other railways under FNM's umbrella, the railway had to cope not only with unifying operations, but also combining finances and administration. The reorganization imposed a challenge on the borrower and led to the formulation and implementation of the 'Programa de Cambio Estructural" (para. 6.02), resulting in a reordering of collective labor agreements, sale of assets (to finance staff reductions), and reductions in staff, redundant installations (such as workshops) and unprofitable services. Thus, this was a period of considerable change to which the Borrower responded with appropriate flexibility. Although the Borrower did not utilize the funds set aside in the loan for technical assistance, FNM carried out from its own resources over sixty studies to indicate the steps to be taken to reorganize the railway, reduce staff and services and seek greater private sector participation. However, much remains to be done. This was the last of a series of six Bank-financed projects for the Railways, and there was evidence of a growing understanding of Bank analytical and procurement procedures. - The Borrower's efforts in implementing the 'Programa de Cambio Estructural" started a restructuring effort in the right direction. X. Proiect Relationships 10.01 Bank relationships with the Government, the Railways, Banobras, and various other agencies dealing with project implementation were generally satisfactory. The procurement processes were properly executed and there were no serious differences between the Borrower and the Bank, a result of nearly twenty years of continuous dialogue in project implementation. Xl. Consulting Services 11.01 Less than a quarter of the S2.5 million equivalent provided in the Loan for technical assistance and training was actually utilized, partly because of budgetary restraints, and partly because FNM wanted to employ consultants of its own choice to examine the issues related to the restructuring effort. Bank loan funds were utilized for environmental studies, to develop a Master Plan, and to conduct detailed studies of contamination problems near workshops and fueling stations, health and safety issues, train accident prevention, and environmental protection measures with regard to new works and maintenance operations. These studies were a prerequisite to the subsequent concessioning of most workshops.  17 XII. Project Documentation and Data 12.01 The Staff Appraisal Report was the basis for framing the legal documents and provided a take off point for supervision and procurement of goods and services. Given the eventual duration of the project (nine years instead of the originally conceived four years), changes in Bank supervision teams, and in the Government and the Borrower's management, the SAR also highlighted the project origins and objectives and provided a frame of reference for alterations and amendments to the project content, which ensured that the basic project objectives were maintained. 12.02 Reports from the borrower were received regularly, though with frequent delays. The Borrower sent a brief 'Reporte de Terminaci6n del Proyecto" in June 1994, which has been incorporated as Part II of this report. This was followed by further data in October 1994 and January 1995, which provided important inputs into the preparation of this report.  18 MIEXICO PROJECT COMPLETION REPORT RAILWAY SECTOR PROJECT (Loan 2575-ME) PART H PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE I. Evaluation of the Bank's Performance and Lessons Learned for the Future Mexico's railways have been working with the World Bank for the past twenty years, during which the Bank has provided funding for the execution of different specific railway projects which has virtually amounted to a constant line of credit. Ferrocarriles Nacionales de Mexico (FNM) is accordingly in a position to evaluate objectively the World Bank's performance during or execution of the project financed by Railway Sector Loan No. 2575-ME, in effect between July 31, 1985 and December 31, 1993. Regarding the loans granted earlier and specifically the one under review, it can be affirmed that the World Bank has fully performed its function of stimulating the development of countries such as Mexico, which rely on external financing for carrying out large-scale public projects of importance for their modernization and for their economic and social progress. FNM is especially appreciative of the World Bank's unfailingly professional attitude and the understanding shown during the negotiations and throughout the project execution period, since it was always at FNM's side with technical guidance and advice for accomplishing the project's objectives. It is worth underscoring that, in addition to the economic benefits from the investments financed by the World Bank and the financial comparative advantages of its loans, the advice provided to FNM through the frequent supervision missions during the course of the project was of great value, because those missions were made up of persons possessing extensive experience and impressive technical qualifications for identifying and resolving railway-related problems, including detailed questions in specific areas. As a result, their recommendations were invariably right on target and most valued by FNM's management in addition to being heard and taken into account by the Federal Government, and served to guide the execution of the measures necessary for tariffs, the revaluation of FNM's assets, the assumption of liabilities, the sharpened focus of capital expenditure and the establishment of performance contracts setting specific goals and commitments, are concrete results of the advice provided by the Bank through the supervision missions. In short, with the loan under review and those that preceded it, the Bank not only contributed to the railways' development and modernization but also furnished the benefit  19 of valuable opinions that significantly assisted FNM's planning, execution, evaluation and control work. The main lesson learned from the execution of this project relates to the fact that the financial targets set for FNM were overoptimistic, since their achievement was not solely dependent on actions taken by FNM which, since it serves a secondary demand, had its earnings severely impacted by the economic crisis Mexico suffered in the 1980s. For the future, every effort should be made to set financial targets that are consistent with FNM's actual circumstances and those prevailina in the environment in which it operates, so as to ensure to the fullest extent possible that they are attainable. II. Self-Evaluation of FNM's Performance and Lessons Learrned for the Future Despite the downturn in economic activity in Mexico in the 1980s, which impacted most Mexican businesses and chiefly public-sector enterprises such as FNM, the railways' performance during the execution of the Railway Sector Project under review is considered acceptable, since almost the full amount of the loan was utilized. However, its effectiveness had to be extended and the originally agreed use categories had to be modified to bring them into line with the new operating conditions created by the absorption in 1987 of the other Mexican railway companies which up till then had been under separate management, namely the Chihuahua-Pacific Railway, the Pacific Railway, the Sonora-Baja California Railway, and the Sleeping Car Company (Empresa de Servicios de Coches Dormitorio). In addition, 1989 saw the transfer of the former Direcci6n General de Construcci6n de Vias Ferreas (DGVF) from the Secretariat of Communications and Transport (SCT) to FNM. DGVF was originally assigned to be executing agency for 50% of the Railway Sector Project, equivalent to USS150 million of Loan 2575-ME, which commitment was then also transferred to FNM. The objectives of the Railway Sector Project--continuous improvement of the railways' operation, strengthening of their marketing practices and improvement of railway 'panninc methods--were to a large extent achieved, notwithstanding the inevitable consmraints on investment resources as a result of the country's economic problems. The Railway Sector Program contained in the Staff Appraisal Report on Loan 2575- NE envisaged investment of US$2,354.5 million in the period 1985-88, whereas the actual av;cunt invested in that period was only 27.4% of that target, at USS644.8 million, on the basis of annual sector expenditure in Mexican pesos at the average dollar exchange rate for each year. In the period 1989-93 the improvement in the Mexican economy meant that more funds were available for railway investment purposes each year. Whereas between 1985 and 1988 average annual railway investment amounted to USS161.2 million, between 1989 and 1993 this average rose by 86.8% to US$30 1.1 million.  20 As regards the commitments FNM assumed vis-a-vis the World Bank, almost all were carried out during the loan effectiveness period except for the financial targets set, which FNM was unable to achieve because the exogenous macroeconomics variables that made these targets impossible to meet were outside of its control. In addition, the funds set aside for "Technical Assistance" were not utilized for that purpose, because following the closing of the locomotive and rolling-stock shops and the contracting out of maintenance and repair of this equipment FNM considered the technical assistance no longer necessary. A part of these funds was used instead, with World Bank authorization, in the preparation of an environmental plan and ecological audits necessary for FNM. Besides the physical progress achieved in infrastructure and equipment modernization, telecommunication systems and the handling of environmental problems, the World Bank financing and advisory services also contributed to the preparation, implementation and consolidation of the FNM Structural Change Program aimed at producing an integral solution to the problems built up over preceding years in the Mexican railway system. Formal implementation of this program was begun as of 1992, the main results posted as of the end of 1993 being: - Elimination of 22,450 positions. - 46% improvement in staff productivity compared with 1991, in terms of traffic units per worker. - Gradual replacement of the train management system based on train orders by the Direct Traffic Control (Control Director de Trafico - CDT) system and the implementation of an Integral Transport Control System (Sistema Integral de Control de Transportes - SICOTRA). - The sustained increase in freight carried in 1992 and 1993, compared with 1991, with a favorable shift toward specialized high economic density traffic. - Discontinuation of express and less-than-carload services and of other unproductive services, chiefly passenger and mixed trains. - Introduction of private participation, which in addition to contributing rolling stock now constructs and operates freight terminals and will provide motive- power and rolling-stock repair and maintenance serves on a contract basis and also perform part of the track rehabilitation work and all of the mechanized maintenance. - Establishment of an active marketing policy which makes it possible to capture, by means of agreements with primary users, around 90% of the annual freight carried; and - Federal Government authorization to deregulate rail service tariffs, which from now on will bet set by the railways in light of market conditions and the cost- price ratio.  21 Throughout the planning, preparation and implementation phases of the above program, due account was taken of the timely observations made by the frequent World Bank supervision missions. The main lesson learned and considered useful for future projects is connected with planning of the operation of Mexico's railways, to ensure that in the future conservative development scenarios are considered so that no unrealistic general goals are set that subsequently lead to failures to meet financial targets and commitments. III. Proiect Relationships between the World Ba:nk and Ferrocarriles Nacionales de Mlexico The relationships established between the World Bank and FNM in the course of Loan 2575-ME and previous operations were amicable, respectful and totally professional based on philosophy of active collaboration in order to move ahead with and appropriately conclude both the negotiations and the execution of the project within the time frame agreed upon. FNM always supported the specific work of each Bank mission, while the Bank performed its responsibilities swiftly in accordance with its established rules and procedures with a view to execution of the financing granted to FNM. The information forwarded by the Bank concerning utilization of the loan funds and the pertinent statements of account is clear and sufficient, although it would be desirable for the balance confirmations required by FNM's outside auditors to perform their audit of its financial statements after the close of the fiscal year to be made available earlier. This requirement will have to be included in the subsequent information obligations for subsequent years and any future IBRD loans to FNM. IV. Evaluation of the Performance of the Banco Nacional de Obras v Servicios Publicos. S.N.C. (BANOBRAS) Banobras was the institution designated by the Mexican Government to act as fin---zal agent between the World Bank and FNM during the Railway Sector Project .i-.t,rced by IBRD Loan 2575-M[E. Throughout the execution of the project BANOBRAS ,as at all times fully abreast of its progress, performing its liaison function promptly and efficiently, carrying out all the procedures for which it was responsible and establishing a quick-acting communication process. Ferrocarriles Nacionales de Mexico hereby expresses its sincere appreciation to the Federal Government, the World Bank and BANOBRAS for the support they provided to enable satisfactory completion of the Railway Sector Project funded by IBRD Loan 2575-ME.  22 NIEXICO PROJECT COMNPLETION REPORT RAILWAY SECTOR PROJECT (LOAN 2575-ME) TABLE 1: RELATED LOANS (US$ Millions) Year of Original Title Loan No. Approval Amount Disbursed Comments 1. Pacific Railway 0103 1954 61.00 61.00 2. Second Railway 0825 1972 78.00 75.00 Project 3. Las Truchas Steel 0934 1973 70.00 70.00 Project 4. Third Railway 1232 1976 100.0 100.00 Project 5. Fourth Railway 1925-ME 1980 150.00 150.00 Project 6. Railway Sector 2575-ME 1985 300.00 295.4 Cancelled 4/6 Project  23 MEXICO PROJECT CONIPLETION REPORT RAILWAY SECTOR PROJECT (LOAN 2575-NME) TABLE 2: PROJECT TIME TABLE Steps in Project Cycle Date Planned Date Actual Identification Sept. 1983 Sept. 1983 Preparation Jan. 1984 Jan. 1984 Appraisal Oct. 19S4 Oct. 1984 Negotiations March 1984 April 1985 Board Approval May 19S5 June 1985 Signing July 19S5 Effectiveness Dec. 19S5 Feb. 1986 Project Completion Dec. 31, 1991 Dec. 31, 1993 Loan Closing June 30, 1992 June 15, 1994 Date: January, 1995 Source: IBRD Project Files  24 MEXICO PROJECT COMPLETION REPORT RAILWVAY SECTOR PROJECT (LOAN 2575-NME) TABLE 3: COMIPARISON BETWEEN APPRAISAL ESTNITES & ACTUAL COSTS (US$ MILLIONS) Appraisal Estimates Actual Costs Dcscription Local Foreign Total Local Forcign Total A. lfrastnicture & Telecoinmuniications New Rail Works 78.5 122.9 201.4 285.0 135.2 420.2 Second lHandrail 24.2 0.0 24.2 85.2 0.0 85.2 Track Machinery 67.4 9.2 76.6 36.1 73.2 109.3 Bridges 24.1 0.0 24.1 90.5 0.0 40.5 Other Works' 45.8 0.0 4-5.8 134.9 0.0 134.9 Telecommiuinications2 92.1 58.6 150.7 37.2 23.1 60.3 Sub-total 332.1 190.7 522.8 618.9 231.6 850.4 B. New liifrastructure Works (SCT) 626.3 402.5 1028.8 329.9 78.2 408.1 C. Motive Power/lZolling Stock New Locomotives 00.0 47.2 47.2 9.6 44.9 54.5 Recoistiuctioni/Locos 0.0 0.0 0.0 80.9 180.7 261.5 Major Repairs/Locos 45.5 106.1 1;1.6 68.2 193.0 261.2 New Wagons 335.4 37.3 372.7 51.0 2.2 53.2 Wagons Reihabilitationi 37.0 0.0 37.0 27.7 0.0 27.7 NewPassengerCars 105.6 15.8 121.4 51.9 0.0 51.9 Passeiiger Rehab, 0.0 0.0 0.0 17.2 2.7 19.9 Worshop Machiniery 12.2 17.6 29.9 17.4 4.8 22.2 Sub-total 535.8 224.0 759.8 323.8 428.3 752.1 D. Otiher Enginccrinig 13.6 0.0 13.6 64.5 0.0 64.5 Studies & Project 4.1 0.7 4.8 29.2 0.0 29.2 Planning Traininig 2.1 0.3 2.4 9.9 0.0 9.9 Administration 21.3 1.1 22.4 8.8 0.0 8.8 Computcr Systems 0.0 0.0 0.0 29.4 0.0 24.4 Sub-total 41.1 2.1 43.2 136.4 0.0 136.4 TOTAL INVESTMENTS 1535.3 819.3 2354.6 1409.4 738.0 2147.4 ............................................................................ .............................................................................................................. ....................................... Source: SAR and FNNI Data. / Othcr works comprised minor yard works. workshops, stores. stations. etc. / Details of NcxJInfrastructure works and Telecommunications works arc given in Table 4.  25 MIEXICO PROJECT COMPLETION REPORT RAILWAY SECTOR PROJECT (LOAN 2575-ME) TABLE 4: CONMPARISON BETWEEN APPRAISAL ESTIMATES & ACTUAL COSTS DETAILS - TELECOMMUNICATIONS AND NEW INFRASTRUCTURE WORKS (USS MILLIONS) Appraisal Estinmats Actual Costs Locaul Foreign Total l.ocal Forelgn Total I. Tcleconmnmunications WVork Rladios 39.4 22,2 61,6 21,8 18.1 39.9 C1'C 46.4 36,4 82,8 4,2 5,0 9,2 Crossiiigs 0.0 0,0 0.0 4,1 0.0 4.1 Elcetricity 6.3 0,0 6.3 7,2 0,0 7,2 Total Telcconmiunications 92.1 58.6 150.7 37,2 23,1 60,3 I. New Inirrastructure WVorks Micxico-Quirclaro 125,0 105,5 230.5 233.0 78,2 311,3 Dobic Via Queritaro-Irapuauto 67,2 36,2 103,4 8,0 0,0 8.0 Pecnjao-La Naranja 6.0 4J2 10,1 0.0 0.0 0,0 Los Rcycs-Paso del Mlacho 21.5 15,6 37,1 25,6 0,0 25.6 Lecheiria-Teotlluacbin 2.0 0.9 2,9 0.0 0,0 0,0 SayulaL-Cd. Guznian 0,X 0,3 IIJ 0,0 0,0 0,0 .Ll=rjndlcnto NMarrunillo 7,9 4.1 17,7 0,0 0,0 0.0 Thijornulco-El Castillo 10,1 7.6 17.7 0,0 0,0 0.0 Ajuimo-Caltzintzin 15,6 6.7 22,2 25,3 0,0 25,3 Corr6muliro-L Cirdenas (Rcf.1) 0.0 0,0 0.0 6,2 0,0 6,2 Tierra Bllanica-Villa Azucta 27,7 13,7 41,4 2.9 0,0 2,9 Coutzacooalcos-SWlina Cruz 2.9 3.0 6.0 2.8 0,0 2,8 .JlatipIlln-CuicIlapa 10.9 113 22,2 0,0 0.0 6,2 Salinas-Laguna Scca 6,6 10.3 1f,9 6,2 0,0 6C2 El Castillo-Encarnaci6n 37,2 28,1 65.3 12.0 0,0 12,0 Loreto-Tauro 5,6 2.4 8.0 0.0 0,0 0,0 Ramiios Arizpc-Villa G:arcia 26.7 20,1 4-G6. 0.0 0,0 0.( LIbraniiicnto lonterrcY 12,2 8.5 201.7 0., 0,0 0,1 cidxico-Tanipico 13.4 5.8 19.2 0,0 040 0,0 Veracruz-Tamplco 13,4 5,8 19.2 0,0 0Q0 0.0 Cuadala:jara-Mlazatlin 12.4 7.9 20.3 0,0 0,0 0.0 Chontalpa-Dos Bocos 10.7 4,G6 153 0,0 0,0 0,0 Libraniicnto Tchuacan 0,0 0,0 0,0 6,9 0.0 6.9 Patio de Nlontcrrey 51.1 55.3 106,4 0,0 0,0 0.0 Patio dc Irapuato 14,6 15.5 30,1 0.0 0.0 0.0 Patio de Coatzacoalcos 15.3 14.4 29,7 0,0 0.0 0.0 Maquinaria de Via 0.0 11.2 11,2 0.0 0,0 0.0 Pucntcs 22.9 0.0 22.9 0,0 0.0 0.0 1ngcnicria y Supervision 53.3 1,6 54.9 0,0 0,0 0,0 Estudlos 28.7 0,0 0.0 0 Total (Ncw Inrrastructurc) 626.3 402,5 1.028.8 329,9 78R2 408x2  26 MEXICO PROJECT COMPLETION REPORT RAELWAY SECTOR PROJECT (LOAN 2575-ME) TABLE 5: PROJECT FINANCING DETAILS Appraisal Estimates Actual Costs Local Foreign Total Local Foreign Total NdeH Internal 1087.5 - 1087.5 - IBRD Loans - 195.0 195.0 - 341.0 341.0' Other Credits - 200.0 200.0 - 396.9 396.9 Gov't 64.0 1321.0 1385.0 1310.4 4700.8 6011.2 Funding Sub-total 1151.5 1716.0 2867.5 1310.4 5438.7 6749.1 SCT IBRD Loan - 150.0 150.0 - - - Other Credits - 74.7 74.7 - - Gov't 636.2 167.9 804.1 147.1 - 147.1 Counterpart Subtotal 636.2 392.6 1028.8 147.1 - 147.1 SCT TOTAL 1787.7 2108.6 3896.32 1457.5 5439.7 6896.2' Source: SAR and FNNI data. / Of this amount of $3896.3 million, $ 1541.8 million was for dcbt-scnricc (NdcM) and S2354.5 million for the proposcd invcstnicnts - $1325.7 million for NdcM and 1028.8 for SCT works. / of this amount of $6896.2 millioni, S4747.8 million was for debt scrvicc and $2147.4 for thc actual invcstmnicis. 3/ The SCT program of invesinients was mcrgcd with thc Nde M's program wvhen thc construction wing of the SCT (DGVF) was taken over by the NdeM in 1988.  27 MEXICO PROJECT COiMIPLETION REPORT RAELWAY SECTOR PROJECT (LOAN 2575-ME) TABLE 6: LOAN DISBURSEMENTS Appraisal Actual as FY 1986 Estimatc Actual % of Estimate 1986 Dec. 31, 1985 0.0 0.0 - June30, 1986 20.0 21.11 105.6 1987 Dcc. 31, 1986 36.0 44.35 123.2 June 30, 1987 69.0 67.59 98.0 1988 Dec. 31,1987 111.0 67.95 61.2 June 30, 1988 150.0 100.32 66.9 1989 Dec. 31, 1988 186.0 118.79 63.9 Junc3O 1989 216.0 137.A2 63.5 1990 DCc. 30, 1989 240.0 165.41 68.9 Junc 30, 1990 258.0 175.58 68.1 1991 DcC. 30, 1990 273.0 206.27 75.6 June 30, 1991 282.0 237.51 84.2 1992 Dec. 31, 1991 291.0 268.79 92.4 IJUIe 30. 1992 300.0 284.40 94.8 1993 Dcc. 31, 1992 294.40 June 30, 1993 294.40 1994 Dec. 30, 1993 295.0 JUIC 30, 1994 295.40 Date of Disbursements May 31, 1994. Date: January 1995 Source: Supervision Reports and IBRD Records of Loan Disbursements.  2S NIEXICO PROJECT COMPLETION REPORT RAILWAY SECTOR PROJECT (LOAN 2575-ME) TABLE 7: USE OF BANK RESOURCES (STAFF INPUTS) Scope of Project Cycle Planned Actual (Staff-weeks) Through Appraisal NA 119.5 Appraisal-through Board Approval NA 34.3 Board Approval through Effectiveness NA 6.8 Supervision 174.2 334.8 Source: IBRD Records.  29 MEXICO PROJECT COMIPLETION REPORT RAILWAY SECTOR PROJECT (LOAN 2575-ME) T.-OLE S: ,SS2OY DAT A Number or Days in Stage of Pro_c__ Cycle NlonhfYear Per ons Field Specaisstitiin Rating Conmnents 1. Tlrotizh Appraisal Project Idenitificationt September 1 9S3 4 1 1 Eco ,Etg.. Fin.. FirtL Project Brier. CoIL. Opt. October 1983 Projecta,tission January 1984 5 13 Eco. E.ig, Project Briefiig 21 - Proc. Fin, Con Febnuary 1984 Preparation Mis,on June 19S4 6 10 Eco. Eng. (2), Project Brisuig Ui. Fua. (2). Con.. August 19S.1 Apprdisal October 1984 6 20 Eco(2). Fit (21. Issues Paper. Eng (2)Nonembcr 1981t tI. Arnwl Tliroujli Bmuk Asronal Post Appra.al Mission January 1985 4 7 Eco.Fin..Eng (2) Negotitlions Apnl 15-19.1995 Ilm Board Approyal Thro,Wl1 Loun EITcctivn,,,s Follow-up/Supervision I.lay-jwer 1985 3 7 Eco. rEig Fin. Lowu. Elfecticeness February 8, 1986 Loan Sipinug July16. 2195 Supervoioci October 1985 2 3 En. (2MU Earcquae Dimmage Rev. ['v. S.mInensioti Supervuloo April 1986 3 10 Eco.Eng.Fu% Supervi.ion Aug,st 1986 3 5 Eco t2).Eng. 2 Supervufon December 1986 3 12 Eao (3) 2 Supervuioli lanuary 19S7 3 12 Eco(3) 2 Review of investment Vist to Brel/U3; June 19S7 1 3 Eco Review ofPasseiger Service Supervision October 1987 2 12 Ero .Eig. 2 Sup,crvison June 1988 3 7 Eco .FwL.Enp. 2 Snipervuion October 198X I 7 Eng Rcvynw of I lucarn Gilbert d.nui.gc S,epenrlon Jun. -Fel>. 299 3 1. Eco-.1!g.Fin 2 Supct,woil July 1989 3 10 Eco.Eng,.Fun. 2 Fincuiial target Supcnuwoni January 1991) 3 11 Eco .Eng.Fui 2 Supervision AigrLt 199) 3 7 Eco .Eing(2) 2 Sriper,-ison Jaiiuiary 1991 .t 9 Eco .Fui .Eng t1. 2 Superviuon Mwy 1991 2 7 f3co Fin 2 Supervison August 1991 4 10 Eco .Fan Eng : 2 Supcnu,oti Noreniber 1991 J 10 Eco .Fun Eng(21 2 Stipcnmwon May 2992 3 20 Eco.Ftn Enig 2 Loasn closing extlended to liate I Supeiu-on October 1992 2 10 Elig t2) 2 -Camnii E.tnrctural Propan- SupervuioivProject Febnuay 1993 5 3 Eco Fin .Eng.t2). 2 Instructions iyveni En, for PCR prepartion Loazi ClosuJ June I S. t 993 Sri nm.uX StaftDat, Through AppraL-I 289 Appraial to Board 28 Board Appro,alt/ETcctjvene.s 6 Supervision 338 Supervuion Total 334  30 MIEXICO PROJECT COMPLETION REPORT RAILWAYS REHABILITATION PROJECT (LOAN 2575-ME) TABLE 9: COMPLIANCE WITH LOAN COVENANTS Art No. Coventant Statuis Loan AZreement 2.04 Closing Date June 30, 1994. Extended to June 15, 1994. 3.01 Borrower to have Special Complied with. Account annually audited with annual audit and monthly statements furnished to the Bank. Guarantee A2reements 3.05 Government to prepare, by Complied with. November 30th each year, updated version nof SCT Rail Investment Program for following four years. 3.06 Any investment in SCT program Complied with. to have at least 12% rate of return. 3.08 Seminannual exchange of views. Complied wvith. 4.01(d) Annual furnishing of verification Complied with. of SCT project accounts. 4.02 Government to take all measures Complied with until required to enable FNM to meet 1987. Since then obligations under Loan financial targets not Agreements. met. 4.03 Government compensation to Not separately FNM for passenger services identified since 1987. losses.  31 MyIEXICO PROJECT COMPLETION REPORT RAILWAYS REHABILITATION PROJECT (LOAN 2575-ME) TABLE 9: COMPLfANCE WITH LOAN COVENANTS (Cont.) Project A2reement FNM to meet operational Most targets met, except and investment targets in locomotive availability schedule to Project which improved towards Agreement. conclusion of project- 2.04 Semiannual exchange of Complied with. views. 2.05 FNM to prepare, by Complied with. November 30 each year, updated version of Investment program for following four years. 2.06 Any investment in FNM to Complied with. have at least 12% rate of return. 3.02(b) FNM to allocate sufficient Track rehab. almost as funds for locomotive and programmed. Scrappping track maintenance and scrap and Rehabilitation of 218 locomotives by Locomotives done as 12/3 l/S3. programmed. . -'a' FNiM to increase tariffs Not complied with. gradually to meet long-term variable costs for passengers and freights by January 1, 1988. 4 3(a) FNM financial covenants. Not complied with. 2n 4.04(a)  32 MIEXICO PROJECT COMIPLETION REPORT RAILWAYS REHABILITATION PROJECT (LOAN 2575-ME) TABLE 9: COMPLIANCE WITH LOAN COVENANTS (Cont.) Actions to be taken by FNM 1. Furnish to the Bank an November 30, 1986. Complied with. assessment of the cost of mainlihe passenger services by lines and types of services. 2. Establishment of an September 1987 Complied with. accounting mechanism to monitor FNM workshop costs. 3. Furnish to the Bank an March 31, 1987. Complied with. assessment of the costs of transportation of types of products agreed with the Bank and back- haul services. 4. Furnish to the Bank a September 30, 1986. Commercial Dept. report on the reorganized in 1992. organization and staffing of its commercial departments, including recommendations for its reorganization as applicable. 5. Development of a December 31, 1986. New marketing strategy marketing stra;egy for developed January 1992. FNM and exchange of views with the Bank on such strategy.  lMEXICO PROJECT COM'IPLETION REPORT RAILWAYS REHABILITATION PROJECT (LOAN 2575-ME) TABLE 9: COMPLIANCE WITH LOAN COVENANTS (Co nt.) 6. Implementation of the April-30, 1987. Strategy implemented marketing strategy in 5. February 1992. Above. 7. Installation of an June 30, 1986. Complied with. operational control system for wagons and locomotives. 8. Exchange of views with December'3 1, 1986. Complied with. the Bank on the impact and future application of the control system referred to in 7. 9. Installation of a Train June 30, 1987. Simulator purchased. Performance computer model and training in its operation. 10. Furnish to the Bank a September 30, 1987 Complied with. master plan for yard development which shall have been revievwed by the Guaran cr .; .n.cm 7'-e G_.aran or January 1, 19S6 and each Complied with. and the Ba.k ;:f the year thereafter. productivity of newly mechanized units and for maintenance of rail tracks.  34 INIEXICO PROJECT COMIPLETION REPORT RAILWAYS REHABU[ITATION PROJECT (LOAN 2575-ME) TABLE 9: COMPLIANCE WITH LOAN COVENANTS (Coit.) 12. Furnish to the Bank an December 31, 1987. Complied: Procurement of assessment of the new passenger coaches was advisability of utilizing drastically reduced. improved designs for passenger coaches. 13. Establishment of a December 31, 1985. See above. system for monitoring the cost of passenger coaches to be acquired under the project. 14. Establishment of an December 31, 1987. Complied with. accounting system that will enable FNM to produce costing, budgeting and other management information through electronic data processing. Source: Supervision Reports and Project Files.  - 35 - SITS]CO PROJECT COSIPLETION REPORT RAILWAY S REILABILITATION PROJECT (LOAN '5'!V-IE) TABLE 10: COSIPLIA.NCE W%lTlI OPERATIONAL & IN.VFSTNILNT TARGETS 1985 1986 1987 19K9 1989 1990 1991 1991 1998 Target Actual T-rCgn Aa. at TargeL Actual Tarcel AdoAt Actual Actual Actual Actual Actual 1. Operational Targets a) AverSoe r. pcrlo.vo vn 96.000 102.400 97,000 99,700 9S.000 1 1to,00 100000 S1,700 84.080 101.500 108.600 112,200 100,4a loceto o va Onse nrvcre/ynat. b) Average or Iovoreotb,vee in rie(9) 71 62 7_ 62 77 62 s0 60 68 71 61 72 74 c) Ten-Lea pe,r lSrt0I coo per day. 1.750 I 760 10800 I. 754 .6950 12741 1.900 I 660 1 610 1.57) 1.469 1.54 2 1.5v' d) Averge torn-acoood bme of rcighlt con (dope) 17 109 16 1 16 1 7 IS 2 20 05 25 26 o) Avenge of fic,ghI ca in *ervicea (tna) 95 97 95 91 95 92 95 90 90 90 90 90 95 f) Avenge not load per fic,ght car (to.-) 55 56 55 S. 55 57 55 5S S_ 5S 57 59 54 g) Noanbtr of oenigr car en L.n per dJy 1.500 4.216 3.500 3.327, .500 5.001 1.500 7.275 8218 7.946 8,168 8,781 9.::5 b) Predoatcv,ty r fflt ir (tmlk co su per 675.000 644.134 700.000 572.82 7'0.1000 566.952 750.000 57 5,965 51 0.01o4 501,297 478.583 665.090 69S.601 2. le.sc.ment Targeu a) Trak re,h.ILaton wtLh n Md.rala(kbtslyecr) 340 169 550 417 370 717 585 620 517 399 346 250 IOn b) Track fnhabdttacon willh re-o-nrej racl ( e/yearl 260 135 215 175 210 146 200 360 214 284 273 13 5 121 mw tac-nonce oreo-lw-uYtuck ( tyelr) 1,500 1.122 2.500 1,44J 2.901 0.461 5000 5.019 4.8't0 5.520 6,190 4,415 A. II  36 MIEXICO PROJECT COMPLETION REPORT RAILWAYS REEHABILITATION PROJECT (LOAN 2575-NME) TABLE 11: ECONONMIC RE-EVALUATION Sub-proj ect IRR 1. Rehabilitation with New Rail M6xico-Ciudad Juarez 14.9% M6xico-Nuevo Laredo 25.1% C6rdoba-Tres Valles 16.2% Chicalote-Tampico 12.1% G6mez Palacio-Torre6n 14.3% Chihuahua-Topolobampo 12.7% Cd. Frontera-Pared6n 15.9% Mexico-Veracruz (linea S) 16.3% Guadalajara-Hermosillo 15.8% Oriental-Veracruz (linea V) 15.2% Overall (Track Rehabilitation New Rail) 16.7% 2. Procurement of EHy-Rail Trucks 92.7% 3. Readjustment Potrero-Paso del Macho 17.0% 4. CTC-Irapuato Guadalajara 35.9% 5. CTC-SLPotosi-Benjamin Mendez 35.4% 6. Procurement of Locomotives 41.9% 7. Rehabilitation of Locomotives 43.8% 8. Procurement of Wagons 24.1% 9. Rehabilitation of Wagons 28.0% 10. Overall, for project 21.2% Source: FNM Data Date: January 1995.  MEXICO PROJECT COMPLETION REPORT RAILWAYS REHABILITATION PROJECT (LOAN 2575-ME) TABLE 12: Ferrocarriles Nacionales de Mexico (FNMi: Financial Results. 1984 throuah 1993 Current Mexican pesos (thousands) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 NS N _ N$ N$ N$ N$ N$ N$ N$ N$ 1 Operating Income 116,077 191,478 346,681 848.809 1,631,859 2.002,437 2,572,633 2.866,484 2,724,990 2,875,099 1.1 Freight 102,097 168,146 306,240 734.000 1,424,186 1,766,842 2,254,499 2,542,816 2,470,765 2,679,400 1.2 Passengers 3,674 4,817 9,571 34,077 93,203 87,648 119,160 115,122 110,745 113,052 1.3 Express and mail 3,241 7,473 10,820 29,154 55,097 48,185 57,384 66,493 44,755 389 1.4 Demaurrage 4,206 7,639 10,819 24,536 46,643 76,447 107,258 105,133 53.929 48,071 1.5 Other 2,859 3,403 9,231 27,042 12,730 23,315 34,332 36,920 44,796 34,187 2.1 Operating expenses 81,357 166,583 293,701 1,162,551 2,050,965 2,317,223 3,185,625 3,834,514 4,313,728 3,836.904 2.1.1 Labor 53,604 122,454 188,170 597,515 1,100,012 1,304,598 1,738,197 2.145,312 2,693,642 1,978,225 2.1.2 Pensions 161,951 283,409 374,137 402,007 537,829 2.1.3 Materials 24,254 36,120 89,144 515,079 824,668 706,860 978,315 940,898 970,249 954,441 2.1.4 Other 3,499 8,009 16,387 49,957 126,285 143.814 185,704 374.167 247,830 366,409 2.2 Other expenses 2.2.1 Interest 0 0 0 0 0 0 0 217,279 218.221 295.798 2.2.2 Depreciation 25,004 37,430 71,260 255,807 460.893 554,198 688.126 796,422 849,130 898,056 2.2.3 Other costs 61.081 49.605 140.183 248,830 71.145 44,051 -56.856 402,574 439.923 -328,997 2.2.4 Government subsidy 13,790 38,164 54,756 169,338 99,604 142,549 77,390 674,171 1,056,402 1,215,039 3 Results 3.1 Working result 34,720 24,895 52,980 -313.742 -419,106 -314,786 -612,992 -968,030 -1,588,738 -961,805 3.2 Operating result 9,716 -12,535 -18,280 -569.549 -879,999 -868,984 -1,301,118 -1,764,452 -2,437,868 -1,859,861 3.3 Less interest 9,716 -12,535 -18,280 -569,549 -879,999 -1,030,935 -1,584,527 -2,355,868 -3,058,096 -2,693,488 3.4 Overall result -37,575 -23,976 -103,707 -649.041 -851,540 -932,437 -1,450,281 -2,084,271 -2,441,617 -1,149,452 4 Ratios 4.1 Working ratio 0.70 0.87 0.85 1.37 1.26 1.16 1.24 1.34 1.58 1.33 4.2 Operating ratio 0.72 1.07 1.05 1.67 1.54 1.43 1.51 1.62 1.89 1.65 Inflation 59% 64% 106% 159% 52% 20% 30% 19% 12% 8% _ Cumulative inflation 31.37 19.15 9.30 3.59 2.37 1.98 1.52 1.28 1.14 1.06 _ Exchange rate 167.8 256.9 611.8 1378 2273 2461 2812 3018 3090 3150  MEXICO PROJECT COMPLETION REPORT RAILWAYS REHABILITATION PROJECT (LOAN 2575-ME) TABLE 12: Ferrocarriles Nacionales de Mexico (FNMI: Financial Results. 1984 throuoh 1993 Constant 1994 Mexican pesos Constant 1993 Mexican pesos 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 N$ _ N$ N$ $ N N$ N$ N$ N$ N$ N$ 1 Operating Income 3,640,872 3.666.606 3.225.745 3,047.018 3,861,554 3,958,623 3.915.200 3,672,055 3,119,569 3,047,605 1.1 freight 3,202,376 3,219,823 2,849,456 2,634,882 3,370,126 3,492,875 3,431,043 3,257,427 2,828,532 2,840,164 1.2 !Passengers 115,239 92,241 89,055 122.328 220,551 173,272 181,345 147,475 126,781 119,835 1.3 Ex ress and mail 101,657 143,100 100.676 104,656 130,379 95,257 87,331 85,180 51,236 412 1.4 i:;emaurrage 131,925 146,279 100,667 88,078 110,374 151.128 163,232 134,679 61,738 50,955 1.5 M.ther 89,675 65,164 85,891 97,074 30,124 46,091 52,249 47,296 51,282 36,238 f, _ ept 2.551.845 3,189,893 2,732,785 4,173,275 4,853,306 4,580,924 4,848.091 4,912,132 4,938,356 4,067,118 2 1.1 ..abor 1,681,344 2,344,863 1,750,856 2,144.934 2,603,016 2,579,063 2,645.301 2,748.212 3,083,681 2,096,919 2.1.2 ,:'ensions 0 0 0 0 0 320,161 431,310 479.281 460,218 570,099 2.1.3 |.vaterials 760,751 691,661 829,454 1,849,008 1,951.455 1,397.393 1,488,863 1,205.320 1.110,741 1,011,707 Co 2T4 14 Dther 109,750 153,364 152,475 179,333 298.835 284,306 282,616 479,320 283,716 388,394 2.21 Other expenses 2.2.1 !nterest 0 0 0 0 0 0 0 278,341 249,819 313,546 2.2.2 _Depreciation 784,276 716.746 663.049 918,285 1.090,635 1,095,596 1,047,235 1,020,241 972,084 951,939 2.2.3 ';Other costs 1,915.867 949,885 1,304.354 893,239 168,354 87,085 -86,527 515,710 503,624 -348,737 2.2.4 ;..!overnment subsidy 432.537 730,801 509,485 607,882 235,698 281,806 117,777 863,634 1,209.369 1,287.941 ___ !_ esults 3.1 TWVorking result 1,089.028 476,714 492,960 -1,126,257 -991,753 -622,301 -932,891 -1,240,077 -1,818,787 -1,019,513 3.2 Operating result 304,752 -240.032 -170,089 -2,044,542 -2,082,388 -1,717,897 -1,980,126 -2,260,318 -2,790,871 -1,971.453 3.3 Less interest 304,752 -240,032 -170,089 -2,044,542 -2,082,388 -2,038.058 -2,411.436 -3,017,940 -3.500.908 -2,855,097 3.4 Overall result -1,178,578 -459,116 -964.957 -2,329,899 -2,015,044 -1,843.337 -2,207.132 -2.670,016 -2,795,163 -1,218,419 4 Ratios 4.1 VWorking ratio 0.70 0.87 0.85 1.37 1.26 1.16 1.24 1.34 1.58 1.33 4.2 O0perating ratio 0.70 1.07 1.05 1.67 1.54 1.43 1.51 1.62 1.89 1.65 Inflation 59% 64% 106% 159% 52% 20% 30% 19% 12% 8% Ckimulative inflation 3137% 1915% 930% 359% 237% 198% 152% 128% 114% 106% Exchange rate 167.80 256.90 611.80 1378.00 2273.00 2461.00 2812.00 3018.00 3090.00 3150.00  MEXICO PfROJECT COMPLETION REPORT RAILWAYS REHABILITATION PROJECT (LOAN 2575-ME) TABLE 12: Forrocarriles Nacionales de Mexico (FNM): FinancIal Results. 1984 throuaLh 1993 USS millions 19WIA tfidE 1986 1987 1988 1989 1990 1991 1992 1993 U_s_ US$ USS US$ USS US$ US$ usS US$ US$ 1Operating Income 6i'31 16 745.34 566.66 615.97 717.93 813.67 914.88 949.80 881.87 912.73 1.1 Freight (608.44 654.52 500.56 532.66 626.57 717.94 801.74 842.55 799.60 850.60 1.2 Passengers 21.90 18.75 15.64 24.73 41.00 35.61 42.38 38.15 35.84 35.89 1.3 Express and mail 19 31 29.09 17.69 21.16 24.24 19.58 20.41 22.03 14.48 0.12 1.4 Demaurrage 25.07 29.74 17.68 17,81 20.52 31.06 38.14 34.84 17.45 15.26 1.5 Other 17.04 13.25 15.09 19.62 5.60 9.47 12.21 12.23 14.50 10.85 2.1 Operating expenses 484.85 648.44 480.06 843.65 902.32 941.58 1,132.87 1,270.55 1,396.03 1,218.06 2.1.1 Labor 310.45 476.66 307.57 433.61 483.95 530.11 618.14 710.84 871.73 628.01 2.1.2 _ Pensions 0.00 0.00 0.00 0.00 0.00 65.81 100.79 123.97 130.10 170.74 2.1.3 Materials 144.54 140.60 145.71 373.79 362.81 287.22 347.91 311.76 314.00 303.00 2.1.4 Other 20,05 31.18 26.78 36.25 55.56 58.44 66.04 123.98 80.20 116.32 - 1~~~~~~~~~~~~~~~~~~~~~~~0 2.2 Other expenses 2.2.1 Interest 0.0( 0.00 0.00 0.00 0.00 0.00 0.00 71.99 70.62 93.90 2.2.2 Depreciation 149.01 145.70 116.48 185.64 202.77 225.19 244.71 263.89 274.80 285.10 2.2.3 Other costs 364.01 193.09 229.13 180.57 31.30 17.90 -20.22 133.39 142.37 -104.44 2.2.4 Government subsidy 82.10 148.56 89.50 122.89 43.82 57.92 27.52 223.38 341.88 385.73 3 Results . . _ 3.1 WorkIng result 206.91 96.91 86.60 -227.68 -184.38 -127.91 -217.99 -320.75 -514.15 -305.33 3.2 Opera!lno result 57.90 .48.79 -29.88 .413.32 -387.15 -353.10 -462.70 -584.64 -788.95 -590.43 3.3 Less interest 57.90 .48.79 -29.88 -413.32 -387.15 -418.91 -563.49 -780.61 -989.68 -855.08 34 Overall result -223.93 .93.33 -169.51 -471.00 -374.63 -378.89 -515.75 -690.61 -790.17 -364.91 A Ranos _ 4.1 1WZ4i..ing ratio 0.70 0.87 0.85 1.37 1.26 1.16 1.24 1.34 1.58 1.33 T4 2 Operating ratio 3.57 1.07 1.05 1.67 1.54 1.43 1.51 1.62 1.89 1.65 Inflation 5U% 0.638 1.058 1.592 0.517 0.197 0.299 0.188 0.119 0.08 Cumulative inflation 3137% 1915% 930% 359% 237% 198% 152% 128% 114% 106% tExchange rate 167.80 256.9 61 1.8 1378 2273 2461 2812 301 8 _3.09 o 3.15 L