Mali - Railway Project

RESTRICTED Report No. P-509 FILE CPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT FOR A RAILWAY PROJECT TO THE REPUBLIC OF MALI September 15, 1966  INTERNATIONAL DEVIJOPNENT ASSOCIATION REPORT AND RECOIMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVEaOPMT CREDIT FOR A RAILIWAY PROJECT TO THE REPUBLIC OF MAIJI 1. I submit herewith the following report and recommendation on a proposed development credit in an amount in various currencies equivalent to U.S. $9.1 million to the Republic of Mali to finance part of the cost of a program for the rehabilitation and modernization of its Railway. PART I - HISTORICAL 2. A request from the Government to finance the proposed project has been under discussion between the Government, the R6gie du Chemin de Fer du Nvlali (Regie) and the Association since early 19614. During the same period parallel discussions were held with the Government of Senegal and its R6gie des Chemins de Fer on a complementary railway rehabilitation and modernization project in Senegal for which financing by the Association had also been requested. In the surmer and fall of 1964 consultants reviewed both the Mali and Senegal projects for the Association, and in October/November 1964 an IDA mission ap- praised the two projects. In June 1965, a pre-negotiation mission to both countries resulted in modifications in both projects which were appraised in their final form in the spring of 1966. 3. Formal negotiations took place in Washington in June/July 1966 when the proposed credit for the Senegal project was also negotiated. Because of the interdependence of the two projects, the negotiations were in part held jointly with the Mali and Senegal Delegations. The Mali Delegation was led by His Excellency Louis Negre, Governor of the Banque de la R6publique du Mali; the R6gie was represented by its Director, Mr. T. Traore. 4. Mali has not yet received any loans or credits. The Mali Railway, however, was a beneficiary of the 1954 Bank loan of $7.5 million to complete the dieselization of the former French West African Railways, of which the Mali Railway at that time was a part. The project was successfully carried out and the loan has been repaid. 5. The Bank and the Association have no further projects under immedi- ate consideration, although it is hoped that the Permanent Mission in Western Africa will be able to help in preparing agricultural projects. At the sug- gestion of the Bank, the Government has requested technical assistance from UNDP for a study of the transport sector (excluding the Railway), for which the Bank is expected to act as executing agency.  - 2 - PART II - DESCRIPTION OF THE PROPOSED CREDIT 6. Borrower: Republic of' Mali. Beneficiary: R6gie du Chemin de Fer du Mlali. Amount: $9.1 million equivalent. Purpose: To meet part of the cost of rehabilitating and modernizing the Mali Railway. Amortization: 50 years, by semi-annual payments beginning January 1, 1977 and ending July 1, 2016. Payments to and including the installment payable July 1, 1986 to be 1/2 of 1% of principal amount and each installment there- after to be 1-1/2% of the principal amount. Service Charge: 3/4 of 1% of the principal amount of the credit disbursed and outstanding. Relending Terms: The Borrower will relend the proceeds of the credit to the R6gie at 6% interest, repayable in 30 years, including three years of grace. PART III - THE PROJECT 7. A report "Appraisal of the Mali Railway Project, Republic of Mali" (TO-543a) is attached. 8. The project includes the improvement of parts of the Kayes-Senegal border and Bamako-Koulikoro lines, the purchase of locomotives, rolling stock and equipment, the construction of a workshop, the renewal of telephone lines along part of the track and the provision of consulting services. 9. Total project costs, including consulting services and contingency reserves, are estimated at $11.1 million. Their foreign exchange component is $9.4 million. Of this amount, $0.1 million has been covered by a grant from the French Fonds d'Aide et de Coop6ration (FAC); $0.2 million are not eligible for financing by the Association because they represent expenditures incurred in 1964. The proposed credit would meet the remaining foreign ex- change portion in the amount of $9.1 million, equal to 82% of the total proj- ect cost. The R6gie would cover the local currency expenditures for the project out of its own resources. Taking into account the fact that the As- sociation has had the project under active consideration since 1964, it is proposed that the R6gie would be reimbursed out of the proceeds of the pro- posed credit for eligible project expenditures incurred after January 1, 1965. The amount for which reimbursement could be claimed is about $0.8 million.  - 3 - 10. The main categories included in the project are: track improvement $2.4 million (21%), locomotives and rolling stock $4.3 million (391%), work- shop construction and spare parts $2.8 million (26%), renewal of telephone lines $0.7 million (6%), consulting services $0.1 million (1%) and contin- gencies $0.8 million (7%). 11. The project items to be financed out of the proposed credit will in general be procured after international competitive bidding. An excep- tion is, however, proposed for the locomotives, certain rolling stock and spare parts in an amount of $3.5 million, wihere the overriding need for standardization argues in favor of negotiated contracts. Contracts for domestically procured materials will be awarded to the extent practicable after local competitive bidding. 12. Some of the above items proposed to be exempted from the Associa- tion's normal procurement procedures have already been ordered and partly delivered ($1.2 million). Due to the R6gie's lack of funds, financing has been sought and obtained through suppliers' credits. Following the Associa- tion's recommendation, the R6gie is negotiating with the suppliers concerned to make cash payment of the amounts outstanding and thereby avoid certain charges. The R6gie would be reimbursed out of the proposed credit for pay- ments already made under these credits and for the balance to be paid off in cash. 13. The project also provides for the services of the followring con- sultants and technicians; a) consultants to carry out a detailed traffic cost study, b) one consultant on railway management, c) one or two con- sultants to advise on railway workshop design and equipment, and d) eight technicians to strengthen the R6gie's staff. An essential part of the duties of all of these consultants and technicians will be assisting the Regie in training local staff. 14. Given the technical and financial interdependence of the Mali and Senegal railway systems, close and continued cooperation between the two countries and their Regies is vital for the successful carrying out of the project. A Convention, signed in 1963 between the R6gie and the R6gie des Chemins de Fer du S6n6gal, provides a satisfactory basis for such coopera- tion. In addition, the Government of Mali and the Regie have re-confirmed to the Association that they will take all reasonable action to facilitate railway operations between the two countries. The Association has obtained an identical undertaking from the Government of Senegal and the Regie des Chemins de Fer du S6n6gal in connection with a proposed railway credit for Senegal. Finally, the Mali and Senegal Governments have agreed to modify the provisions in the above-mentioned Convention presently calling for equal ton/km rates and equal passenger/km fares in both territories for interna- tional traffic. The amendment allows either railway to introduce a different tariff from the other in case changes in costs were to warrant it. 15. During the past several years, the Mali Railwiay for its normal operations depended heavily on Senegal locomotives, rolling stock and re- pair facilities wihich Senegal made available against payment. The unfa- vorable financial position of the Mali Railway and the country's shortage of foreign exchange, however, prevented Mali from settling the accounts  - 4 - regularly. This led to the accumulation of a substantial debt vis-a-vis the Senegal Railways. An agreement now concluded between Mali and Senegal provides for a satisfactory settlement of these arrears. As to the future, the implementation of the project will provide the Mali Railway with equip- ment of its own sufficient to reduce greatly the need to utilize Senegal's facilities except for major overhauls of locomotives. Payments -to the Senegal R6gie would consequently be reduced to a manageable level. 16. The Government and the Regie have also agreed to introduce a series of internal measures aimed at correcting the Regie's unfavorable financial position. Among them is the gradual reduction over the next few years of the total amount of remuneration paid to railwjay personnel. As a result of these measures and the expected growth in traffic, the Regie should start showing profits in the near future. The rates of return on the R6gie's in- vestments are expected to reach 4% in 1968/69, 5% in 1970/71, and not less than 6% thereafter. 17. The project would be completed by mid-1969. It is technically, financially and economically sound and would, because of the Railway's crucial role in the country's transportation system, make a major contribu- tion to Mali's overall economic development. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 18. A draft Development Credit Agreement between the Republic of Mali and the Association, a draft Project Agreement between the Association and the R6gie du Chemin de Fer du Mali, a Supplementary Letter on tariffs ap- plicable to international traffic and the Report of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Associa- tion are being distributed to the Executive Directors separately. 19. In view of the complementary nature of the Mali and Senegal railway systems and of the interdependence of the proposed Mali and Senegal projects, special provisions have been inserted in the credit documents. In this con- nection, particular attention is drawn to paragraphs (b) and (c) of Section 5.02 of the draft Development Credit Agreement, which enable the Association to suspend disbursements and, under certain circumstances, to premature the credit, if (i) certain agreements concluded between Mali and Senegal which provide the basis for the operation of the two railway systems have been modified or terminated so as to affect adversely the ability of the Borrower or the R6gie to carry out their obligations (paragraph (b)), or (ii) inter- national traffic has been substantially interrupted for other than technical reasons, unless these reasons are manifestly beyond the control of the Republic of Mali (paragraph (c)). Section 5.02 (d) also entitles the As- sociation to suspend disbursements if disbursements have been suspended under the Senegal credit and if as a consequence, it will be improbable that the purpose of the project will be achieved. It is also contemplated that the Mali and Senegal Credit Agreements will become effective concurrently (Section 6.01 (a)).  20. The draft Development Credit Agreement provides that the proceeds of the credit will be relent by the Borrower to the Regie, and to simplify the administrative procedures, withdrawals from the Credit Account will be made directly by the R6gie (Section 7.04). The conclusion of arrangements satisfactory to the Association with respect to the employment of the con- sultants and technicians referred to in paragraph 13 above has been made an additional condition of effectiveness of the Development Credit Agreement (Section 6.01 (b)). PART V - TH3 ECONOMY 21. A report on "The Economy of Mali" (AF-50) was circulated to the Executive Directors on September U., 1966. It noted that the limited re- sources and the geographical isolation of M4ali, a largely desert and land- locked country with a population of -.5 million and an average annual income below $70, provides one of the most difficult natural settings for economic development in Africa. 22. After Mali became independent in 1960, the Government launched an ambitious program of economic development and institutional reforms designed to establish a centrally-planned economy. At the same time, for political and economic reasons, Mali severed most of the linlks which it had w-Jith its West African neighbors and France, thus adding political and economic isola- tion to geographical isolation. In particular, as a result of the break-up of the short-lived Federation with Senegal in 1960, Mali was deprived for about three years of the use of the railway to and from the ocean. Under these emergency conditions Mali developed and has since tried to maintain alternative transport systems which have proved very costly. In 1962 Mlali withdrew-from the West African Mlonetary Union thus foregoing the possibility of quasi-autcmatic foreign exchange assistance available to member countries and, at the same time, was no longer subject to the monetary restraints ac- cepted by the members of the Union. 23. While these steps produced little economic growxth, the Government undertook large current and capital expenditures, notably on rapidly expand- ing public services and on the establishment of a number of public enterprises many of which proved unprofitable. The need to subsidize the heavy operating losses of state enterprises was largely responsible for sizeable budget def- icits. In turn it brought excessive recourse to domestic credit, together with substantial short and medium-term external borrowing which led to an acute financial crisis. In this situation, the Association considered that action to prevent further deterioration and to pave the way towards an im- provement of the economic and financial situation of the country, was an essential condition for its assistance. 24. In 1964 Mali, in agreement wfith the International Monetary Fund, devised a stabilization program and obtained a $9.9 million standby credit, drawJings on which were completed in April 1965. In the course of that year, in spite of substantial efforts, Mali found itself unable to meet all of its commitments to the Fund on financial policy.  - 6 - 25. In December 1965, after consulting with the Association, Mali em- barked upon another program designed to tackle more directly the basic is- sues. A number of steps have already been taken to promote production and exports, increase taxes, restrain current and investment expenditures, to reschedule external debt and avoid further borrowing on inappropriate terms and to obtain technical assistance in the management and operations of state enterprises. The Government's measures till need time to produce results and more technical assistance to be completely successful. The Association has asked the Government, and the Government has agreed, to approach the appropriate international agencies for the necessary technical assistance. 26. The proposed credit would substantially improve the situation of one of the major deficitary public enterprises. The measures taken by the Government since July 1964, and especially those taken since December 1965, supplemented by technical assistance to reorganize and improve the financial situation of the transport enterprises, should pave the way towards a general improvement of the economic and financial situation of Miali. 27. Given Mali's poverty, its inability to service debt on conventional terms even if generous rescheduling is obtained, the remedial policy measures already taken, and the evidence of the Government's continued readiness to take the difficult measures required by the present situation, I consider it appropriate to grant MIali a credit for the proposed railway project. The project itself is of high economic priority because of I4ali's acute dependence on rail access to the sea, and in addition the progressive elimination of the railway's deficit will contribute directly to improving the state of M4ali's public finances. PART VI - COMiPLIANCE WITH ARTICLES OF AGREENT 26. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 29. I recommend that the Executive Directors adopt the following resolu- tion: RESOLUTION NO, Approval of a Development Credit to the Republic of Nali in an amount equivalent to U.S. $9,100,000 RESOLVED: THAT the Association shall grant a development credit to the Republic of Mali in an amount in various currencies equivalent to nine million one  - 7 - hundred thousand United States dollars (U.S. $9,100,000), to mature on and prior to July 1, 2016, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and condi- tions set forth in the form of the Development Credit Agreement (Railway Project) betwieen the Republic of Mali and the Association and the form of the Project Agreement (Railway Project) between the Association and the Regie du Chemin de Fer du Mlali, which have been presented to this meeting. Attachment George D. Woods President September 15, 1966