Zambia - Fourth Railway Project

 Fourth railway project Report No: ; Type: Report/Evaluation Memorandum ; Country: Zambia; Region: Africa; Sector: Railways; Major Sector: Transportation; ProjectID: P003192 Zambia: Fourth Railway Project (Credit 1575-ZA) The Zambia Fourth Railway project (Credit 1575-ZA, approved in FY85) was prepared by the Africa Regional Office with Part II contributed by the Borrower. The credit for SDR 20.5 million (USS20 million equivalent) was approved on March 28, 1985. The project was supported by parallel financing from the African Development Bank and the bilateral development agencies of Belgium, Canada, Germany, and the United States, bringing, total foreign exchange support (including IDA) for the project to US$66.8 million. The project became effective in December 1985 and was to be completed by June 30, 1989. However, IDA disbursements were suspended for all projects in Zambia from March 1987 to February 1991 following Zambia's abandonment of the IMF/Bank-supported structural adjustment program. The project closed on June 30, 1994, five years behind schedule. The project was formally restructured in 1993, at which time SDR8 million of the IDA credit was canceled. A balance of SDR 4.4 million was subsequently canceled. The project was the Bank's fifth operation in Zambia's transport sector and the third supportingthe railways. Its main objective was to increase the efficiency with which the Zambian Railway (ZR) utilized its existing equipment. To this end, the project comprised: (i) investments to rehabilitate 30 kms of track; (ii) spare parts and workshop machinery for upgrading, repair and maintenance of locomotives and rolling stock; (iii) signaling and communications equipment; (iv) 170 new wagons to replace some of those to be retired; and (v) technical assistance, studies and training. Efficiency improvement targets were also agreed upon, but these did not include financial indicators. The project failed to meet its primary objective of improving the operational efficiency of ZR.The project was not supervised by IDA during the four-year suspension, although disbursements by the other agencies continued. In the end, most of the original physical investments were completed. However, ZR management continued to purchase additional locomotives and wagons and to hire additional staff in an effort to expand operating capacity, in contravention of the project's restructuring objectives and covenants. The ZR management's focus on physical capacity expansion (the purchase of 15 new locomotives and 500 additional wagons), at the expense of improved utilization of existing equipment, resulted in ZR's failure to meet the operational targets acreed during appraisal/negotiations. The liberalization of the Zambian economy in 1990, and the consequent increase in competitionfrom truckers, severely reduced the railways' customer base, traffic volume and capacity utilization. Because of this and ZR's ill- considered expansion program, the railways' financial condition has continued to deteriorate. The project's economic rate of return is negative. A 1993 project restructuring provided the framework within which ZR management established a plan that includes far reaching measures, inclusing staff retrenchment and efficiency improvements to allow ZR to become competitive with road transport for a wider range of goods. However, progress in executing this plan has been slow and bringing back traffic to the railway is proving difficult. The Operations Evaluation Department (OED) concurs with the ICR in rating the projectoutcome as unsatisfactory, its institutional development as moderate and its sustainability as uncertain. Although the Bank can take some credit for the recent changes in ZR's policy, its performance, overall, was unsatisfactory, primarily because it lent for an operation for which borrower commitment was lacking and because the supervision and donor coordination effort was weak. Lessons from this project emphasize the importance of three elements which were found lackinghere: (i) Borrower ownership of, and commitment to, the project's objectives; (ii) financial targets and a management action plan to achieve these as well as the operational efficiency targets; and (iii) adequate donor coordination. The ICR is satisfactory. Its analysis of the issues is clear and concise. It would, however, havebenefited from a more detailed review of donor coordination issues and of project accomplishments prior and during suspension of disbursements, and upon their resumption by the Bank. No audit is planned.