Colombia - Fifth Railway Project

I-D 56/-Co F -CoPY RESTRICTED Report No. TO-652a 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF A FIFTH RAILRAOD PROJECT COLOMBIA July 11, 1968 Projects Department  CURRENCY EQUIVALENTS Currency Unit - Peso (Ps) US$ 1 = Ps 16.3 Ps I US$ 0.0613 Ps 1 million = US$ 61, 350 WEIGHTS AND MEASURES EQUIVALENTS I m 3.28 ft 1km = 0.62 mi 1 km2 0. 386 sq. mi I m ton = 2.205 lb FISCAL YEAR January 1 - December 1  CO'O0PIA APPRAISAL OF A FIFTH RAILROAD PROJECT Table of Contents Page SUMMARY 1. NTTRODUCTION 2. BACKGROURD 3 General 3 Transportation 4 Transportation Coordination 3. TEE COLOMIAN NATIONAL RAILROADS 6 Organization, Management and Staff 6 Railway Property 8 Operations 12 Traffic 12 4. THE PROGRAM AID TIE PROJECT 13 CNR's Five-Year Investment Program 1968-1972 13 Description of the Project 15 Financing of the Project 16 Execution of the Project 17 5. EARNINGS AND FINAINTCES 17 Tariffs and Revenues 17 Budgets, Accounting and Audit 19 Earnings 19 Finances 22 6. ECONOMIC JUSTIFICATION 25 Freight Traffic 25 Passenger Traffic 27 Economic Benefits 27 7. CONCLUSIONS AND RECOIllEMNDATIONS 29 This Appraisal Report is based on the findings of an appraisal mission in December 1967 consisting of lIessrs. Mackay and Regling (engineers), Bickers (economist) and Chapman (financial analyst). hessrs. Sei-Young Park and Karcher (economists) of thLe Bank also contributed to the preparation of the report.  T A B L E S 1) Traffic to and from Principal Ports (Excl. oil) 2) Composition of Motive Power and Rolling Stock 1967-1972 3) Table of Type, Age and Capacity of Freight Cars 4) Summary of Operating Statistics 5) Table of Derailments and other Accidents in 1967 6) Annual Paying Freight and Passenger Traffic 1962-1967 7) The Five Year Development Program 1968-1972 7A) The Project 8) Summary Income Accounts 1962-1967 9) Forecast Operating Results 1968-1976 10) Balance Sheets 1962-1967 11) Long Term Debt 1962-1967 12) Statement of Estimated Cash Flow 1968-1972 13) Debt Service 1968-1976 14) Estimate of Investment IJeeds - Period 1973-1976 15) CNR Forecast Summary Balance Sheets 16) Estimated Freight Traffic 17) Estimated Benefits and Costs of the Project Annexes: 1 - Traffic Density Chart 2 - Employment of Consultants 3 - Track Rehabilitation and Maintenance Program Map: Colombian National Railroads (IBRD 22h1 R)  COLOIvIBIA APPrIAISAL OF A FIFTH RLELROAD PROJECT SuIqLARY i. The Colombian National Railroads (CNR) have asked the Bank for a loan of US$18.3 million equivalernt to help finance the first three years of their new Five-Year Investment Program, 1968-1972. CNR's investments during the period are estimated at Ps 1.0 billion (US$61.9 million equiva- lent) with a foreign exchange component of US$38.7 million equivalent. ii. This would be the fifth Bank loan to CNR. The first three loans, beginning in 1952 and totalling US$46.3 million equivalent, financed the building and equipping of the Atlantic line which has given Colombia access by rail to the Atlantic Ocean. The fourtih loan of US$30.0 million equiva- lent, made in 1963, was devoted to rehabilitating the other lines and opera- ting facilities of CNR and to increasing their carrying capacity. iii. The fourth loan followed a transport survey concerned with all modes of transport in Colombia (undertaken on the initiative of the Bank). This resulted in the establishment of a CNR investment program for 1963-1972 divided into two five-year periods. The first five-year program, 1963-1967, for which Loan 343-CO helped to finance the first two years, fell behind expectations, because of inadequacies in financing and execution which the Government and CIR have since taken measures to correct. The project financed by Loan 343-CO was completed satisfactorily except for the placing in service of 200 freight cars, for which component parts were purchased under the loan. These cars will go into service by the end of this year. iv. The loan now proposed would continue the process of rehabilitating, modernizing and increasing the capacity of CNR which was the purpose of the last loan. The Project would consist of the first three years of CNR's new Five-Year Investment Program, 1968-1972. The loan would finance the foreign exchange component of priority requirements in this period (other than diesel locomotives and freight cars being obtained with suppliers credits) which are: rails and accessories; ballast cars and maintenance equipment; machinery and tools to equip workshops; components to modernize rolling stock; miscellaneous equipment and consulting services. All equipment requirements would be procured under international competitive bidding. v. The Government and CNR have been negotiating with various countries to procure rails and accessories through the barter of surplus coffee. US$6.6 million is provided under the proposed Bank loan to cover the pro- curement of the rails and accessories, with the option being given to Government and CNR to cancel all or part of funds if satisfactory barter arrangements can be concluded within the Project period. vi. The Management of CNR is keen and is becoming more experienced and efficient. Main weaknesses exist in track and rolling stock repair  - ii - and maintenance, and provision is made in the Project to correct organi- zational and staff deficiencies in these respects. Operational efficiency is improving but further improvement is being sought under the Project. vii. Since 1952, CNgRIs freight traffic has been increasing at an average rate of 4 to 5 percent per annum. The transport survey of 1961 anticipated growth of over 6 percent annually from 1963 onwards and this growth could have been achieved had CNR's capacity been equal to the task. Increases are now forecast during the period 1968-1976 at an average annual growth of about 5 percent. Passenger traffic has been declining over the last few years; reorganized, improved services are expected to hold the traffic at its present level. viii. Expectations of improved finances have not been realized. Revenues have been affected by a slower than anticipated growth in traffic and by CNR's inability, in the face of road competition, to raise tariffs to an adequate level; and operating costs have been inflated by wage awards and price increases resulting largely from currency devaluation. As a result, CNR has had to rely on external loans for foreign exchange, and on Government to provide all local currency funds for investment. Provision of Gcvernment funds proved tardy and insufficient until 1966 and 1967. ix. CNR's financial expectations have improved with the prospect of growing traffic and of economies consequent on rehabilitation and moderniza- tion, supported by tariff revisions in 1966/67 and rate increases being introduced in l968. Forecasts based on traffic projections indicate that in 1968 there should be a small net operating surplus (after depreciation) and by 1972 a financial rate of return of 3 percent on net fixed assets, improving to 6 percent by 1976. These objectives are ambitious but capable of realization provided that the momentum for change and improvement, now in evidence in Colombia and in CMR, is maintained. x. The Project is justified on economic grounds. It would ensure the continued and expanded operation of CNR which is essential to the economic needs of the country. It would provide a return of about 15 per- cent on the investment. xi. The Project is suitable for a Bank loan of US$18.3 million equivalent to the Colombian National Railroads for a term of 20 years, including 3 years of grace.  COLOMBIA APPRAISAL OF A FIFTH RAILROAD PROJECT 1. INTRODUCTION 1.01 The Colombian National Railroads (CNR) have asked the Bank for a loan of US$18.3 million equivalent to finance part of the foreign ex- change cost of CNR's new Five-Year Investment Program 1968-1972. This Program is the second half of a Ten-Year Investment Program 1963-1972 which was established in 1961/62 with the assistance of a general trans- port survey group (Parsons, Brinckerhoff, Quade & Douglas) and a team of railroad experts (Coverdale & Colpitts). CNR's overall execution of the first half of the Ten-Year Program fell short of expectations and the new Program for 1968-1972 includes a considerable amount of equipment and rehabilitation work originally planned for the period 1963-1967. This new program has the broad objectives of rehabilitating, raodernizing and expanding CNR's capacity. The Project would consist of the first three years of the Program and the proposed loan would finance priority requirements within the Project. 1.02 This report is based on the findings of a Bank mission consist- ing of Messrs. Mlackay and Regling (engineers), Bickers (economist), Chapman (financial analyst), which visited Colombia in December 1967 with further brief visits in January and April 1968, and on information provided by CNR and the Colombian Government. Messrs. Sei-Young Park and Karcher (economists) of the Bank, also contributed to the prepara- tion of the report. 1.03 The Bank has made four loans for the Railroads, the first three of which were all for the construction and equipment of the new Atlantic railroad. The first of these (68-CO), made to the Government in 1952, provided USP25 million equivalent for the foreign exchange cost of the construction of the first section from Puerto-Salgar to Gamarra (see map). The second loan (119-CO) of US$15.9 million equivalent, was made to CNR in 1955 to finance the foreign exchange cost of the comple- tion of the line from Gamarra to Fundacion, the rehabilitation of the existing Santa Marta-Fundacion line, and the procurement of locomotives and rolling stock for the line. Further locomotives and rolling stock and also shop equipment for the operation of the line were financed under the third loan (267-CO) to CNR in 1960 of US$5.-4 million equiv- alent. l.o4 The fourth and latest loan, 343-CO, for US$30 million - making a total of US$76.3 - was made to CNR in 1963 to provide funds for purchases for the whole system under the first two years of the 1963-1967 section of the Ten-Year Investment Program. This loan financed freight cars and component parts, diesel locomotives and spare parts, rails and accessories, other equipment and materials and consulting services. All items have been acquired and are satisfac- torily in service except 200 freight cars for which component parts were purchased; these cars should be completed and in use by the end of this year.  1.05 Performance in carrying out thie first half of CNR's Ten-Year Investment Program was poor. Under the last loan the Government was required to allow CNR to adjust rates and fares to cover operating expenditure (including depreciation), reserves, working capital and the purchase of equipment and betterments; and to make funds available to CNR as required for carrying out the project. Authority as necessary was given to CNR to increase rates and fares but competition from truckers made it difficult for CNR to do so, while such increases as were made were largely offset by inflation. There was lack of adequate and timely financial support to CNR for the Program from the Government from 1963 through 1965, a position which improved greatly in 1966 and 1967. In addition progress under the Program was hampered by the shortage of experienced staff and by the accumulating effect of deferred maintenance of track, locomotives and rolling stock. In the result the first half of the Ten-Year Program progressed slowly and two extensions to Loan 343-CO were required. 1.06 The further loan now proposed has been under discussion for nearly three years. The Bank insisted that no further assistance would be possible until there had been satisfactory progress in areas agreed with the Government and CNR. Progress has now been made in these areas as indicated in the next paragraph. 1.07 The principal positive results to be seen from the Bank's 15- year relationship with CNR are: i) the establishment of a centralized and unified railroad system with a common gauge (previously there were 7 systems and 2 different gauges), ii) the construction of the Atlantic line, now the main artery for railway traffic (Annex 1 and map), iii) improvements in organization and management (para 3.01), in commercial practices (para.3.02), and in statistics and accounts (para.5.11), iv) progressive reductions in the number of staff employed pari passu with increases in traffic (para.3.03), v) the beginning of reorganization of the civil and mechanical engineering departments which in turn should make possible the progressive rehabilitation of track and rolling stock (paras.3.10 and 3.21), vi) the introduction of adequate communications and operating control (para. 3.11), vii) the beginning of dieselization now to be completed (para 3.13) and viii) the achieving of an operating ratio (99 in 1966 and 115 in 1967) w