Malawi - Railways Restructuring Project

 ICRR 10865 Report Number : ICRR10865 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 08/22/2000 PROJ ID : P034489 Appraisal Actual Project Name : Malawi Railways Project Costs 29 9.3 Restructuring Project US$M ) (US$M) Country : Malawi Loan /Credit (US$M) Loan/ US$M ) 16.16 6.7 Sector (s): Railways Cofinancing 11.98 2.2 US$M ) (US$M) L/C Number : C2696 Board Approval 95 FY ) (FY) Partners involved : USAID Closing Date 12/31/1998 03/31/2000 Prepared by : Reviewed by : Group Manager : Group : 2. Project Objectives and Components a. Objectives The primary objective of the project was to contribute to Malawi's economic growth through: (a) revitalizing the poorly-operated Nacala rail route, which is shorter and less expensive than other alternative routes currently used; and (b) restructuring, commercialization, and eventual privatization of Malawi Railways (MR) and Lake Services Department, enabling them to operate more efficiently and without government subsidies. The project had two subsidiary objectives: (i) formulation and implementation of a transport policy aimed at promoting inter-modal and inter-route competition; and (ii) setting-up an institutional mechanism for close coordination among the entities managing the Nacala rail route, viz., Malawi Railways, the railways of Mozambique (CFM), and the Port of Nacala, to improve operations on the Nacala rail route. b. Components The project comprised four components: (a) Restructuring component involved: (i) setting-up of new railway and lake services companies, to be called the Malawi Railways (1994) Limited (MR94) and the Malawi Lake Services Limited (MLS); (ii) transferring of assets and staff to the new companies; and (iii) gradual downsizing and final closure of the existing Malawi Railways. (b) Revitalization component involved: (i) commercialization of rail operations; (ii) eventual privatization of MR; (iii) extension of the services of the marketing and facilitation experts to CFM to improve performance of the whole Nacala route; and (iv) setting up of an institutional mechanism for effective coordination of the railways in Malawi and Mozambique. (c) Lake Services component included: (i) commercialization of operations; and (ii) eventual privatization of Malawi Lake Services Limited (MLS) core services. (d) Transport policy component involved: (i) developing a transport policy aimed at improving the performance of the transport sector, with particular emphasis on restructuring and privatization of parastatals; (ii) strengthening the institutional capacity of the Ministry of Transport for analyzing the performance of the transport sector and providing adequate response. c. Comments on Project Cost, Financing and Dates The Credit Agreement was amended in 1998 because: (i) USAID decided to support the financing of staff retrenchment through a separate Program; and (ii) many sub-components were canceled or significantly reduced as the Bank realized (from the concessioning experience in other countries) that investments by parastatals were not always fully valued by the potential bidders and there was a real danger that the value of many of the investments would have been discounted considerably. As a consequence, the total cost of the project was revised from US$ 29 million to US $12 million and the credit amount was revised from US$ 16.6 million to US$ 9.5 million. The actual cost of the project was US$ 9.3 million and IDA disbursed US $ 6.7 million. The project closed on March 30, 2000, fifteen months after the original closing date. 3. Achievement of Relevant Objectives: 1. The project achieved its primary objectives of revitalizing the Nacala-rail route and restructuring and privatization of railways and lake services. Two new companies one for the railways (MR94) and the other for the Lake services (MLS) were created. The restructuring of Malawi Railways was successfully completed. The privatization of railways has been fully completed and the concessionaire commenced operations on December 1, 1999. 2. The objective of the privatization of Malawi Lake Services was achieved, but involved long delays. The process of privatization is now underway and is expected to concluded by the end of 2000. 3. The project achieved its objective of formulating and implementing the National Transport Policy. The policy sets the stage for the legal and regulatory frameworks for railways, inland waters, shipping, road traffic, transport, and civil aviation. A regulator responsible for enforcing the safety and environment-related requirements has been appointed. 4. The project did not achieve the objective of setting-up an institutional mechanism for close coordination among the entities managing the Nacala rail route, viz., Malawi Railways, the railways on the Mozambican side, and the Port of Nacala. However, since the same concessionaire was selected for the Mozambican side, the stage is set for efficient improvement of the Nacala Corridor. 4. Significant Outcomes/Impacts: Two new companies one for the railways called MR94 and other for the Lake services called MLS were created. The restructuring of Malawi Railways was successfully completed. The surplus land, real estate and assets belonging to MR were sold. Some assets and staff from MR were transferred to MR94. The formal winding up of MR still awaits the disposal of unsold assets such as scrap and discarded locomotives and wagon and the settlement of few cases of real estate. The privatization of railways has been fully completed and the concessionaire commenced operations on December 1, 1999. The same concessionaires will be operating the Mozambican side of the Nacala railway system and the port of Nacala by the end of September 2000. 5. Significant Shortcomings (including non-compliance with safeguard policies): Performance targets for the railways are still far below expectations: (i) overseas traffic for 1988-99 is 145,000 tons far below the revised target of 300,000 tons; (ii) the operating ratio is 110 instead of the target of 94. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. NOTE: 7. Lessons of Broad Applicability: Investments by parastatals ahead of privatization are not always valued by the potential bidders and there is a real danger that many of the investments could be considerably devalued. All investments prior to concessioning, therefore, need to be subjected to a rigorous technical and financial evaluation. To the extent possible, all long-lived investments prior to concessioning should be avoided. Restructuring of railways while waiting for the completion of the concessioning process (which can take a number of years) can play an important role in helping the privatization process. During the interim period, restructuring can yield benefits such as retrenchment of surplus staff, reduction in operating costs, improved accountability, etc. which are critical for reducing losses and making the railways attractive to private sector. 8. Assessment Recommended? Yes No 9. Comments on Quality of ICR: The quality of ICR is Satisfactory. The section on quality at entry is very well written. The ICR identifies very important lessons for the restructuring/privatization of railways.