Mozambique - Beira Railway Project

Initial Project Information Document (PID) Report No: AB185 Project Name MOZAMBIQUE - Beira Railway Project Region Africa Regional Office Sector Railways (100%) Theme Other financial and private sector development (P); Other public sector governance (S) Project P082618 Borrower(s) GOVERNMENT OF MOZAMBIQUE Implementing Agency(ies) CFM Note: Bank's support will be estimated after selection of the successful bidder. Address: Caixa Poatal 2158 Praca dos Trabalhadores, Maputo, Mozambique Contact Person: Mr. Rui Fonseca Tel: 258 (1) 431706 Fax: 258 (1) 313364 Email: ruifonseca@cfmnet.co.mz Environment Category B (Partial Assessment) Date PID Prepared November 10, 2003 Auth Appr/Negs Date March 15, 2004 Bank Approval Date July 15, 2004 1. Country and Sector Background  2 PID The main transport sector issues are: (a) inadequate availability of transport in many areas; (b) high cost of transport; (c) poor condition of rail and road infrastructure and services; (d) high level of financial support from the Government to all transport sub-sectors including the railways; and (e) high rate of accidents and poor record of safety. Inadequate availability of transport. The central region of Mozambique suffers from lack of adequate transport services. The rail line is not functional and there are no roads to sustain any level of traffic. The poor inhabitants are forced to walk miles and miles to reach markets and satisfy social obligations. In the absence of appropriate transport systems, development of any type of business, even agro-based business, is proving difficult. High Cost of Transport. The overall cost of transport in Mozambique continues to be excessively high. Road tariffs average 8 US cents per net ton kilometer (ntkm). Although the average rail tariff (about US$0.05/ntkm), is much lower than the average road tariff, it is nevertheless almost twice the rate prevailing in efficiently-run railways and about three times, if purchase parity is taken into consideration. Moreover, the rail users currently have to face costs induced by the unpredictability of operations, such as delays in the allocation of wagons, delays in allocation of locomotives, improper handling and storage of goods, derailments, and accidents. The abnormally high transport costs are eroding the global competitiveness of most commodities and adversely affecting exports. Other reasons for the high cost of rail transport include the overstaffing in the railways, lower utilization of expensive assets, and constraints of managing a commercial enterprise in a public sector environment. As regards the cost of road transport, even though the sector has been liberalized, the costs continue to be high. The reasons for the continuing high cost of road transport in Mozambique are not very clear but include poor fleet management, high cost of spare parts partly due to high import duties, and poor condition of roads leading to increased cost of vehicle operation and maintenance. GOM is in the process of undertaking an elaborate Transport Cost Study to understand more clearly the causes of high transport costs and to develop strategies for reducing them. Private participation in the operation and management of railways is expected to lead to cost reduction. High Level of Government Financial Support to the Sector. The Government is currently forced to provide substantial financial support to all the transport sub-sectors. In the road sub-sector, in spite of GOM's efforts to introduce measures to improve cost recovery (including the road fund), revenues continue to lag behind the road network's capital and maintenance requirements. In the railways sector, although the CFM is not receiving a direct operating subsidy from Government anymore, it has not been able to service its loans and the Government has had to write off some of them. Even at the high rates of tariff, GOM is unable to generate enough surplus to keep the assets in a good condition. Its assets have deteriorated to such an extent that a substantial injection of private or public capital would be necessary to prevent the railways from collapsing altogether. GOM's strategy to reduce its financial support to these sectors is to continue its focus on short-term cost recovery from road users and to open the rail sector to private sector participation. Deteriorating Condition of Infrastructure. Despite high tariffs, and substantial investments in the past, the rail infrastructure is in a very poor condition. Among others, the following reasons account for this: (a) overall poor quality of maintenance and absence of adequate and timely allocation of funds for maintenance thus causing a relatively faster deterioration of the infrastructure; (b) concentration of huge amounts of funds on certain sections of the infrastructure and development of these sections to unnecessarily high standards while starving the others of even the basic minimum maintenance; and (c) acquiring a fleet of locomotives and wagons far in excess of the high utilization-based requirements, which is obviously difficult and expensive to maintain. The road infrastructure has similarly suffered due to  3 PID serious shortage of funds caused by the inadequate cost recovery from road users, inadequate enforcement of axle load regulations, and inefficient maintenance. With the Government having very little capacity to finance the required capital expenditure, the transport infrastructure is at considerable risk of further deterioration. The Government's strategy is to improve the infrastructure by opening the rail sector to private participation and increasing the road user charges to cover at least the short-term marginal cost of roads and to reorganize the institutional setup for management of roads so as to make it more efficient and commercially oriented. Inadequate Management of publicly-managed enterprises. The Bank's experience in the railway sector points to the difficulty, if not the impossibility, of improving the railway performance within the "Parastatal" framework. Operating within this framework puts the railways to serious constraints, mainly: (a) the bureaucratic culture which tends to discourage initiative and innovation and fails to punish inaction and lethargy; (b) cumbersome rules and procedures that make the decision-making process very slow; (c) subtle and sometimes direct political interference in the working of the railways, eroding the authority and effectiveness of the railway management; (d) frequent changes of personnel in the top management of the railways and the ministries; and (e) pressure on the railways to provide loss-making services without adequate financial support that force the railways to cut back on maintenance. On the other hand, the experience with the concessioning of the railways in most Latin American countries and some African countries