Argentina - Railway Project

RESTRICTED Report No. PtR-6Za This report was prepared for use within the Bank and its affiliated organizations. They do not accept respon;ibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR REtCONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF A FIRST RAILWAY PROJECT ARGENTINIE RAILWAYS March 3, 1971 Transportation Projects Department  Currency Equivalents Currency Unit = Pesos ($a) $a 1.00 = US$0.25 US$1.00 = $a 4.0o $a 1.0 million = US$0.25 million Fiscal Year January 1 to December 31 Weights and Measures: Metric System 1 kilometer (km) = 0.62 mile 1 meter (m) = 3.28 feet 1 liter (1) = 0.22 imp. gallons 0.26 US gallons 1 kilogram (kg) = 2.20 pounds 1 ton = 2,205 pounds Abbreviations and Acronyms CONADE - Consejo Nacional de Desarrollo FA - Ferrocarriles Argentinos FIEL - Fundacion de Investigaciones Economicas Latino Americanas SOFRERATL - Societe Francaise d' Etudes et de Realisations Ferroviaires  ARGENT[NA FIRST RAILWAY PROJECT TABLE OF CLDNTENTS Page No. SUIJbtARY . .......................................... i 1. INTRODUCTION ......... ............................. 1 2. Xi"CKGROUND ........... 2 A. Economic Setting ............................. 2 B. The Transport Sector ......................... 3 C. Transport Coordination ....................... 4 3. ARGENTINE RAILWAYS ..................... 6 A. General ............ . . . 6 B. Organization and Management. 6 C. Staff ........................................ 7 i). Railway Property ... I ......................... 8 (i) Railway Lines ........................... 8 (ii) Motive Power and Rolling Stock .... ....... 9 (iii) Other Property .......................... 10 E. Traffic and Operations .......... .. ........... 10 (M) Freight Traffic ......................... 10 (ii) Passenger Traffic ....................... 11 (iii) Operations .............................. 11 (iv) Commercial Policy ....................... 12 F. Tariffs and Costs ............................ 12 4. THE PLANl AND THE PROJECT .......................... 14 A. The Plan ..................................... 14 B. The Project .................................. 15 C. Financing of the Project and the Plan ........ 17 D). Execution of the Project, Procurement and Disbursemernt ........................ 17 This report hias be-en prepared by Messrs. Blumstein (railway engineer), Chapman (financial analyst), lHouston (consultant economist), Kesson (railway engineer) and Marco (economist), and has been edited by Miss V. Foster.  fable of Contents (Continued) Pag,,e Ao. 5. ECONOMIC EVALUATION .........................18 A. General .......... 18 B. Economic Benefits of the Five-Year Plan ...... 19 C. The Project (1971-72) ..... ................... 20 6. EARNINGS AND FINANCES ............. .. .............. 21 A. Present Position ............................. 21 B. Future Prospects ............................. 23 C. Budgets, Accotnts and Audit .... .............. 26 7. RECONROIENDATIONS ................................... 27 TABLES 1. Freight Traffic by Modes of Transport, 1950-1963 - tons 2. Freight Traffic by Modes of Transport, 1950-19683 with Projections for 1969-19 74 - ton-km 3. Route and Track Data 4. Line Rationalization and Closure Program 1971-1975 5. Fleet of Locomotives and Cars 6. Summary of Operating Statistics, 1964-1969 - FA 7. Freight Traffic Trends 1968-1969 and Forecast through 1975 8. Passenger Traffic Trends 1966-1969 and Forecast through 1975 9. Summary of Operating Statistics, 1969 - Individual Railways 10. Investment Plan 1971-75 11. Estimated Schedule of Disbursements 12. Income Accounts 1964-69 13. Summary Balance Sheets as of December 31, 1964-68 14. Income Statement 1970-75 15. Cash Flow Forecast 1971-75 16. Forecast Summary Balance Sheets 1971-75 ANNEXES 1. Argentine Railways Organization 2. Argentine aailways Type Railway Organization 3. Time-Phased Program for iehabilitation of Diesel Motive Power 4. Diesel Locomotive and Freight Car Fleets for 1975 'T'raffic 5. FA 1971-1975 Investment Plan - Main Itemns 6. Freight Car Procuremnent 7. Economiic Benefits and Methodology S. Long- and Medium-Term Debt - December 31, 1969 'IAPS 1. Argentine Railways, 1969: IBRD - 2418RI 2. Quenos Aires 'Metropolitan Area: IBRD - 2635  ARGENTINA FIRST RAILWAY PROJECT SUMMARY' i. The proposed project, costing an estimated US$368 million equiv- alent, consists of the first two years of the Argentine Railways (Ferrocar- riles Argentinos, or FA) US$839 million 1971-75 Investment Plan ("Plan de Mediano Plazo"). The foreign exchange component of the project is expected to be between US$166 million and US!D172 million, depending on the bids won by Argentine suppliers in international competition. The proposed loan of US$84 million equivalent would finance about 50% of the foreign exchange costs of the project. ii. This would be the first loan to FA but it follows a long series of contacts between the Bank and Argentina on the problems of the railways. A cycle of increasing road competitLon, political influences, poor manage- ment, low staff morale, general ineEficiency, poor and inadequate invest- ments and increasingly large deficits placed a burden on the Government budgets and contributed largely to inflation in Argentina. Little change took place until 1967 when the Government embarked on measures to stabilize the country's economy, including a major reorganization of the railways. FA was placed under the management of military personnel who began design- ing and implementing a comprehensive recovery program for FA. Mi. At the request of the Government a series of Bank missions has kept contact with FA and has established that serious efforts have been and are being made to improve FA's physical and financial positions. Economical- ly, even with the recent development of other modes of transport, principally highways and pipelines, there remains a useful role for the railways in the future, especially for the long-distance haulage of bulk commodities and for urban transport in the Buenos Aires area. The production potential of Argen- tina is high, with a forecast of satisfactory growth in GDP, which should lead to increasing demands for all forms of transportation. iv. Since 1967 much has been accomplished by the Government and FA, resulting in an increase in freight: traffic and a reduction in the working loss (excluding depreciation), at constant 1966 prices, from the record $a 555 million (US$158 million equivalent) in 1966 to $a 205 million (US$58 million equivalent) in 1969. A new Enterprise Law, to enable FA to operate on commercial lines, has been enacted; a sotnder general management organiza- tion with more effective control over the individual railways has been estab- lished; staff has been reduced from 171,000 to 145,000; and a preliminary review of the future system size has been completed. Improvements in operat- ing and co;mlercial matters have been undertaken, working capital has been provided, and costing is being developed as a basis for commercial pricing. v. Considerably more remains to be done over the next several years; on a realistic basis it is estimated that it would take until about 1975 for working expenses to be covered by operating revenue and until about 1979 for  - ii - all operating expenses, including depreciation, to be met. This would be a considerable achievement and one which would have a beneficial effect upon the country's economy. An essential condition would be the continuing political will on the part of the Government to pursue the increasingLy difficult steps needed to achieve FA's recovery. The efforts by the Govern- ment and FA will require the parallel assistance and support of the Bank. vi. The Investment Plan is only one part of the recovery plan of FA; this must be accompanied by continuing associated improvements in many sectors, but principally in further selective reductions in staff, rational- izing and reducing services, closing lines, rehabilitating existing diesel locomotives, reorganizing and reducing the number of workshops, developing effective commercial policies, and reorganizing the accounting and statistic- al systems. Programs of action over the next few years have been developed by FA and are satisfactory. vii. The principal items in the proposed project include new diesel locomotives, passenger and freight cars (41%); rehabilitation and improved maintenance of existing locomotives and cars (22%); track renewals and im- provements (25%); bridges, station buildings and yards (8%); and signalling, telecommunications and miscellaneous equipment (4%). The maximum foreign exchange element is estimated at US$172 million equivalent. Up to US$84 million of this would be financed by the Bank, and another US$34 million by suppliers. The balance would be provided by the Argentine Government. The following items are suitable for international competitive bidding, and are suitable for finance under the proposed Bank loan: track material, track equipment and major civil works contracts, workshops, signalling and telecom- munications equipment, freight car bogies and a portion of freight car bodies. Domestic bidders for Bank financed equiDment would be accorded a 15% margin of preference in lieu of higher import duties in evaluating bids. Components for the rehabilitation of existing diesel locomotives now out of action will also be eligible under the loan. They will involve negotiated contracts with the original suppliers in seven countries. viii. Four thousand four hundred freight cars are required. The bogies are to be procured on international bidding, with 100% financing by the proposed loan. The bodies (that is the cars less the bogies) are to be pro- cured in two groups of equal size. The first grouo is to be procured after international bidding; 90% of the cost of this group will be financed by the loan irrespective of whether the orders are placed in Argentina or abroad. The second group, bids for which will be called and opened simultaneously with the bids for the first group, is to be for local bidders only. Contracts for the second group will be awarded only if the lowest bidder is willing to supply at the price within 125% of the lowest bids for similar cars in the first group; otherwise the order will be offered to the successful bidder in the first group. The Bank will not finance car bodies in the second group except for those awarded to successful bidders in the first group. Should local firms win all the contracts in the first group, the proposed loan would be financing an estimated US$6 million of domestic expenditure. Foreign bor- rowing by FA for the project is expected to cover only about US$118 million of the likely foreign exchange cost of US$166-172 million of the project.  - iii - ix. The project as defined in, the report is technically and economically sound. The financial position of FA, with the investment and the continuance of the recovery program, should improve from an operating ratio of 166 in 1969 to about 115 in 197'5 with a target ratio of 100 by 1979. The internal economic return on the whole investment is estimated to lie within the range of 14.5 to 26.5%, with a most: probable value of 20.5%. The principal benefit arises from the avoidance of the diversion of FA traffic to highway transport at a higher economic cost: to the nation. x. A law has recently been passed modifying a previous law and re- quiring all state enterprises to use local industry; a condition of ef- fectiveness of the loan is the enactment of additional legislation to en- able FA to procure goods in compliance with the Bank's normal requirements. xi. The proposed project provzides a suitable basis for a Bank loan to FA of US$84 million equivalent, for. a term of 25 years, including a four- year period of grace.   ARGEN T INA FIRST RAILWAY PROJECT 1. INTRODUCTION 1.01 The Government of the Republic of Argentina and the Argentine Railways (FA) have asked the Bank for assistance in financing FA's invest- ments during the first two years of its five-year plan 1971-75 ("Plan de Mediano Plazo"). FA's investments during these two years are estimated at $a 1,472 million (US$368 million equivalent) with a foreign exchange compo- nent between US$166 million and US$172 million, depending on the bids won by Argentine suppliers in international competition. 1.02 This will be the first lcan to FA but it follows a long series of contacts between the Bank and Argentina dealing with the problems of the railways. Until 1946 the financial results for the railways were reasonable but, thereafter, increasing road competition, political influences, poor management, low staff morale, and general inefficiency led to increasing financial difficulties. Large deficits in turn led to poor or inadequate investments for the maintenance ancd renewal of assets and for improvements to meet changing circumstances. Thke deficits also increased the burden on the Government budgets and thus contributed in large measure to the infla- tion which occurred in Argentina. The pattern of decline which developed could be broken only by decisive action. 1.03 In 1960 the Argentine Government, the United Nations Special Fund and the Bank set up a Transport Planning Group to formulate long-term trans- portation plans and investment programs. The recommendations inter alia proposed extensive reforms and economies for the railways. The Government attempted seriously to implement these in 1962/63 but a drastic reduction of labor created political and financial problems beside having an adverse effect upon the morale and efficiency of the railways. The program was thereafter abandoned and the only permanent result was the retirement of about 50,000 FA staff. 1.04 In early 1967, the Goveniment embarked upon measures to stabilize the economy, including the reorganization of the railways. The direction of FA was placed under military control and steps were taken to restore dis- cipline and the morale of the stafl". Design of a complete recovery program for FA was started and, at the request of the Government, the progress made and the plans for the future were reviewed by a Bank mission in September 1968. The Bank recommended that ti-ie recovery measures be accelerated and that mediun-term investment and financial programs be developed. A sub- sequent series of missions has kept contact with the Government and FA and has deterMined that serious efforts have been and are being made to improve the physical and financial position of FA. Traffic has increased and deficits have decreased but much remains to be done, especially in sectors where effective action is more difficult. Programs of action for the next  few years have been developed by FA and are satisfactory. Procedures for periodic review and revision have been agreed upon. Because of the size of the tasks still remaining, success will not only depend on the present proi-- ect but will also require the continuing political will on the part of the Government to pursue increasingly difficult steps. The efforts of the Gov- ernment and FA will require the parallel assistance and support of the Bank. 1.05 Other Bank Group lending for transportation in Argentina has con- sisted of two highway loans, the first (288-AR) of US$48.5 million equivalent in 1961 which is fully disbursed and the second (619-AR) of UJS$25 million equivalent in 1969. A third highway loan of US$67.5 million equivalent has just been negotiated. 1.06 This appraisal is based on information supplied by the Government of Argentina and the Argentine Railways and on the findings of Bank missions in May and November 1970, comprising Messrs. Blumstein (railway engineer), Chapman (financial analyst), Houston (consultant economist), Kesson (rail- way engineer) and Marco (economist). This report was prepared bv them and edited by Miss V. Foster. 2. BACKGROUND A. Economic Setting 2.01 Argentina with a land area of 2.8 million km2 is the second largest country in South America and is more than twice as large as Spain, France, and Italy combined. Its population is estimated at about 23.3 million (1970) and has been growing at the average rate of 1.5% per annum during the past decade. Almost one-third of the population is contained within the city and immediate surroundings of Buenos Aires, while two-thirds is concentrated within the provinces of Buenos Aires, Santa Fe, and Cordoba (15, of the land area). These provinces account for about 80% of the country's agricultural production and almost all of its industrial output. 2.02 Argentina has an exceptionally favorable resource endowment in relation to its population, but its economic histcry has been characterized by slow and uneven growth and considerable inflation. Stabilization poli- cies reduced the rise in the cost of living (20.7% per annum in the 1960's) to 16.2% in 1968 and 7.6% in 1969. The figure for 1970 returned to about 13.5%, due mainly to an increase in the price of beef and wage awards. Be- tween 1961 and 1970, GDP grew in real terms at an average rate of 3.7% per annum or just over 2% on a per capita basis. Real wages rose only an aver- age of 1.9% per annum during the same period. Per capita GDP, which grew at 4% as a yearly average for the last four years, reached about US$82) in 1970, and is the second highest in Latin America. 2.03 The production potential of the country is high, and an annual average growth in real GDP of about 5.5% is projected over the next five  - 3 - years. This will generate a substantially larger demand for transport of both primary products and manufactured goods. 2.04 Major transport flows in IArgentina consist of agricultural products and other raw materials moving main]y from the interior to ports and popula- tion centers on the coast. Machinery and other production inputs, vehicles, and manufactured consumer goods move largely in the opposite directions to the agricultural, mining, and forestry areas. All of the main transport modes are significantly involved. B. The Transport Sector 2.05 The extensive railwav system (40,000 km) was built mostly in the late 19th and early 20th centuries, when it was the only means for trans- porting rapidly increasing quantities of grain and livestock to market. The system radiates from the principal ports, especially Buenos Aires, to the producing areas (Map, IBRD 2418R1). Since then the economy has become more diversified with emphasis on light industry concentrated in the La Plata- Buenos Aires-Santa Fe-Cordoba corridor. Agricultural products now account for less than half the railway freight tonnage. The railways carry over a million passengers per day on the Buenos Aires urban services, as well as substantial intercity passenger traffic. 2.06 Highway construction became important after the railways were already well developed. There was a major period of building from 1931 to 1944, followed by lower levels of construction until the early 1960's when a more active program was resumed. There is now an extensive and generally well-maintained system of about 137,000 km designated as national and pro- vincial primary highways, about 50,000 km of which are surfaced. In addition, there are some 800,000 km of secondary and tertiary roads and tracks. The vehicle fleet has expanded rapidly in recent years; in 1968 it contained over a million light vehicles, about 27,000 buses, 650,000 trucks, and 69,000 trailers. There is now approximately one vehicle for every 11 persons (com- pated with one vehicle for 38 persons in Brazil and one for 4.5 in France). Road transport now provides many of the services required by industry and agriculture, especially over medium and short distances. 2.07 Domestic transport by wat:er, both coastwise and by river, is im- portant, accounting for about one-third of total freight ton-km, mostly in heavy bulk commodities. Petroleum pipelines have become a major factor, accounting for about 10% of total t:on-km, and will be expanded in the 1970-74 period. Domestic air transport has been growing rapidly; all provincial capitals, main cities, and principal tourist areas are served. In 1969, over 1,580,000 passengers utilized these services. Extensive international ocean shipping and air services effectively link Argentina to all parts of the world. 2.08 Tables 1 and 2 show the weneral evolution of freight traffic, by mode of transport, since 1950 and projections to 1974. The overall growth of the economy is expected to result in an increase in shipments from 74,200  -4- million ton-km in 1968 to 108,200 million in 1974 (an average annual growth of 6.5% compared with 5.5% for GDP), with significant increase in all modes. Between 1960 and 1967, railway freight traffic diminished and the railwav share of total freight movements (in ton-km) declined from 32% to 16%. Meanwhile, truck traffic more than doubled. The change in management of FA in early 1967 has led to a considerable improvement in operations with the result that traffic increases have been achieved in 1968, 1969 and 1970. While the railway share of total traffic is likely to continue to decline, the absolute volume of freight carried is expected to increase further and that of passengers to remain at about the present level, provided that im- proved services are offered. Details of expected traffic are given in paragraphs 3.20 and 3.21. 2.09 The Bank Transport Mission which visited Argentina in September 1968, at the request of the Government, concluded that there would remain a useful and economic position for the railways to fill, particularly for the longer distance haulage of bulk commodities and for urban transport in the Greater Buenos Aires area. More recent studies confirm the potential econo- mic role of the railways in Argentina. C. Transport Coordination 2.10 Until recently, little has been done in Argentina to coordinate the development of the various modes of transport to ensure that each performs the functions to which it is inherently best suited. Probably the most im- portant detriment to transport functions in Argentina has been the neglect of the railways from 1946 to 1966. During this period, railway rates and fares were subject to Government approval and were kept at artificially low levels to avoid contributing directly to increases in the cost of living. However, the deterioration of equipment and service due to lack of renewal investment was such that even with low tariffs the railways could not main- tain their traffic during a period in which total ton-km of freight transport in Argentina more than doubled. 2.11 Trucks are mostly operated by owners and truckers and are not closely regulated with respect to services offered and rates charged. There has been a large flow of private capital into trucking, taking advantage of improved equipment becoming available and, in recent years, of improved roads to compete strongly with the weakened and deteriorated railways. As a result, a considerable amount of traffic is now moving by road that could be handled more economically by an efficient railway system, a trend which could continue as total traffic expands in coming years. Overall, the pres- ent system of highway user charges generates revenues which certainly cover the relevant economic costs of providing and maintaining the road system. The charges, however, have borne more heavily on automobiles than on large trucks, but in January 1971, when all fuel taxes were increased, that on gas oil was increased by a relatively much larger amount than that on gasoline, which corrected the position to some extent. The allocation of traffic. in any case, has been more the result of inferior railway service than of rate differences; the recent changes in highway user charges will improve slight- lv the competitive position of FA. A study is in progress concerning the  -5- general influence of road user charges on vehicle ownership and use, commis- sioned by the Highway Administration under the Secretariat of Public Works and Transport. The Government also intends to carry out a broader economic study of road user charges, with special emphasis on urban areas, and the Bank will be given the opportunity to comment upon the terms of reference. 2.12 There have been recent improvements in the Government organization for policy formation and administration of transport activities. The National Development Council (CONADE) is intended to have an important role in major policy and investment decisions. The Ministry Reorganization Law of October 1969 largely remedied previous divisions of responsibility between different ministries and different Secretariats of State. Most of the agencies dealing with transport now come under the F[inistry of Public Works and Services. A Sectoral Development Office is functioning in the Secretariat of Public Works and Transport and is becoming an important factor in planning and coordination. An interagency working group has been created to evaluate proposals for clos- ing unprofitable railway branch lines. It considers the alternatives of main- taining railway services and of shifting traffic to road transport. Arrange- ments can be made for continuing rail service with financial subsidy where it is determined that the rail alternative is less costly to the country in economic terms. The group is cLosely associated with the Sectoral Development Office, and techniques of analysis adaptable to deeper studies of major transportation corridors should emerge from this work. 2.13 The Greater Buenos Aires area presents special problems of coor- dination between rail and road services for handling an intense and grow- ing volume of traffic in goods and passengers. Planning agencies have been established, and a transport investment plan for the Buenos Aires metropoli- tan area is to be completed in 1971. The plan should set up priorities among the proposed large investments in the coastal corridor La Plata-Buenos Aires-Tigre (Map IBRD 2635) for railways, highways and subways in order to avoid undue competition for the same passenger traffic. The railway propo- sal is for the improvement and electrification of the urban services on the Roca railway and the Bank has proposed that an economic study be made; the Government is still considering the matter. There may be economic justifica- tion on urban congestion, pollution and other grounds for subsidized railway service to retard the growth of automobile traffic. 2.14 The Mesopotamia region, lying between the Parana and Uruguay Rivers, also has a major transport coordination problem. The Government is building the Zarate-Brazo Largo Bridge to provide direct access by both road and rail to Buenos Aires. The financial implications for FA of this connection have not been made explicit. A study of the economic roles of road, rail, and river transport in Mesopotamia has been completed and the results, as they will affect FA, are being examined by the Government and FA.  -6- 3. ARGENTINE RAILWAYS A. General 3.01 Until 1946 there were a large number of individual railway systems in Argentina, mostly private but some owned by the Government. The private railways were purchased by the Federal Government in that year and all were formed into six systems, four having broad gauge (1.676i m), one standard gauge (1.453 m) and one meter gauge (1.0 m) (Table 3). There was a small headquarters organization but it provided only a loose control over the individual railways. The six systems, broadly serving different geographical areas fanning out from Buenos Aires, are noted below and are illustrated on Map IBRD 2418R1. Gauge Length System m km Area Served Roca 1.676 8,700 South and Southwest Sarmiento 1.676 3,800 Southwest to West San Martin 1.676 4,700 West Mitre 1.676 6,300 Northwest Urquiza 1.435 3,300 North Belgrano 1.00 13,500 Mostly Northwest and North Total 40,300 The Urquiza standard gauge system is largely isolated from the others but the Belgrano meter gauge system is intermingled with the broad gauge railways to some extent. All the railways carry considerable commuter traffic in the Buenos Aires area. B. Organization and Management 3.02 As noted in Chapter 1, the railways were placed under military control in early 1967. The military personnel brought a new outlook to bear, restoring discipline and morale and improving services. 3.03 As a state enterprise FA comes within the portfolio of the Minister of Public Works and Services and, under the Enterprise Law (No. 18360 dated September 17, 1969), the management is the responsibility of a President, a Board of Directors and an executive Vice-President. The Board is composed of the President, as Chairman, the Vice-President and three to six directors; 1/ at the present time these are all military. The new law gives FA greater freedom to operate as a commercial enterprise, and Government control is now limited to such items as investment plans, annual budgets and accounts, and 1/ Two "Sindicos" (non-voting members) additionally represent the Min- istries of Finance and Public Works and Services.  - 7 -. maximum tariff levels. FA can make proposals for the closure of unremunerative lines and services; the Government must give decisions within a time limit and, if the proposals are rejected, determine the sources from which the deficits shall be met. The law is provisional during the management by the military personne:l. The loan documents contain a provision which defines as an event of default of the proposed loan any modification affecting adversely and substantially the conduct of FA's operation or financial condition. 3.04 A new general management organization was established in 1968 to strengthen the central control and administration of the railways; Annexes 1 and 2 give the details. The planning division is new and has been res- ponsible for many of the restructuring proposals and the progress made so far in FA. 3.05 Military personnel occupy the majority of senior administrative positions at headquarters and in the railways; they are able men, mostly engineers with industrial management training. Senior technical posts are held by civilians who are generally experienced and competent. Due to past low salaries in comparison with other enterprises, there is a shortage of good quality middle level administrative and technical staff, capable of being trained for senior posts and particularly of replacing the military personnel eventually. There is need for further standardization and coordination between headquarters and the railways which, until recently, have planned and operated individually. To improve the position, FA is (a) increasing salaries (para. 3.09), (b) making promotions on merit rather than on seniority, (c) improving the administrative control of the indivi- dual railways in conjunction with reducing the number of broad gauge systems from four to two, (d) centralizing the control of workshops (para. 3.17), (e) improving staff administration, anc. (f) extending training facilities; and has engaged consultants to assist with technical changes, 1/ economic and commercial studies, 2/ and financial matters. 3/ C. Staff 3.06 The number of staff has varied considerably from about 130,000 in 1942, to 219,000 in 1956, to 171,000 in 1966. Since then FA has reduced staff by attrition to 145,000 in November 1970. FA plans to reduce the staff further to about 120,000 at the end of 1975. Reliance on attrition has meant that reductions have not beeni related to quality or position. Many of those leaving have been essential personnel, because FA salaries have not been competitive; on the other hand there are many places, such as the workshops, where there are local st:aff surpluses (para. 3.17). 1/ Societe Francaise d'Etudes et de Realisations Ferroviaires (SOFRERAIL) - France 2/ Fundacion de Investigaciones Economicas Latino-Americanas (FIEL) - Argentina 3/ ilenry Martin (Argentina) associated with Arthur Young and Co. (USA)  -8- 3.07 To deal with localized problems, FA will need the assistance of the Government in the retraining and re-employment of surplus staff. FA has made detailed reviews of future requirements, redeoloyment needed and redundancies. With this information available, FA and the Government have prepared realistic time-phased programs setting out the staff reductions, and the means bv which they will be achieved. 3.08 There are five FA staff unions, the largest of which has a member- ship of 124,000; they exercise considerable pressures and in the past have used the strike weapon extensively. Under the present Government, strikes are illegal but still occur occasionally in the various state enterprises; FA had some localized labor troubles in 1969. Wages in all enterprises (state and private) were increased in 1969 and 1970, and the labor situation improved. A further wage increase was made on January 1, 1971. 3.09 FA has started to improve salaries paid to managerial, supervisory and skilled staff. In 1969, FA made increases (in addition to statutory wage awards) of: (a) up to 40% to about 300 high level management staff; and (b) about 20% to approximately 1,000 professionally qualified staff. D. Railway Property (i) Railway Lines 3.10 For the traffic, present and foreseen, the existing railways are over-large with many duplicated services and facilities. FA is carrying out a detailed analysis and is taking simultaneous action to reduce services and facilities to the minimum needed for expected traffic (rationalization), and to recommend closing lines where rationalization is not adequate to cover out-of-pocket costs. The following table summarizes the situation assessed as at present: Blroad Meter Standard Total Gauge Gauge Gauge km km km km Main trunk lines ) 5,700 3,200 1,100 10,000 ) rationalize Secondary lines ) services 14,500 5,400 1,500 21,40O Sub-total 20,200 8,600 2,600 _1,400 Lines for possible closure 3,200 5,000 700 8,900 Lines closed 1967-69 1,300 1,600 200 3_100 Sub-total 4,500 6,600 900 12,00 TOTAL 24,700 15,200 3 500 43,400  - 9 - 3.11 FA has recently completed a preliminary general review of the whole system, has rationalized services on about 3,900 km of branch and secondary lines and has recommended to the Government about 2,700 km of line for closure. In addition, all services on the Urquiza and freight services on the Belgrano railways have been reorganized to improve schedules and to teduce train-km. FA has prepared programs for 1971-75 (Table 4) to (a) carry out further rationalization of services (18,700 km), (b) examine lines for possible closure (6,200 km), and (c) continue the overall reorganization of train services and facilities, both passenger and freight. 3.12 Much of the track material is old and the main traffic lines need better standards of material and maintenance for the volumes of traffic and speeds in force. An analysis of existing tracks by traffic volume and approximate condition is given in Table 3. FA has been carrying out a limited amount of complete track renewal and improvement, but the program needs to be accelerated and subsequent maintenance to be improved. Over the next five years about 3,000 km of complete relaying and 3,800 km of improve- ment would be appropriate to FA's requirements and capacity to carry out the work. The provision of mechanical track equipment is essential to achieve the necessary quality of work. Signalling and traffic control equipment is mostly old but some modern signalling and centralized traffic control equipment has been installed; extensions are needed for safety and capacity reasons in areas of high traffic density, particularly on the Greater Buenos Aires urban lines. As part of the rationalization of serv- ices, many intermediate yards and depots are to be eliminated and improve- ments are to be made at those retained. (ii) Motive Power and Rolling Stock 3.13 Table 5 gives the details of the nominal fleet: about 1,800 steam locomotives, 1,200 diesel engines, 280 diesel railcars, 400 trailers, 760 electric railcars, 4,600 passenger and 71,000 freight cars. Utilization of available equipment is generally gcod, with the exception of steam locomotives and freight cars (Table 6). Availability is the key issue. 3.14 Diesel locomotives and railcars have poor availability (55%) due mainly to a shortage of components, lack of preventive maintenance and some unsatisfactory designs. With the assistance of SOFRERAIL, a detailed review of the future possibilities for using the diesel fleet has been completed; some 60 locomotives should be scrapped and 140 allotted to secondary and shunting duties, leaving about 1,0(10 available for main line duties. A time- phased program for increasing the availability to 85% by 1975 has been pre- pared (Annex 3). This program is fundamental for improving operations but is dependent upon action on (a) an adequate supply of components and (b) a reorganization of workshop managenmnt. FA has taken appropriate steps on both these matters. 3.15 Tn order to relieve part of the pressure on the workshops during reorganization, to obtain early financial savings from the elimination of steam traction, an(l to allow for the increased traffic forecast, some additional diesel locomotives will be needed for main line operations  - 10 - (Annex 4). In addition, diesel rail tractors should replace steam and heavy diesel locomotives for light shunting operations. This investment, combined with the rehabilitation program of diesel motive power, shouldt enable steam to be phased out by 1975. 3.16 Availability of electric railcars, passenger cars and freight cars is poor, due partly to age and partly to unsatisfactory maintenance. Re- placement of the oldest railcars and passenger cars is proposed, the latter at a rate of about 90 per year. Of the 71,000 freight cars, only some 40,000 are in reasonable condition, with only 12,000 of these less than 30 years old; most of the cars are of low capacity, not suited to modern operations or the easy handling of bulk commodities. A systematic scrapping program for old cars is now under way. FA obtained 1,200 new cars in 1968 and 600 in 1969 and ordered about 2,200 in 1970. The future fleet size for 1975 traffic is estimated to be under 60,000 cars (Annex 4) and, to enable FA to offer satisfactory freight services, the rate of replacement needs to be maintained at about 2,000 per year during the 1971-75 period. 3.17 There are at present 23 workshops, each working on several pro- duction lines (steam, diesel, railcars, passenger cars, freight cars). First, the direction of workshops is to be centralized at headquarters during 1970/71, and next, the number of workshops is to be reduced to 18 by 1975. Associated with the reduction will be a decrease in stores and wayside depots. The labor force, about 49,200 in 1969 (19,500 in workshops and 29,700 in wayside depots and stores), should decrease to less than 33,700 (of which about 14,700 in workshops) by 1975. FA has prepared a detailed time-phased program for implementation as part of the general staff redeploy- ment and reduction (para 3.07). FA is to continue its studies with a view to achieving additional reductions both in workshops and in staff during the period. (iii) Other Property 3.18 Most buildings on the railways are old and in many cases (in work- shops and freight yards) too large for present needs. The buildings used by the public are maintained to a good standard while other structures in use are maintained to a lesser but adequate standard. Some reconstruction and alterations to buildings will be needed in conjunction with moderniza- tion of passenger and freight-handling facilities. FA is preparing schemes for the commercial redevelopment of excess property in large centers. E. Traffic and Operations (i) Freight Traffic 3.19 Freight traffic statistics for the years 1968-70 and forecasts for the years 1971-75 are given in Table 7. In the past, 1937 was the peak tonnage year at 38.7 million tons. Thereafter, increasing road com- petition and deteriorating standards of railway service caused a decline to 16.8 million tons in 1967. At the same time, FA has become increasingly  - 11 - a long-distance carrier, average haul increasing from 327 km in 1937 to 639 km in 1969. Thus ton-km have not decreased so much; the peak was 16.5 bil- lion ton-km in 1951, with a low of 11.2 billion ton-km in 1967. Since then, some recovery has taken place, reflecting improvements already achieved by the new management. 3.20 Over the period 1971-75, tonnage is expected to increase further by 30% to about 27.1 million tons and ton-km by 22% to about 16.3 billion ton-km. Some decrease in the average length of haul to about 600 km is ex- pected as a result of shifts in prcduction and consumption centers. The traffic forecasts, developed by FA and its consultants with the assistance of Bank staff, take account of expected further improvements in FA services, vigorous commercial action and the costs of competing road transport. Traffic increases are expected in agricultural commodities (better equipment and service, grain storage facilities and special rates), minerals and building materials (increased building and production activity nearer Buenos Aires), and miscellaneous manufactured and processed goods (growing indus- trialization, improved service and sales efforts). On the other hand, FA's share of livestock traffic has fallen from 65% of the total in 1950 to about 20% at present and there is little prospect of growth even with improved services. Oil traffic, too, is expected to decline with further pipeline construction. (ii) Passenger Traffic 3.21 Passenger traffic statistics for the years 1966-70, together with forecasts for 1971-75, are given itt Table 8. The urban traffic in the Buenos Aires metropolitan area accounts for about 91% of the passengers and 58% of the pass-km. The increase in highway capacity and quality and the extended use of buses and private automobiles have, in the past, limited the growth of railway passenger traffic. In the forecasts it is assumed that the potential passenger traffic increase which might be expected from the better service now being offered w:Lll be countered by fare increases (para. 3.27); total passenger traffic, therefore, is expected to remain at about the same level through 1975. However, for Buenos Aires urban traffic there may be economic reasons to encourage the use of rail transport and to limit fare increases (para. 3.28). (iii) Operations 3.22 Table 6 gives a summary of FA's operating statistics 1964-69. Statistics for the individual railwqays for 1969 are shown in Table 9. The operating performance of FA was poor pre-1967; under the new management general improvement has been shown in 1967-69, although there are differences among the individual railways. There is room for further considerable im- provement; in particular, train loads and the utilization of freight cars are poor. For passenger trains average occupancy is reasonable (53% urban and 32% general) and the general timekeeping has improved, but further  - 12 - progress is needed. Serious accidents are normally few 1/ but minor derail- ments due to track and vehicle defects are high, and need to be reduced as better standards of maintenance of track and equipment become effective. 3.23 FA has made a start with measures for improved operations and intends to pursue these vigorously during 1971-75: (a) rationalizing of train services; (b) using heavier freight trains and more "block" trains for bulk loads (both requiring improved freight cars); (c) improving control of locomotives and cars (requiring improved telecotimunications); and (d) concentrating and improving marshalling yards and freight terminals (to re- duce delays and improve utilization). (iv) Commercial Policy 3.24 The fundamental need is for FA to improve the services offered, but this must be accompanied by a parallel effort to sell these services to potential customers who have been discouraged by FA's past poor perform- ance. Efforts should also be made to improve FA's public image. The physi- cal rehabilitation of FA will not by itself achieve improved utilization of equipment or the freight traffic increases forecast. FA has made a start on a vigorous commercial effort and is preparing, with the aid of SOFRERAIL and FIEL, a time-phased commercial pricing program, based on experience obtained in a pilot area, and on the costing system being introduced for tariff purposes. FA is intensifying its efforts particularly to provide (a) private sidings to large users; (b) grain silos and other track-side storage; and (c) mechanized cargo-handling facilities; it is also making special market- ing studies and negotiating rates for special tariffs and full car loadings. Time-phased action programs for the next two years have been prepared by FA. F. Tariffs and Costs 3.25 Tariff levels have been generally low, although in 1967 passenger fares were raised by 50% and freight rates by an average of 66%; this was followed in 1969 by two increases, the first (in May) of 25% on urban and 15% on general passenger fares and the second (in December) of 30% and 21% respectively, together with surcharges on particular passenger services. These increases should be viewed against the rise of 25% in the cost of living over the two years 1968 and 1969. Parcel traffic is not remunera- tive, and FA has directed much of it to independent forwarding companies. Starting in 1969 the Government is (a) paying for the carriage of mail (estimated to bring in about $a 35 million annually), and (b) reimbursing for the free or reduced fare transportation of military personnel (about $a 15 million in 1970). 1/ Although a very serious accident on February 1, 1970 caused the deaths of 260 passengers.  - 13 - 3.26 FA and FIEL have made traffic cost studies but sufficient basic data have not yet been available to establish accurate figures, particularly for incremental costs, as required for rate fixing and tariff structuring. FA has now established a good costing organization, working to sound tech- niques, and in association with FIEL, is completing detailed cost analyses of main commodities. SOFRERAIL is studying the tariff structure, using these costs, to enable FA to (a) ensure that all commodities will at least cover marginal costs, (b) set maximum tariffs according to the competitive situation, and (c) give emphasis to Loadability. 3.27 In order to meet the financial targets (para 6.16) FA intends to make (a) increases in freight rates sufficient to increase average revenues per ton-km by about 2% each year, 1971-75; and (b) increases in fares of 15% per year, 1971-73, on urban, and 10% per year, 1972-74, on general, passenger traffic. These increases will be in real terms; in accordance with the Enterprise Law, FA will propose and the Government will decide promptly on any additional adjustments in the tariffs to offset in- creased costs arising from general inflationary conditions. In line with this arrangement, and with FA's proposals, the following tariff charges were made in January 1971: (a) Freight traffic - increases of 10-21% to several major commodity rates, raising average revenue per ton-km by about 15.5% (i.e., norrnal annual rise of 2% plus about 13.5% to offset inf:Lationary cost increases); (b) Urban passengers - increases to individual fares, of 10-23%, raising average revenue per pass-km by about 15.5%, to offset inflatioinary cost increases; (c) General passengers - increases to individual fares of 12-17%, increasing average revenue per pass-km by about 13%, to offset inflationary cost increases. 3.28 In implementing the tariff increases, special attention will have to be given to the appropriate pricing of urban rail services in view of the potentially large economic losses that could occur if only financial targets are considered. Such losses could occur if, in pricing rail services higher than the relevant economic (incremental) costs to achieve financial targets, traffic is diverted to the already congested highways and streets serving Buenos Aires. In the study of the Roca railway improvement proposals, special emphasis is to be given to this pricing problem to ascertain whether the financial needs of FA with respect to urban services should be filled from user charges (fares) or partially from an economically justified Government subvention.  - 14 - 4. THE PLAN AND THE PROJECT A. The Plan 4.01 FA has prepared a five-year investment plan 1971-75. The plan has been appraised by the Bank and, following some revisions as a result of this appraisal, is estimated to cost about $a 3,350 million (about US$840 million equivalent) with an estimated foreign exchange component of US$360 million (Table 10 and Annex 5); a summary is given below. Assurances have been obtained that the Government and FA shall implement the full plan, shall periodically review it, and shall not make major additions to or deletions from the plan without the agreement of the Bank. If the economic study of the Roca railway electrification scheme shows it to be justified, then this may imply a further project for Bank participation. 1971-75 Investment Plan Summary % of $a million US$ million Total I/ 1/ Expen- Local Forein - Total Local Foreign- Total diture 1. Track re- newals and improvements 807.2 175.6 982.8 201.8 43.9 245.7 29 2. Signals and telecommuni- cations 49.2 37.2 86.4 12.3 9.3 21.6 3 3. Structures 252.0 10.0 262.0 63.0 2.5 65.5 8 4. Locomotive and car main- tenance 294.0 206.8 500.8 73.5 51.7 125.2 15 5. New loco- motives and cars: a. diesel locomotives - 316.0 316.0 - 79.0 79.0 9 b. passenger cars 156.4 124.0 280.4 39.1 31.0 70.1 8 c. freight cars 161.2 442.8 604.0 40.3 110.7 151.0 18 6. Miscellaneous 22.8 - 22.8 5.7 - 5.7 1 7. Total 1,742.8 1,312.4 3,055.2 435.7 328.1 763.8 91 8. Contin- gencies 169.6 131.2 300.8 42.4 32.8 75.2 9 9. Grand Total 1,912.4 1,443.6 3,356.0 478.1 360.9 839.0 100 1/ Assumes 50% of freight car bodies ordered from foreign firms.  - 15- 4.02 The recovery of FA depends not only on the investment plan but also on parallel inter-related actions on (a) staff reductions, (b) rationaliza- tion of services and closure of lines, (c) rehabilitation of diesel locomo- tives, (d) reduction of workshops, and (e) commercial plans, for which FA has prepared time-phased action programs (Chapter 3). These programs are to be carried out by FA in association with the investment plan. B. The Project 4.03 The project consists of the first two years of FA's investment plan 1971-75. The total cost is estimated at $a 1,472 million (US$368 million equivalent) with a foreign exchange component expected to be between US$166 million and US$172 million, depending on the bids won by Argentine suppliers in international competition; US$84 million of this would be provided by the proposed loan. A breakdown of the project and of the expenditure suitable for finance under the proposed loan, with brief details, is given below (also in Annex 5): US$ million Total Foreign 1/ Proposed 1971-72 Cost Cost Loan 1. Track renewals and irnprovements, civil works 30.1 3.5 3.5 2. Track material and equipment 53.2 12.9 10.4 3. Signalling and telecommunications 8.2 3.3 3.3 4. Structures 28.1 1.0 - 5. Locomotive and car maintenance 75.2 35.3 16.5 6. New locomotives and cars: (a) diesel locomotives 41.0 41.0 - (b) passenger cars 33.3 13.0 - (c) freight car bogies 22.5 22.5 22.5 (d) freight car bodies 41.5 24.3 15.8 7. Miscellaneous equipment 2.7 - - 8. Total 335.8 156.8 72.0 9. Contingencies 32.2 15.6 12.0 2/ 10. Grand Total 368.0 172.4 84.0 1/ Assumes 50% of freight car bodies ordered from foreign firms. 2/ Allows for normal contingencies plus an addition to cover the possibil- ity that some freight car bodies of the second 50% may be awarded on international competitive bidding and therefore could be financed by the Loan (para 4.12).  - 16 - 4.04 New locomotives and cars (the largest item) cover 120 diesel loco- motives, 100 small rail tractors (for shunting), 175 passenger cars (locally built) and 4,400 freight cars. The locomotives will enable the use of steam power to be reduced and will relieve part of the pressure on the workshops during reorganization. The rail tractors will replace large locomotives, both steam and diesel, for light shunting operations in stations, yards and private sidings. All will form part of the program for the elimination of steam traction by 1975. However, agreement has been reached that locomo- tives for the Urquiza railway are to be obtained only if the revised traf- fic forecast, based on the transport study of the Mesopotamia region, justi- fies the purchase (para 2.14). The passenger cars are part of a continuing program for the replacement of over-age wooden-bodied cars, unsafe under modern operating conditions. The freight cars will replace old, small ca- pacity cars also not suited to present-day operations in heavy fast trains; the majority will be specialized cars for the easy handling of bulk commo- dities and should improve operating efficiency and the services offered to the public. 4.05 The item for locomotive and car rehabilitation is to (a) provide components for the rehabilitation of existing diesel locomotives, (b) im- prove existing suitable freight cars for use in heavy fast trains and (c) provide equipment related to the reduction and reorganization of workshops. 4.06 Track renewals cover complete replacement of rail and timber sleepers, with the welding of rail joints and the provision of stone ballast, on the main trunk routes. Improvements cover the partial re- placement of rail and sleepers plus the provision of welded rail joints and stone ballast on the more heavily utilized secondary lines. The regular cycle of such work has fallen considerably into arrears during past years and the annual amounts need to be increased to enable FA to continue to carry present traffic and to provide higher speeds and better services for future traffic; about 2,100 km of track will be dealt with during the period. Mechanical track maintenance and workshop equipment will improve the quality of track work in the future. 4.07 Lesser amounts are provided for improvements to (a) signalling and telecommunications, and (b) structures, to improve the services and utilization of equipment. Before purchases are made on item (a), decisions are to be taken on common policies and standardization of equipment through- out FA. 4.08 The estimates in the project are based on 1970 prices but a contingency allowance of about 10% has been added to all costs. Local costs are expected to rise about 5% per annum over the period 1971-73 while prices for imported material and equipment due to present increasing labor and other costs in the industrialized countries may rise by about the same amount.  - 17 - C. Financing of the Project and the Plan 4.09 Throughout both the projeci: and plan periods, FA will be unable to provide from earnings any finance for investment, which will consequently have to be financed entirely from borrowing and from Government resources. The total financial requirements of the project, US$368 million equivalent, will be financed as follo4s: US$ Million Maximum foreign exchange 172 Bank loan 84 Suppliers' (Foreign) Credits 34 Capital Grant from Government 54 Local Currency Cost 196 Local Bank Loans and Credits 81 Capital Grant from Government 115 4.10 In the full plan period l971-75, an expenditure of US$339 million equivalent will have to be financed. Presumably over the last three years of the plan a similar proportion will be obtainable from foreign and inter- national credits as tnder the first two-year project. The balance once more will have to be provided or arranged by the Government. The detailed cash flow is presented in paragraph 6.18 following. D. Execution of the Project, Procurement and Disbursement 4.11 PA is competent with the 1help of its consultants to carry out the project. All imported goods to be Financed from the proposed loan would be acquired through international competitive bidding except for the components for locomotives, which will necessarily involve negotiated procurement of about US$15 million from the nine original suppliers in seven countries. The components are needed to restore to service valuable capital assets "cannibalized" in the past due to shortage of spare parts. Suppliers' cred- its are not normally available for this type of purchase. Financing by the Bank will facilitate this operation which is a vital aspect of the rehabil- itation effort. Argentine firms may participate in bidding for some of the track maintenance, signalling and telecommunications equipment and also for the freight cars (see next paragraph). All customs duties on imported equip- ment are higher than 15% and Argentine firms will be accorded a preference margin of 15% in lieu of import duty in the bid evaluation of equipment and freiqht cars. Contracts for major track renewals and improvements, amounting to US$500,000 equivalent or more, would be let after international competitive bidding. Contracts for less than US$500,000 would be tendered locally as at present and would not involve Bank financing. Disbursements on major track renewal and improvement contracts would be to meet the estimated foreign ex- change component which is 50% of the total cost.  - 18 - 4.12 Four thousand four hundred freight cars are required. The bogies for the cars are to go wholly to international bidding, there being no local manufacture of bogies. The freight car bodies (that is, the cars less the bogies) are to be procured in two groups of similar car bodies of approxima- tely equal numbers. For the first group international bids will be invited. For the second group bids will be invited only from local bidders, there being an established local industry which the Government wishes to continue to support. In this group, local bids must fall, or be negotiated, within 125% of the lowest bids for similar cars in the internationally procured first group. Should this not occur, these cars will be offered to the suc- cessful bidder in the first group. The Bank loan woulc finance the car bogies 100%, and the car bodies in the first group 90% (on the basis that the cars if imported will arrive as components and be erected locally) whether the contracts are won by foreign or local firms. Tlhe Bank will not finance the cars in the second group, except for any which may be offered to successful bidders in the first group at a price no higher than that stipulated in his bid. The detailed arrangements are set out in Annex 6. 4.13 Should local firms win all the freight cars in the first group, a maximum of about US$6 million of the loan would be financing local currency expenditure (Annex 5). It should be noted that FA's expected external bor- rowing is only about US$118 million compared to the minimum estimated foreign exchange content of the project of US$l66 million. 4.14 A law has been passed recently in Argentina modifying a previous law and requiring all state enterprises to use local industry to the maximum ex- tent available. However, the Government has agreed to approve the loan agreement by law, which will enable FA to procure goods under the proposed loan in compliance with the Bank's normal requirements. The enactment of this law is to be a condition of effectiveness of the proposed loan. 4.15 Disbursement of the proposed loan is given in Table 11. Because of inevitable delays in the delivery of equipment and the execution of track works, the disbursements will extend through 1974. The project forms part of the continuing investment plan 1971-75 which has been appraised as a whole and to which further Bank loans may be rnade. It is proposed, therefore, that if there are any savings on Bank financed items of the project, thev be used to finance the foreign exchange costs of continuincg items in the plan, subject to review and agreement with the Bank. 5. ECONOMIC EVALIJATION A. General 5.01 The 1971-75 Investment Plan is part of a coordinated program of reorganization, commercial action, and physical investment designed (a) to  - 19 - preserve and to restore the ability of the railways to carry a substantial part of total Argentine freight and passenger traffic; and (b) to improve economic use of resources and to eliminate fiscal pressure and inflationary effects produced by railway and Government deficits. 5.02 If this recovery program were not carried out there would be further deterioration in the quality of railway services, and large tonnages of agricultural products, building materials, manufactures, and other goods, as well as long-distance and urban passengers, would be diverted to higher cost highway carriers. No significant diversions to air or water transport wotuld occur. Passenger traffic is assumed to be diverted to buses and the higher cost of diversion to private cars is not considered. 5.03 A large part of the investment in the 1971-75 plan is to make up past deficiencies in the orderly renewal and replacement of rolling stock, track, and other facilities. Some further investment of this type will be required in the 1976-80 period, after which it is assumed that a capital renewal and replacement program adequate to maintain the railway at normal levels of efficiency and service will be carried out. Estimates of the investments required after 1975 have been included in the economic analysis (Annex 7). 5.04 The investments proposed for the 1971-75 period are adequate if efficiently utilized to allow achievement of the forecast levels of traffic. This traffic is described in paragraphs 3.20 and 3.21 and shown in detail in Tables 7 and 8. The program is as large as FA can efficiently handle in the years concerned. Detailed alternative plans with smaller investments in the 1971-75 period were not available for comparison. However, a sensi- tivity analysis indicates that it is possible to attribute a high proportion of total benefits to a hypothetical smaller plan and still to justify the additional amount involved in the full plan. Therefore, it is believed that the size of the program now proposed is justified and appropriate. 5.05 It is not possible to attribute specific portions of the traffic to individual components of the recovery program, because all are needed;to achieve the operating results and the traffic levels forecast. The proposed plan does not represent a marginal increment to an efficiently functioning system, but amounts to ensuring the continuance of a railway where it would otherwise soon almost cease to exist as a major transport mode. Therefore, the economic justification of the proposed investments has been analyzed in terms of the benefits and costs of the program taken as a whole. B. Economic Benefits of the Five-Year Plan 5.06 The principal economic benefits of the railway program are the avoided investment and operating costs of highway transport. Some labor savings attributable to the program provide additional benefits, but these are relatively small. Not included in the quantitatively estimated benefits are savings in travel time and reduced loss and damage for freight and passengers that would continue on the railways even in the absence of the  - 20 - plan. There would also be benefits from reduction of accidents and from highway congestion avoided. Some passenger traffic would probably be diverted to private cars rather than buses, but the higher costs that would be involved have not been estimated. 5.07 Owing to the uncertainties inherent in estimates of investment costs, operating costs, labor savings, and traffic projections, a sensitivitv analysis was performed to test the effects of variations from the estimates believed to represent the most likely magnitudes. The economic rate of re- turn for the total investment in the program was found to range from 14.5Z with very conservative estimates of the variables (including stagnant traffic over the investment life) to 26.5% with verv favorable assumptions. The most probable economic return is 20.5% which confirms that the program is economically well justified and of high economic priority. Iurther details of the analysis are in Annex 7. 5.08 Sensitive factors for maintaining a high economic rate of return for the plan are (a) early action to capture traffic and (b) control of investment costs; these factors have been taken into account in determining the timing of the plan outlavs. The investment plan should be carried out as soon as possible; five years is the most reasonable duration that can be expected for the physical accomplishment of the plan. 5.09 The five-year plan will have a beneficial impact on the Argentine balance of payments. The probable amount of foreign resources in the plan (43% of the total investment) is less than the amount of foreign exchange that would be used in truck investment and road transport operations if the railway plan were not carried out. C. The Project (1971-72) 5.10 The 1971-72 project under consideration for Bank financing covers important investments in the first two years of the recovery plan. The proposed timing for these investments is the most reasonable, taking into account urgent needs for equipment and the practical ability to absorb this new equipment and works. These investments are essential to carry the traffic forecast by 1972; supporting operational and commercial development activities are under way to promote earlv traffic growth. The investments are appropriate for early procurement, and the Bank has asked FA to call as soon as possible for competitive bids for the items in the first two years of the recovery program.  - 21 - 6. EARNINGS AN) FINANCES A. Present Position 6.01 After nationalization in 1946 and 1947, the earning power and financial condition of the Argentine railways steadily deteriorated, cul- minating in a record working loss (before depreciation) of the equivalent of US$158 million in 1966. 6.02 With declining efficiency, aggravated by political factors, loss of workers' morale and discipline, and failure to maintain equipment to proper standards, and confronted with rising road competition, the rail- ways have been caught in a familiar vicious circle of expenses rising much faster than revenues, leading to neglect of necessary investment and main- tenance. 6.03 Under the new management, FA has made the first steps along what is likely to be a long process of recovery; the rise in operating expendi- ture has been virtually halted, and revenues, aided by traffic and tariff increases, have risen substantially. The situation is illustrated by the following summary oerating accounts for 1966- 69 (more detailed operating accounts for 1964- 69 are given in rable 12): 1966 1967 1968 1969 ($a million) 1/ OPERATING RESULTS Operating Revenue 446 618 709 799 Working Expenses l,0Cl 1,118 1,091 1,118 Depreciation 2/ 170 180 190 200 Operatinpg Expenses 1,171 1,298 1,281 1,318 Working Loss 5555 500 382 319 Operating Loss 2/ 725 680 572 519 Operating Ratio 2/ 2262 210 181 166 1/ Amounts have been converted from the currency prevailing until January 1970 (M$N) to the present currency. 2/ )Depreciation figures for 1966 to 1969 differ from those shown in Table 12: the latter are inadequate and the assessed figure for 1969 has been substituted to pive a more correct comparison of earlier years with 1969.  - 22 - 6.04 Under the new management the working loss has been brought down from $a 555 million in 1966 to $a 319 million in 1969; in terms of constant 1966 prices, the change has been from $a 555 million to about $a 205 mil- lion. This is a reduction of almost two-thirds in real terms of the burden on Government finances, which is a creditable achievement. All six railways incurred operating losses in 1969, with operating ratios varying between 101% for the San Martin to 195% for the Belgrano. These, of course, under- stated the position because of the very inadequate provision made for de- preciation. 6.05 Labor cos-ts are the most important operating cost, being higher than gross operating revenue, and 73% of total working expenditure in 1969. National wage awards of November 1, 1969 and March 1, 1970 raised salary levels by about 13%. Pensions and family allowances are payable by Govern- ment, with FA contributing 10% to family allowances and 12% to the pension fund (the staff contribute 8% to pensions). Material costs have been low, mainly due to past lack of spares for maintenance, but are now increasing. Fuel costs are affected adversely by the continued operation of steam locomotives, using fuel oil, coal and wood. 6.06 FA has been revaluing its assets on a current cost basis and the work is to be completed, and adequate provision for depreciation be made, based on the revised values, by the end of 1972. 6.07 The balance sheets for 1964-69 are given in Table 13 and are summarized below for 1966-69: 1966 1967 1968 1969 ($a million) Summary Balance Sheets Net Current Assets (liabilities) 2 (150) 60 157 Net Fixed Assets 596 704 976 1,188 Deferred Assets 761 1,306 1,121 806 Totals 1,359 1,860 2,157 2,151 Debt 731 1,042 977 976 Government Account (net) 924 1,089 1,481 1,535 Capital (deficit) (296) (271) (301) (360) Totals 1,359 1,860 2,157 2,151 6.08 The value of inventories has been inc.reasing since 1966, mainly due to the purchase of spares to improve the maintenance of locomotives and rolling stock. In line with the reorganization of stores, FA is cur- rently examining all stores holdings to eliminate obsolete and slow-moving items; this review is to be completed by the end of 1972. 6.09 The debt consists of (a) loans from Eximbank and the Government Central Bank and (b) liability for contractor financing. This latter is  _ 23 - not entirely for debt already incurred, but is a mixture of liability for progress payments due as work or equdipment is completed, and of debt re- payments. Further details are given in Annex 8. 6.10 "Deferred asset:s" is also a mixture consisting of (a) commitments for the value of work to be done or equipment to be delivered by contractors, in general complementary to item (b) in paragraph 6.09 and (b) the value of naterials (consumables and fixed assets) awaiting analysis and allocation to the correct asset account. FA has agreed that this item will be substan- tially cleared by the end of 1972. 6.11 One item of debt shown under "Government account" as of December 31, 1969, and still outstanding, relates to FA's 1967 contribution to pen- sion funds ($a 143 million) not paid into Government funds due to shortage of cash. This reflected FA's former lack of working capital with conse- quent long delays in settlement of accounts, leading in turn to increased costs. Recently working capital has been considerably improved, with $a 85 million being provided from the official savings bank (repayable over five years), which has enabled FA to reduce considerably the delays in the settle- ment of local accounts. 6.12 In its present form the balance sheet of FA is unsuited to an enterprise which in the future is to operate on commercial lines. In line with the general policy of reorganization of accounts, the balance sheet is to be reconstructed by FA with the aid of consultants (para 6.23) by the end of 1972. B. Future Prospects 6.13 FA's aim is (a) to hold oMterating expenses to about the present, 1971, level, (b) to increase revenues sufficiently to meet working expenses by about 1975, thus eliminating the need for the large subsidy from Govern- ment for operations, and (c) by about 1979, to cover all operating expenses, including adequate depreciation. 6.14 In achieving (a) above, FA plans to use the savings arising from the reduction in labor force to an average of about 120,000 in 1975, to give selective increases to managerial, supervisory and skilled staff suffi- cient to increase the average pay oE such staff by about 20% through 1975. The actual amounts and timing of the selective pay rises should be regulated so that total labor costs would vary within the limits of $a 1,100-1,120 mil- lion each year. Any further general pay rises ordered by the Government, such as recentlv announced (January 1971) will, of course, be in addition to the above. The revised labor costs forecast for 1971 are about $a 1,086 mil- lion for an average labor force of about 141,000 persons. This includes basic salaries, allowances and provision for pensions and family allowances. In each of the vears 1971-73, FA's contribution to the pension fund will rise by 1%, to 1571 in 1973, with a corresponding reduction in the staff contribu- tion. Each rise of 1% will cost FA about $a 7 million annually.  - 24 - 6.15 Revenue increases will be achieved by (a) increasing freight traf- fic by about 3% per annum and at the same time adjusting tariffs in the light of costing information and the competitive environment so as to raise the average revenue per ton-km in real terms by about 2,, p.a. over the five vesrs, and (b) raising urban and general passenger fares as explained in paragraph 3.27, while retaining passenger traffic at about the current level. 6.16 The forecast operating results over the period 1970-75 are given in Table 14 and are summarized below. These results, wlich indicate the working ratio improving from 124 in 1970 to 98 in 1975, and the operating ratio improving from 145 in 1970 to 115 in 1975, are believed to be as good as can be achieved. Their attainment will require sustained and concerted action by the Government and FA. Summary Income Account 1970 1971 1972 1973 1974 1975 ($a million) Operating Revenues 970 1,078 1,167 1,272 1,356 1,409 Working Expenses 1,205 1,356 1,358 1,374 1,372 1,373 Depreciation Provision 200 225 231 237 243 247 Total Operating Expenses 1,405 1,581 1,589 1,_611 1,615 1,620 Net Operating Loss 435 503 422 339 259 211 Interest Charges 24 64 85 88 101 111 Net Loss 459 567 507 427 360 322 Working Ratio % 124 126 117 108 101 98 Operating Ratio % 145 147 136 127 119 115 6.17 Forecast requirements and sources of funds for the years 1971-75 are given in Table 15 and can be summarized as follows:  - 25 - Totals 1971 1972 1973 1974 1975 1971-72 1971-75 (Project (Plan Period) Period) ($a million) a) Funds Required for Investment Local Funds 374 408 384 379 367 782 1,912 Foreign Exchange 362 328 296 245 213 690 1,444 Total Investment 736 736 680 624 580 1,472 3,356 b) Other Funds Required for: Debt Service 244 282 238 283 310 526 1,357 Operating Loss (Surplus) Before Depreciation 278 191 102 16 (36) 469 551 Total Other Funds Required 522 473 340 299 274 995 1,908 Total Funds Required (a+b) 1,258 1,209 1,020 923 854 2,467 5,264 c) Funds Available from: Borrowing - IBRD 109 227 336) - Other 241 218 415 412 376 459) 1,998 Government 908 764 605 511 478 1,672 3,266 Total Funds Available 1,258 1,209 1,020 923 854 2,467 5,264 6.18 Over the project period (1971-72) FA will require $a 1,472 million (US$368 million equivalent) for capital investment and $a 995 million (US$249 million) for reimbursement cf debt service and net operating losses, that is, a total of $a 2,467 million (US$617 million). It is assumed that for the capital investment, $a 336 million (US$84 million) will be provided by the proposed loan, $a 136 million (US$34 million) from suppliers' credits for locomotives and railcars on favorable terms and $a 323 million (US$81 million) in loans from local finance institutions, with the balance, plus the amounts to meet debt service and operating losses, totalling $a 1,672 million (US$416 million), in the foim of equity from the Government.  - 26 - 6.19 In the remaining three years (1973-75) annual capital investment needs will decrease, the total required being $a 1,884 million (US$471 mil- lion equivalent). With improved operating revenues FA's net operating losses will also decline but debt service will rise, the total reimburse- ment being $a 913 million (US$228 million). The total cash requirements will then amount to $a 2,797 million (US$699 million) which it is assumed may be met to the extent of about $a 1,203 million (US$301 million) by borrowing from multilateral, bilateral and local sources and the balance, $a 1,594 million (US$398 million), by the Government, on a declining scale, over these three years. 6.20 In view of the unsatisfactory nature of FA's current balance sheets and the revaluation of fixed assets presently under way, it is not possible to project future balance sheets in the normal manner. Instead, an attempt has been made to build up forecast statements on the basis of (a) an estimate of the revised gross values of fixed assets, and of accumulated depreciation, (b) the forecast operating results, (c) the annual forecast of debt, and (d) the assumption that FA's accounts, particularly those relating to equity and the Government accounts, will be reorganized within the next two years. These summary tentative balance sheets for the years 1971-75 are given in Table 16. Over the five years, there should be a slight improvement in the current ratio, from 2.0 to 2.2; the debt/equity ratio will range from 33/67 to 41/59 and should improve thereafter. 6.21 Agreement has been reached that: (i) the Government shall promptly provide all funds to cover the annual deficits resulting from operations and debt service and to carry out the plan; (ii) FA shall (a) for 1971-75 take all necessary steps to achieve the annual working and operating ratios set out above, (b) provide annual depreciation of not less than $A 200 million and (c) reconstruct the balance sheet on modern commercial lines by the end of 1972; and (iii) after 1975 FA shall aim to improve net operating revenues so as to achieve an operating ratio of 100 by about 1979. C. Budgets, Accounts and Audit 6.22 FA, in the past, prepared annual operating and capital budgets only. With the help of its consultants FA has now prepared budgets for a five-year period 1971-1975, and will amend and extend them on an annual basis. 6.23 The accountancy system meets governmental budget needs, but should be converted to modern commercial practice. A start has been made, with the installation of a large computer and with the reorganization of the system,  - 27 - initially to facilitate the extraction of information essential for costing, particularly in the workshops. FA has appointed an accounting and management consulting firm to advise on statistical and management information systems and has also appointed the same firm to advise on the reorganization of accounting matters generally. A new centrally controlled internal check system has been prepared by FA and will be reviewed by the accounting con- sultants before implementation. 6.24 Under the new Enterprise Law, two Government auditors or "Sindicos" are appointed, one responsible to the Ministry of Public Works and Services, and the other to the Ministry of Finance. Their principal duties are to check that FA conforms to its legal powers and to report upon FA's opera- tional and financial performance. These arrangements are not sufficient to ensure that FA's accounts are kepl. in accordance with generally accepted standards and, consequently, as empowqered by the Law, FA has appointed pro- fessional accountants to carry out commercial-style annual audits commenc- ing with fiscal year 1969. 7. RECOMMENDATIONS 7.01 During negotiations, agreement was reached with the Government of the Republic of Argentina and FA on the following principal items: (i) FA's 1971-1975 investment plan and the limitations on changing it (para. 4.01); (ii) time-phased action progranms on (a) staff reductions, (b) rationalization of services and closure of lines, (c) re- habilitation of diesel locomotives, (d) reduction of work- shops and (e) commercial plans (para. 4.02); (iii) revision of tariffs in stages including prompt adjustments to meet such inflationary costs as general wage awards (para. 3.27); (iv) financial targets to reach a working ratio of 100 by 1975 and an operating ratio of 100 by about 1979 (paras. 6.16 and 6.21); (v) provision of funds to meet operating deficits, debt service and capital requirements (para. 6.21); (vi) modifications to the Enterprise Law, affecting adversely and substantially the conduct of FA's operation and financial condition, to be an event of default of the Loan (para. 3.03); and (vii) procurement of freight cars, a portion being reserved to local industry under suitable pricing arrangements (para. 4.12).  - 28 - 7.02 The project provides a suitable basis for a Bank loan of US$84 million equivalent to the Argentine Railways. A term of 25 years, includ- ing four years of grace, is recommended for the loan. March 3, 1971  ARGEhiM RAILWAYS Freight Traffic by Modes of Transport 1950 - 1968 (Thousands of Tons Originating) Year Total Highways Railways Coastal River Pipe Shipping Transport Line (combined) 1950 187,998 147,823 32,849 7,257 69 1951 205,727 163,123 32,966 9,526 112 1952 184,279 142,664 29,677 11,796 142 1953 216,020 173,272 30,540 12,024 184 1954 215,017 170,850 31,042 l2,915 210 1955 221,998 179,164 28,712 13,904 218 1956 217,502 175,373 27,785 4,320 9,766 258 n957 220,396 177-97 26,872 ,1h3 10,9694 1958 236,863 193,615 25,320 5,411 11,958 1959 229,697 184,543 26,798 5,453 12,180 723 1960 233,966 186,310 26,166 6,907 13,089 1,494 1961 248,005 198,188 21,964 9,739 15,522 2,592 1962 243,340 195,855 17,220 10,479 16,170 3,616 1963 238,952 192,806 16,805 10,279 15,482 3,580 1964 259,880 207,893 20,692 10,601 16,962 3,732 1965 285,600 226,285 23,407 10,247 18,630 7,031 1966 280,125 220,059 21,944 10,235 19,008 7,747 1967 292,600 236,228 16,820 12,369 18,683 8,500 1968 322,600 260,329 19,836 12,504 20,289 9,700 Source: CONADE June 1970  ARGENTINE RAILWAYS Freight Traffic by Modes of Transport 1950 - 68, with Projections for 1969 74 (Millions of Ton-km) Coastal River Pipe Year Total Highways Railways2'/ Shipping Transport Line (combined) 1950 29,054 7,652 16,120 5,189 93 1951 32,049 8,607 16,479 6,812 151 1952 32,094 8,212 15,256 8,434 192 1953 33,545 9,684 15,016 8,597 248 1954 34,183 9,468 15,197 9,234 284 1955 35,129 9,502 15,392 9,941 294 1956 35,918 10,061 14,870 6,920 3,719 348 1957 35,662 10,263 14,367 6,481 3,720 831 1958 37,999 11,346 13,835 8,339 3,670 809 1959 40,723 11,411 15,530 8,974 3,798 1,010 1960 47,o84 14,216 < i-,188 11,437 4,135 2,108 1961 56,o48 17,645 14,014 16,232 4,624 3,533 1962 57,998 19,613 10,969 17,927 4,898 4,591 1963 56,707 19,406 10,695 17,439 4,623 4,544 1964 61,663 20,618 11,560 20,103 4,986 4,396 1965 66,629 23,032 14,186 18,809 5,154 5,448 1966 68,116 21,757 14,148 20,729 5,188 6,294 1967 69,184 24,676 11,241 21,575 4,848 6,844 1968 74,197 26,671 12,709 21,917 5,127 7,773 1969 78,306 28,750 13,700 22,645 5,431 7,780 1970 83,930 30,960 14, 200 23,134 5,730 9,906 1971 89,419 36,092 14,800 21,061 6,050 11,416 1972 95,375 36,283 15,550 22,307 6,409 14,826 1973 101,543 37,976 15,800 24,617 6,772 16,378 1974 108,200 41,586 16,200 25,939 7,157 17,318 Source of actual and projected figures: Sectoral Development Office and Secretariat of CONADE (SECONADE) 2 1/ Actual results for 1969 onwiards are lower than projected by SEJOlNADE. They have not been modified as t actual figures fcr other modes are unavailable. M June 1970  ARGENTINE RAILWAYS Route and Track Data Route Length (Ikm) Classification by Traffic (Gross Tons per year) Classification by Track condition I Track System Gauge In Service Closed in In Service I II III IV I II III IV Length M 1966 1967-1968 1969* .Ve than 2 mils .to2mil. L .2 to D.8 ni I Lns,a yhaa o, mL. Very Good Good Fair Bad kJn 1.676 8.527 237 8.290 1.939 2.-518 1 1.398 2.435 260 3.407 4.672 388 8.727 Roca ( 0.750 403 - 43 - - -_ 403 62 262 71 8 403 Total 8.930 237 8.693 1.939 2.518 1.398 2.838 322 3.669 4.743 396 9.130 Mitre 1.676 6.253 10 6.243 2.316 780 2.375 772 616 3.651 2.107 382 6.756 S. Martin 1.676 9 .6,3 - _ .643 1.975 508 510 1.650 230 2.132 2.627 40 5.029 Sarmiento 1.676 3.845 - 3.845 423 828 939 1.655 22) 1.176 1.79C A 02 9, nR8 1.435 3.251 160 3.091 639 683 986 783 314 1.073 1.163 562 3.112 Urquiza ( M.600 209 - 209 _ _ _ 209 _ _ _ 209 209 Total 3.460 160 3.300 639 683 986 992 314 1.073 1.163 771 3.321 1.000 14.689 1.228 13.461 2.616 L.215 2.773 3.857 1.223 6.557 4.598 1.199 13.577 Beigrano (0.750 77 - 77 _ _ 77 _ - - 77 77 Total 14.766 1.228 13.538 2.616 4.215 2.773 3.934 1.223 6.557 4.598 1.276 13.654 TOTAL 41.897 1.635 40.262 9.908 9.532 8.981 11.841 2.925 18.258 17.028 3.767 41.978 * Provisional Data Souroe: PA PA Jung 3.970  ARGENTINE RAILWAYS Line Rationalization and Closure FA Program 1971 - 1975 Rationalize (km) Examine for Closure (kn) Grand ______- -_______ _______ - ~~~~~~~~~~~Total 19 71 72 73 7)4 75 Total 71 72 73 74 75 Total (kin) Mitre - 210 940 1100 850 3100 20 - 300 240 - 560 3660 Roca 1100 130 1400 770 - 3400 320 290 140 - _ 750 4150 San Martin 820 220 190 370 _ 1600 90 440 - 180 - 710 2310 Sarmiento 430 220 340 660 - 1650 300 - 210 100 - 610 2260 Total Broad Gauge 2350 780 2870 2900 850 9750 730 730 650 520 - 2630 12,380 Belgrano (MG) 590 2240 890 1300 1600 6620 1400 890 570 100 - 2960 9580 Urquiza (SG) - - - 170 2200 2370 - - - 160 500 660 3030 Total all Gauges 2940| 3020 3760 4370 4650 18,740 2130 1620 1220 780 500 6250 24,990 Source: Sunmarized from FA detail programs June 1970  AIGENTIMM RAILTWAYS Fleet of Locomotives arid Cars Unita at Feb. 28, 1970 Stea. Diesel Diesel Electric Phuae.ewr Freight Lo.omotiv-es Locomotives Raibere. Railcar T. Cars Ca. Rsilway BG SG MG Total BG SG MG Total BG SG MG Tgtal MG SG MG Total BG SG MG Total BG SG MG Total Total is Fleet 910 140 812 1862 874 465 287 1206 3