Bolivia - Railway Project

RETUrThN TO REPO)RTS DESKi WITHINriLL ONE WEEK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. PTR-llla APPRAISAL OF A RAILWAY PROJECT BOLIVIA November 15, 1972 Latin America and the Caribbean Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Equivalents Currency Unit = Pesos ($b) $b 1.00 = US$0.08 US$1.00 = $b 12.0 $b 1.0 million - US$83,000 Weights and Measures: Metric System Metric US Units 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 liter (1) = 0.22 imp. gallons - o.26 US gallons 1 kilogram (kg) = 2.20 pounds (lb) 1 ton = 2,205 pounds Fiscal Year January 1 to December 31 Abreviations and Acronyms ALALO - Latin America Free Trade Association COMI3OL - Government Mining Conpany CONAVI - National Housing Council tfJM - Daniel, Mann, Johnson & Mendenhall- Consulting Firm, Los Angeles (USA) ENFE - National Railway Enterprise of Bolivia, Bolivian Railways IDB - Interamerican Development Bank MTCCA - Ministry of Transport, Communication and Civil Aviation SOFRERAIL - Societe Francaise d'Etudes et de Realisations Ferroviaires - Consulting Firm, Paris (France) UNDP - United Nations Development Program USAID - United States Agency for International Development YPFB - Yacimzientos Petroliferos Fiscales Bolivianos Note Under the Government's "-tabilization and Development Plan", the Bolivian peso was devalued to $b 20.0 per U.S. dollar on October 27, 1972. The effect of the devaluation, and of related measures, including a wage increase, has not been reflected in the financial figures quoted in this report.  BOLIVIA APPRAISAL OF A RAILWAY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ..............*..*** i 1. INTRODUCTION .................. ............................. 2. BACKGROUND ..........*.*.**** * ........................... 2 A. Geneial ........2*....* * ..........................* 2 B. The Transport Sector ... . 3 C. Transport Investment Planning and Coordination ...... 4 3. THE NATIONAL RAILWAY ENTERPRISE OF BOLIVIA (ENFE) ......... 5 A. General ..... *............. .... *. ...... ........ .. 5 B. Organization and Management ......................... 5 C. Staff ......................... 6............... . 6 D. Railway Property .... .......... ........ 6 E. New Lines ............................ ... 6 F. Traffic and Operations .........................7... 7 4. TlE INVESTMENT PLAN AND THE PROJECT ...................... 8 A. The Plan ............................... ***.O....*..* 8 B. The Project and the Credit ...........*.........O..... 10 C. Financing of the Project ................... ......... 11 D. Execution of the Project, Procurement and Disbursement ............................................. 11 5. ECONOMIC EVALUATION . ............. ........... .......... 12 A. General ....... .. .........*.. . 12 B. Economic Benefits of the Plan ....... .......... 12 C. Sensitivity Analysis o.................o . ......... 13 D. Improvement of the Oruro-Cochabamba Line ....... *.*.. 13 E. Dieselization ... ............. ...... . *............... . 14 F. Uneconomic Lines .. * .... .... ...................... 14 This Appraisal Report has been prepared by Messrs. J. Blumstein (railway engineer), F. Chapman (financial analyst) and J. Mtartinez and A. Mates (economists).  Table of Contents - continued Page No. 6. FINANCES .............. .............. ,. ..*. 14 A. Introduction .................. ,. 14 B. Present Financial Position .......................... 15 C. Tariffs and Costs . 16 D. Past and Future Earnings . 17 E. Financial Targets ..00................... I ,,.,*, 19 F. The Financing Plan ....................... ,... 20 G. Budgets, Accounts and Audit ..*, 22 7. AGREEMENTS REACHED AND RECOMMENDATION ****qese........ .qo 23 ANNEXES 1. Traffic Density Chart 2. Railway Costs and Revenues 3. MIarginal Cost of Road Transport 4. Organization Chart of ENFE 5. Time-Phased Action Programs 6. Brief Description of Railway Property 7. New Lines Under Construction or Proposed 8. Freight Traffic 1969-1977 9. Macro-Economic Model for Forecasting Traffic on the Western System 10. Passenger Traffic 1965-1977 11. Selected Operating Statistics 12. Scope of Phase II Technical Assistance Services to ENFE 13. 1973-1977 Investment Plan 14. Main Items of the 1973-1977 Investment Plan 15. Disbursement Schedule 16. Economic Costs with and without the Investment Plan 17. Summary Balance Sheets (West and Eagt Lines) 1965-1971 18. Cash Flow 19. Operating Accounts 1966-1971 (West and East Liqoe) 20. Income Projections 1973-1977 (West and East Lines) 21. Forecast Summary Balance Sheets 1972-1977 MAP Bolivian Railways - IBRD 3716  BOLIVIA APPRAISAL OF A RAILWAY PROJECT SUMMARY AND CONCLUSIONS l. This report appraises a project consisting of the first stage (1973-1974) of a plan for the technical and financial rehabilitation of the National Railway Enterprise of Bolivia (ENFE). The objectives of the plan are to enable the railways to fulfill their essential role in the economy and to establish ENFE's financial and technical viability. The proposed credit of US$8 million equivalent would be the first credit to Bolivia for development of its transport infrastructure (a Bank Loan 635-BO of US$23.25 million was made in 1971 for a gas pipeline). ii. Transportation in Bolivia has developed piecemeal and in an uncoor- dinated manner. The railways were established in the west by various enter- prises to transport mining products to Pacific ports for export. The east, with Santa Cruz as its commercial center, has only recently been connected to the Argentine and Brazilian railways. The only rail connection between the east and west Bolivian railway systems is by a 600-km detour through Argentina. The highway system, while connecting major cities in the west and providing the only land link in Bolivia between west and east, has no adequate connec- tion with any ports. Thus, for export and import freight traffic, the rail- ways are an essential transportation link for the Bolivian economy. iii. Highway competition for internal traffic has grown considerably over recent years; in face of this, ENFE's tariffs have changed little since 1959, and the railways' revenues per ton-km have, in real terms, deteriorated. Com- pounded by rising costs and poor operating performance, ENFE's annual cash deficits rose to almost US$4 million equivalent in 1971, only partly covered by Government subvention, leading to a steady erosion of ENFE's financial condition. The shortfalls in Government subventions reflect the difficult situation of Government finances; thus, the provision of adequate local currency funds for ENFE over the project period and, on a declining scale, over the remainder of the plan, will be crucial for ENFE's rehabilitation. iv. ENFE has combined virtually all the difficulties frequently encount- ered in many of our railway projects: poor operations with a low traffic density, poorly maintained and over-aged equipment, lack of experienced management and a low standard of staff training, lack of commercial policy, an inadequate level and structure of tariffs, uneconomic lines and services, and excess staff. All of these factors have led to a difficult financial situation, aggravated in the past by inadequate financial assistance from the Government. v. The project forms the first part of ENFE's Five-Year Investment Plan, 1973-1977, which, together with interrelated and most essential action programs, is designed to carry out the physical rehabilitation of ENFE's equipment and im- prove its management, operations and finances. The equipment and works to be  - ii - financed by the proposed IDA credit are, in conjunction with technical assis- tance financed by the United Nations Development Program (UNDP), an essential first step, leading to full dieselization and to better use of existing and new facilities. They include freight cars to replace over-aged, small capac- ity cars, rail tractors to replace large locomotives for shunting operations, diesel rail cars to carry increased passenger traffic, spares and components to rehabilitate and improve diesel locomotives and rolling stock, modernization of workshops and the carrying out of essential track works and improvements to structures and telecommunications. The project includes all works to be com- mitted in the years 1973-1974, at a total estimated cost of about US$11.6 mil- lion equivalent. The proposed IDA credit of US$8 million equivalent would cover the cost of the foreign exchange component of all works and would provide US$0.8 million toward the local currency costs of essential track materials. In order to secure the maximum benefits from the rehabilitation and moderniza- tion program, ENFE will need continued technical assistance. The UNDP has agreed to provide about US$1 million to help finance this assistance. vi. The appraisal has established that continuation of railway service is vital to the economy and has identified means of fulfilling this role by enabling ENFE to become more efficient in its management and operations and to improve its finances. viii On a conservative basis, the economic rate of return on the total in- vestment in rehabilitation, dieselization and modernization is estimated at 21%, The financial benefits will also be substantial and it should be possible for ENFE to become financially viable by about 1978. Due to accounting deficien- cies, including the absence of a realistic valuation of fixed assets, it is not possible to determine a rate of return on net fixed assets. The achievement of working and operating ratios of about 79% and 92% respectively by 1977, which would almost eliminate ENFE's reliance on Government for financial support, is considered to be an appropriate target for future financial performance. viii. The recovery of ENFE will take many years and the success of the Plan will depend on (a) strong financial and political support from the Government, (b) the ability of ENFE's management to carry out successfully the various time- phased plans of action and (c) ENFE's traffic increasing as forecast. In view of the strong resolve to support ENFE expressed by the present and previous Gov- ernments and of the considerable measure of technical support being given to ENFE's management under the UNDP financed project, the chances of success are reasonable provided the future brings no radical change in policies. Traffic prospects are difficult to assess in view of the heavy reliance on exports and imports, which vary with world trade conditions, and on domestic agricultural production; the forecasts are the best estimates in the light of present conditions, but the possibility of variations (both upwards and downwards) must always be recognized. ix. The project is suitable for an IDA credit to Bolivia of US$8 million equivalent, to be made available to ENFE at 7-1/4% interest for a term of 25 years, including a five-year period of grace.  BOLIVIA APPRAISAL OF A RAILWAY PROJECT 1. INTRODUCTION 1.01 The Government of the Republic of Bolivia and the National Railway Enterprise of Bolivia (ENFE) have asked the Bank Group for assistance in the financing of the 1973-1977 Investment and Rehabilitation Plan for the Railways, prepared by ENFE with the assistance of SOFRERAIL 1/, a French consulting firm. The proposed five-year investment is estimated at US$37 million equivalent. Investments during the first two years are estimated at $b 139 million (US$11.6 million equivalent), with a foreign exchange component of US$8 million, includ- ing US$1 million for technical assistance which is expected to be financed by a grant from the United Nations Development Program (UNDP). 1.02 Since its creation in 1964, ENFE has faced severe financial and mana- gerial problems, aggravated by Government and labor interference. Although it manages the majority of railway operations and has a virtual monopoly on many routes, ENFE has been unable to integrate and rationalize operations or to ful- fill satisfactorily the important role that railways should play in Bolivia. The proposed project is a three-fold approach to solving these problems: (a) investment to rehabilitate the railways' equipment and facilities; (b) im- provement in operations, carrying of more traffic and reduction in unit costs; and (c) training of railway personnel (both labor and supervisors) through the implementation of sound railway management programs. Scarcity of resources in Bolivia has long been a problem, particularly affecting ENFE in that Govern- ment has not been able to supply needed finances (para. 6.01). In 1970, Govern- ment enterprises accounted for about $b 205 million of the $b 700 million over- all Government deficit; this included $b 38 million for ENFE (working loss plus debt service), against which Government provided only $b 20 million. During the first two years (1973-1974) of ENFE's Plan, the local currency requirements for investment, operations, debt service and working capital (including funds for retirement benefits) amount to $b 100 million (US$8 million equivalent), a significant sum in the Bolivian context. Apart from financing the foreign exchange requirements for the first two years, the proposed credit can contribute US$0.8 million toward local financing. 1.03 An overall transport survey 2/ of Bolivia was completed in 1969, fi- nanced by the UNDP with the Bank as executing agency. The study proposed a program for integrated transport development over the next ten years. In early 1969, the UNDP agreed to finance consultants to assist ENFE personnel in the implementation of modern operational and administrative methods and in the planning of future investments. The consultants, SOFRERAIL, who were 1/ SOFRERAIL: Societe Francaise d'Etudes et de Realisations Ferroviaires. 2/ Bolivia Transport Survey, prepared by Daniel, Mann, Johnson and Mendenhall, the Stanford Research Institute, and Alan M. Voorhees and Associates, Inc. during the period March 1967-July 1969.  - 2 - selected and began work in October 1970 with the Bank as the executing agency, have established an excellent working relationship with ENFE management and the labor unions, and are successfully completing their terms of reference. Their present contract was extended to September 30, 1972. A request made by the Government for a further extension of their services has been accepted by the UNDP. 1.04 Except for helping to finance a gas pipeline in 1971 (Loan 635-B0, US$23.25 million), the Bank Group has not yet lent to the transportation sec- tor of Bolivia. In the past, USAID has financed highways. The Inter-American Development Bank (IDB) has been requested to finance the Oruro-Cochabamba high- way and has recently lent US$530,000 for a feasibility study. 1.05 This report is based on (a) the five-year Investment and Rehabilita- tion Plan, 1973-1977, prepared by ENFE with the assistance of SOFRERAIL, and updated in agreement with the Association; (b) data supplied by the Government of Bolivia; (c) findings of an appraisal mission in September/October 1971 comprising Messrs. J. Blumstein (railway engineer), F. Chapman (financial analyst) and J. Martinez and A. Mates (economists); and (d) further updating by brief missions to Bolivia in January and February 1972 and by a Bolivian delegation to Washington in October 1972. 2. BACKGROUND A. General 2.01 Bolivia has a land area of about one million square km and a pop- ulation of 5.0 million. It is a landlocked country, with only sparse settle- ments in the tropical plains that constitute two-thirds of its territory; it is more heavily populated in the barren and mountainous southwest. The need to open the rich eastern plains to migration while maintaining the existing communication links among the highland cities poses a difficult transport problem. 2.02 Between 1964 and 1968, GDP grew, in real terms, at an annual rate of 7%, slowing down to some 5% in 1969 and 4% in 1970 because of a decline in overall investment activity. The economy is now expected to grow by about 6% annually during 1973-1977. The forecast growth will be concentrated in commodities produced mostly in the eastern plains, as well as in mineral exports. Little growth is forecast for the highlands. A detailed discussion of general economic conditions and outlook is contained in the most recent economic report on Bolivia, No. WH213(a), dated November 9, 1972.  -3- B. The Transport Sector (i) General 2.03 The railways of western Bolivia (2,302 km), built in the late 19th and early 20th centuries, were developed largely in response to the needs of the mining industry; their routes were selected to provide the most direct and least expensive transport from the mines to Pacific ports. Most of the lines were built with private capital backed by Government guarantees. The railways of eastern Bolivia were built in the early 1960's as a means of de- veloping the Santa Cruz region and providing it with connections to Atlantic ports. In addition to the railways administered by ENFE are the Guaqui-La Paz line (96 km), operated by the Peruvian Corporation (para 2.07), and the Machacamarca-Uncia line (105 km), operated by the Government mining company, COMIBOL. 2.04 The present highway system, almost entirely confined to the south- western third of the country and connecting the major cities through extremely difficult mountainous terrain, consists of 4,000 km of primary roads, of which only 800 km are paved; 2,700 km of secondary roads; and over 12,000 km of ter- tiary roads. A tentative 1970-1979 Highway Plan envisages the construction of 3,600 km of new roads together with the improvement of 2,600 km of existing roads and an improved road maintenance program. 2.05 Inland waterways are no more than a series of isolated systems with primitive facilities and slight traffic. Petroleum pipelines transport all crude oil for Bolivian refineries and for export. A 530-km gas pipeline to the Argentine border, partially financed by the Bank, was completed and placed in operation in 1972. Air passenger transport plays an important role because of the rugged geography of the mountainous region and the lack of other means of communication in most of the plains. Air services link La Paz and Santa Cruz with neighboring countries. (ii) Role of Railways in the Transport Sector: Present and Future 2.06 The meter gauge railway system administered by ENFE, about 2,100 km in the west and about 1,200 km in the east, is the only mode of transport in several areas. Traffic density is low on many of ENFE's routes, as illustra- ted in Annex 1. The major freight traffic flows are between La Paz and Charana (then going on to the port of Arica), La Paz-Oruro-Uyuni and Oruro-Cochabamba. All other lines are of very low density. 2.07 In the west, the railway provides an access to several ports: Matarani in Peru, Arica and Antofagasta in Chile, and Argentine ports via Villazon. The access to Matarani is via the Peruvian Corporation standard gauge line, with trans-shipments on to steamer services over Lake Titicaca; there is only an unpaved mountain road to Matarani. In 1969, over 55% of all traffic on the Western System consisted of exports or imports, including 90% of all mineral transportation, representing about 80% of the total value of exports from Bolivia.  - 4 - 2.08 Most new exports (cotton, timber, fruits) are expected to be gener- ated in the east, where the railway is the only mode of transport to Argentina and Brazil and to Atlantic ports. In )971, over 70% of all traffic by rail in the east was export/import traffic. This percentage is expected to rise to at least 75% by 1977, with exports of timber and cotton accounting for 47% of the total traffic. The high cost of road construction assures that the rail-- ways' monopoly for transport in this area is likely to continue for many years. 2.09 The crucial element in the analysis of the role of the railways is the cost of transportation. Comparisons of marginal costs by road in the wiest (excluding road infrastructure) with those by railway show that road costs are considerably higher for freight and also for most passenger services (Annexes 2 and 3). Although shippers consider other elements, particularly quality of ser- vice, analysis of ENFE's freight traffic shows that a large proportion consists of bulky, relatively low value products, with long hauls, for which transportation cost is a prime factor. The conclusion is that the railway systeF, plays an important role in transportation in Bolivia, and should be given assistaace in improving its services and operations, thus promoting the overall economy. C. Transport Investment Planning and Coordination 2.10 Much of the present transport system grew in response to the need to export western mineral products. Some transportation facilities have been and are being built without adequate economic justification, in the hope that once completed they will generate sufficient traffic (para 3.10 and Annex 7). Also, the 1969 Transport Survey concluded that, except for pipelines, the economic costs of providing transport services are not covered by collected user charges, due not only to inadequate charges but also to evasions of them. The poor quality of the statistics available precludes an accurate estimation of the real subsidy provided by the Government to the various transport modes. A detailed user charges study is necessary to determine the appropriate level of charges for each mode. Given the fiscal limitations, and the high cost of road and rail building in Bolivia, transport coordination must play an important part in the allocation of scarce economic resources. 2.11 Under the new Administrative Reorganization Law (September 1972), the Ministry of Transport, Communication and Civil Aviation (MTCCA) has been made responsible for formulating, directing and executing the transport policy. It will, therefore, receive the proposals of the various transport agencies and will develop, evaluate and adjust them to the transport sector require- ments. The Government proposes to augment the staff in this ministry to undertake the required studies and to prepare investment programs. Technical assistance is expected to be provided for this by the UNDP. The investment proposals of the MTCCA will be finally reviewed by a National Economic and Planning Council to determine the level of investment in light of national priorities.  3. THE NATIONAL RAILWAY ENTERPRISE OF BOLIVIA (ENFE) A. General 3.01 ENFE was created in 1964 to take over (a) the former British owned 97Bolivia Railway Company" (BRC) main trunk lines of the Western System (1,199 km) and (b) the Government branch lines (992 km) radiating from the BRC lines. In 1967, the Eastern Lines, completed in 1964, were also transferred to ENFE and operated as the Eastern System. The only rail connection between the two systems is via a 600-km detour through Argentina, over the Belgrano railway. B. Organization and Management 3.02 The National Directorate of Railways, under the Ministry of Trans- port and Communications, has final technical, financial, regulatory and ad- ministrative control of railways. 3.03 A new Enterprise Law defining the functions, organization and re- sponsibilities of ENFE became effective on July 31, 1970. The membership of the ENFE board and the senior management organization are shown in Annex 4. The board, with the Minister of Transport as Chairman, has six members: three Government, two labor representatives and the General Manager of ENFE (non-voting). The General Manager, appointed by the President of Bolivia, acts as chief executive and refers most policy decisions to the board. The autonomy of ENFE is satisfactory and no major changes in ENFE's organization are necessary. Agreement was reached during negotiations that amendments to the Enterprise Law would be made only after prior approval by the Association. Action programs have been prepared to carry out essential improvements in com- mercial operations, planning, personnel management and unification of proce- dures between the Western and Eastern Systems (Annex 5). Full implementation of these time-phased programs, which also cover improvements to operations and maintenance facilities, rehabilitation of track and equipment, staff re- ductions and redeployment, and financial targets, is a vital element of ENFE's recovery plan, and was agreed upon during negotiations. 3.04 Largely as a result of action by the unions, about 100 senior staff were retired in 1970 under a reorganization scheme. Thi3 left a serious gap, filled only partially by inexperienced and poorly trained personnel. Technical assistance to train and provide support for management staff as well as at the working level has been planned as an important part of the project. The re- habilitation program has been fully explained to the workers by the railway management and the consultants, and the cooperation of the unions has appar- ently been won. 3.05 The General Manager is capable but has lacked support from good quality trained and experienced senior staff. Much of his time has been devoted to per- sonnel problems, including the timely provision of funds for salaries. Imple- mentation of the rehabilitation plan is a full-time job, and it was agreed during negotiations that a senior officer would be appointed to be solely re- sponsible for this task.  -6- C. Staff 3.06 The number of employees on ENFE's West Lines decreased from 6,805 in 1957 to 5,614 in 1962, and 5,200 in 1971. The combined West and East Lines had a total of approximately 6,250 permanent employees in mid-1972. This figure is still excessive, but it includes about 900 waiting to be retired because of age, illness or partial disabilities. As agreed during negotiations, the total will progressively decline by attrition to a more satisfactory level of 5,500 by 1977 (Annex 5, Section C). 3.07 In addition to a pension from the Caja Social Ferroviaria, an employee on retirement receives from ENFE a lump sum ("indemnizacion") consisting of (a) one month's pay for each year of service plus (b) three months' pay. Shortage of funds to Day the lump sums prevents ENFE from retiring staff. 3.08 Salaries for management and professional staff, scaled down from the salary of the General Manager, which by law cannot be higher than that of a Minister of State, appear to be competitive with those of other Government- owned enterprises or agencies. The salary structure for non-menagerial and non-professional employees remains a chaotic mix of the salary systems of the railways that were merged into ENFE. The basic salaries have not changed since 1958. A National Commission consisting of six representatives -- two Government, two ENFE and two labor -- has been created to formulate a new ra- tional wage structure. During negotiations, agreement was reached that a re- vised salary structure would be prepared and submitted to the Association by December 1973, and that the new structure would be implemented in consultation with the Association. D. Railway Property 3.09 ENFE's track and structures would be adequate if essential renewals of material were carried out, particularly sleepers, track fittings and some rails, together with strengthening of some wooden bridges; however, rolling stock and equipment are in very poor condition. A brief description of the property is given in Annex 6. E. New Lines 3.10 Annex 7 gives details of new lines under construction or being pro- posed. An Argentine/Bolivian joint coLmnission, which constructed the Yacuiba- Santa Cruz line, has been building a 310-km extension northward from Santa Cruz to Puerto Mamore. This extension has not been justified economically and is likely to operate at a loss for many years. A further 140-km extension to Trinidad is now being studied. There are no commercial operations yet on the completed 102-km section ending at Santa Rosa. The Government is studying the construction of a line to link the West and East Lines, although the DNJM Transport Survey reported unfavorably on this project. At negotiations, agreement was reached that (a) the Puerto Mamore-Trinidad section would be implemented only after economic studies had been carried out and the Asso- ciation had been afforded a reasonable opportunity to exchange views with the Government; (b) the finances of the new Santa Cruz-Puerto Mamore line  - 7 - (or anv extension) would be separated from those of ENFE until such time as the line becomes viable; (c) once ENFE is required to manage operations on the line, any resulting losses would be compensated by specific reimbursement; and (d) construction of the East-West link would be undertalen only if justified by economic analysis satisfactory to the Government and to the Association. T7. Traffic and Operations (i) Freight Traffic 3.11 Total freight transport, accounting for about 75% of all railway revenues, increased steadily in the period 1960-1971. In the west, ton-km rose by 5% per annum from 155 million in 1960 to 261 million in 1971, and in the east from 41 million in 1967 to 86 million in 1971. Freight traffic de- clined only in 1964, because of difficulties resulting from nationalization of the network, and in 1970/71, because of a general slowdown in the economy and a deterioration of ENFE's equipment. 3.12 The sectoral traffic analysis for 1972-1977 (Annex 8) forecast an increase in ton-km of about 4.5% per annum in the west and 6.5% in the east on the basis of 1971 traffic. Total 1977 traffic is estimated to reach 465 million ton-km. In the west, the largest increases are expected for wheat and ores; in the east, cotton (large developments are in prospect) and timber iccount for about 60% of the projected traffic increase. 'e13 This analysis was compared with the results of a macro-economic "odel (Annex 9), which uses GDP estimates in the four main sectors and average revenue per ton-km (all in constant prices) for the period 1960-1969 as explana- tory variables of traffic growth in the west. The conclusion indicated that to achieve the results of the commodity analysis, GDP should grow by 5.5% annually; such a rate is within the range forecast for the country. (ii) Passenger Traffic 3.14 On the Western System, passenger traffic has declined since 1965 in terms of number of passengers, but there has been an upward trend in total pass- km. This is due to the introduction of "Ferrobuses", providing a fast, reliable, railcar service between distant urban centers, which has more than offset the downward trend of passenger traffic in regular trains. Actual and forecast traffic for the period 1965-1977 is given in Annex 10. Traffic growth is affected to a large extent by the speed and the comfort provided. Thus for the fast, comfortable railcars, the rate of growth projected is 4.7% annually while, for regular trains, the increasing competitiveness of road transport should limit growth of passenger traffic to 2.5% annually. In the east where road competition is almost nonexistent, the annual growth rate of total rail pass-km in the period 1965-1971 was about 4%. The projected annual growth in pass-km is 5.2% from 1972 on, shared equally by trains and railcars.  -8- (iii) Operations 3.15 Operations have been poor in general, partly due to the lack of adequate telecommunications, but also to the lack of supervision and training of staff. vith the consuitants' help, a time-phased program of reorganiza- tion has been prepared (Annex 5, section D), and a start has already been nade in introducing transportation plans and creating a train control office. Staff productivity, at about 90,000 traffic units (pass-km + ton-km) per employee, is somewhat low when compared to that of other meter gauge railroads (MIalagasy: 97,000; East Africa: 125,000; the Belgrano, in Argentina: 115,000) but has to be related to ENFE's light overall traffic density. It should improve with the full implementation of the rehabilitation and modernization schemes, tne manpower tedeployment plan and the expected traffic increase. Annex 11 sumnarizes operating statistics from 1967 to 1971. Due to the lack of miuch basic information, many of the 1969 figures had to be calculated on the basis of a four-month sample. A comprehensive plan to improve production of statistical information, prepared by the consultants, is being implemented, and by end-1972 statistical data will be published on a weekly and monthly basis. (iv) Commercial Policy 3.16 Until recently, a commercial policy barely existed in ENFE, with tariffs responding more to political pressures than to railway costs and transportation demand. The tendency has been to stress rate discounts in an effort to sell inadequate rail services instead of adjusting ENFE's services to the needs of the client. It is fundamental for ENFE to improve the serv- ices offered and to sell them at competitive tariffs which at least cover their marginal costs. A commercial policy that will mold the services of the railway to the needs of the customers, while ensuring that they produce a profit, is crulcial to the success of the rehabilitation program and the attainment of the financial targets. Creation of a commercial department and training of its personnel will be completed by the end of 1972. 4. TlE INVESTMENT PLAN AND THE PROJECT A. The Plan 4.01 ENFE, assisted by its consultants, has prepared a five-year Invest- ment and Rehabilitation Plan, 1973-1917, estimated to cost aboit $b 440 mil- lion (about US$37 million equivalent), with an e8timated fbreign exchange component of about US$28 million. The overall objective of the Plan is to make up heavy arrears in maintenance of track and equipment, and to modernize operations by replacing costly steam traction with diesel Inotivb power, by renewing an over-aged rolling stock fleet, and by modernizing Vokkshops. In conjunction with the proposed investment, and of prime importance to the re- sovery of ENFE, is the continuation of the existing UNDP financed scheme for assistance to ENFE in all fields of management and, in particular, the train- ng of staff in modern engineering and commercial practices. (Annex 12 gives  - 9 - details of the second phase.) This assistance is also essential to help ENFE in implementing the parallel interrelated action programs (para 3.03), which have been prepared in conjunction with the consultants and Association staff. 4.02 The Plan has been appraised by the Association and, following some revisions, has been agreed on. The investment is the minimum required to carry out the outlined objectives, and it was agreed during negotiations that the Government and ENFE would implement the full Plan, would periodically re- view it, and would not make changes without the agreement of the Association. Annexes 13 and 14 give details of the Plan; a summary is given below. 1973-1977 Investment Plan Summary $b million US$ million % of total Local Foreign Total Local Foreign Total expenditure 1. Way and Works 83.6 50.2 133.8 7.0 4.2 11.2 30 2. Motive Power - 68.4 68.4 - 5.7 5.7 15 3. Rolling Stock - 135.6 135.6 _ 11.3 11.3 31 4. Locomotive and Car Maintenance - 14.4 14.4 - 1.2 1.2 3 5. Workshops 9.0 5.9 14.9 .7 .5 1.2 3 6. Technical Assistance 1.4 11.7 13.1 .1 1.0 1.1 3 . Total 94.0 286.2 380.2 7.8 23.9 31.7 85 8. Contingencies Physical (1%)'4 .4 - 4.4 .4 - .4 1 Price (13%) 8.5 46.5 55.0 .7 3.9 4.6 14 9. Grand Total 106.9 332.7 439.6 8.9 27.8 36.7 100 /1 Physical contingencies amount to 5% of civil engineering works. 4.03 Included in way and works are track renovation material (sleepers, fastenings, rails), maintenance tools and equipment, structural reinforcement of existing wooden bridges, protection against flooding and soil slides on the important Oruro-Cochabamba line, and modernization of telecommunication equipment. Motive power comprises the procurement of 15 diesel units, 13 rail tractors and 3 railcar sets to phase out steam traction; delivery of the 15 main line units is, however, projected for 1975-1976 only, since ENFE will first have to establish adequate maintenance facilities, together with an or- ganized spares supply system and the training of staff. Rolling stock includes the provision of 850 freight cars, 25 passenger coaches and 20 cabooses to re- place over-aged equipment. Locomotive and car maintenance includes components to rehabilitate equipment which is still in reasonable condition, and the creation of a basic stock of spare parts. Workshops comprises the moderniza- tion of the three workshops remaining after concentrationi, and the procurement of essential machine tools. Technical assistance is related to the extension of the present scheme in order to pursue basic training of staff and to assist ENFE in carrying out the various rehabilitation programs.  - 10 - B. The Project and the Credit 4.04 The project, which consists of the items to be committed during the first two years (1973-1974) of ENFE's Investment Plan, is to complete the pre- liminary stage, already started, of improving the quality of ENFE's management, staff and facilities so as to make the best use of existing equipment. There- fore, the emphasis is primarily on training and on the carrying out of action programs, together with a minimum investment in equipment, spares and compo- nents, track and rolling stock rehabilitation and workshops modernization. An important item is the continuation of the technical assistance (para 4.01). The prospects of the increased traffic forecast for the second phase of the Plan, and the consequent investment in additional equipment, are heavily dependent on the satisfactory execution of this first stage. A breakdown of the project and of the expenditure suitable for finance under the proposed credit is given below: $b million US$ million US$ million Local Foreign Total Local Foreign Total Proposed Credit 1. WJay and Works 30.1 20.5 50.6 2.5 1.7 4.2 2. M4otive Power - 14.4 14.4 - 1.2 1.2 1.2 3. Rolling Stock - 28.8 28.8 - 2.4 2.4 2.4 4. Locomotive and Car Maintenance - 10.0 10.0 - .8 .8 .8 5. Workshops 9.0 5.9 14.9 .8 .5 1.3 .5 6. Technical Assistance 1.3 7.9 9.2 .1 .7 .8 - 7. Total 40.4 87.5 127.9 3.4 7.3 10.7 7.4 8. Contingencies Physical (1%) 1.6 - 1.6 .1 - .1 - Price (7%) 1.9 7.6 9.5 .2 .6 .8 .6 9. Grand Total 43.9 95.1 139.0 3.7 7.9 11.6 8.0 /1 See paragraph 4.09. 4.05 Included in way and works are (a) essential track works and material to implement the rehabilitation program and to facilitate the introduction of modern track maintenance practices, (b) the first phase of bridge strength- ening and of protection works on the Oruro-Cochabamba line, and (c) improve- ment in telecommunication equipment. Motive power covers the procurement of 13 rail tractors to replace large locomotives, both steam and diesel, for light shunting operations, and three diesel railcar sets to carry the projected passenger traffic increase between urban centers. Rolling stock includes 200 freight cars intended to replace old, small capacity cars and to ease ENFE's acute shortage of serviceable cars.  4.06 Locomotive and car maintenance relates to the provision of (a) com- ponents to rehabilitate existing diesel locomotives and railcars, and to im- prove existing suitable passenger and freight cars; and (b) a basic stock of spare parts to implement an organized maintenance program. The provision of spares and components will involve negotiated procurement of about US$500,000 from the original suppliers of the locomotives, railcars and their engines, I_n Japan and Germany. These components are needed on a one-time basis to re- store to service capital assets now out of service due to lack of spares. Suppliers' credits are not normally available for this type of purchase and none are expected in this case; this item has, therefore, been included in the proposed credit. Workshops comprises the modernization of facilities and the procurement of essential machine tools for maintenance of modern equipment. 4.07 Cost estimates are based on 1972 prices, and a total contingency al- lowance of about 8% has been provided. Physical contingencies have been taken at 5% of the estimated (local currency) costs of civil engineering works while price contingencies are based on the assumptions that (a) local costs will rise at about 3% per annum over the period 1973-1974; and (b) prices for im- ported material may rise by about 5% per annum. C. Financing of the Project e08 The following table summarizes the proposed financing of the project: $b million US$ million Proposed IDA Credit 96.0 8.0 69 UNDP Grant 9.8 0.8 7 Government resources 33.2 2.8 24 139.0 11.6 100 4.09 No financing is expected from railway resources since ENFE will not be able to generate sufficient cash during the project period. The total for- eign exchange cost, excluding technical assistance, is US$7.2 million. With UNDP continuing to finance technical assistance, the balance of US$0.8 million from the credit can be used as a contribution toward local costs of investment in way and works. D. Execution of the Project, Procurement and Disbursement 4.10 Except for spares and components mentioned in paragraph 4.06, all goods to be financed from the proposed credit would be acquired through inter- national competitive bidding. Disbursements for imported goods would be made on the full CIF cost of all such procurement; disbursements for wooden sleepers and other permanent way material, which are expected to be produced locally, would be on the basis of ex-factory costs of these items.  - 12 - 4.11 Preferential trade agreements exist between Bolivia and members of ALALC. 1/ They are, however, irrelevant for procurement procedures under the project because, according to chapter 86 of the customs code, no duties are payable by ENFE on railway equipment to be financed from the proposed credit. 4.12 The estimated quarterly and annual rates of disbursement of the pro- posed credit are given in Annex 15; the disbursement will extend until 1975, The proiect forms part of the continuing Investment Plan 1973-1977, which has been appraised as a whole. It is proposed, therefore, that if there are any savings in IDA-financed items of the project, they be used to finance the for- eign exchange costs of continuing items in the Plan, subject to review and agreement with the Association. 5. ECONOMIC EVALUATION A. General 5.01 The 1973-1977 Investment Plan is a coordinated program of rehabil- itation and modernization designed to enable the railways to perform efficient- ly and to carry the rail traffic forecast for the 1973-1977 period. If the Investment Plan is not implemented, declining quality of service and diminish- ing capability to move traffic will result partly in diversions to more ex- pensive road traffic and partly in complete loss of traffic in areas where roads do not exist. 5.02 The full benefits of any one item (renovation of track, rolling stock, modernization of workshops, etc.) can be realized only if the whole investment program is carried out; this interdependency precludes computa- tion of benefits for most individual items. An overall economic rate of re- turn was therefore calculated taking into account two alternatives: (a) mak- ing no investment in the railway and (b) accepting the Investment Plan. In addition, two parts of the Investment Plan (improvement of the Oruro-Cochabamba line and dieselization), whose benefits can be singled out, were analyzed separately (paras. 5.06 and 5.08). The timing of investments under the Plan takes into consideration the absorptive capacity of the railway in terms of works to be executed and the level of demand for railway services in future years (the purchase of more rolling stock in the project period was consid- ered and did not prove justified on economic grounds). The detailed economic costs under the two alternatives are given in Annex 16, and their comparison assumes no further growth in traffic beyond 1977. B. Economic Benefits of the Plan 5.03 The economic evaluation is based on measuring the costs to the economy in the event that the railway Investment Plan is not implemented. The main benefits related to the Investment Plan are the avoidance of (a) the 1/ ALALC - Latin America Free Trade Association  - 13 - higher costs of transportation by road and (b) lost traffic (where no alternative roads exist). Costs by road take into account only marginal costs and exclude those of road construction. The marginal road costs for freight are based on using seven-ton trucks, while for passengers the cost of buses is taken. No consideration was given to the high costs in- volved in providing transport by smaller vehicles. For traffic that is lost to the economy, the loss was measured by the average revenue per unit- km; this assumption is conservative since the value added to freight trans- ported, mainly imports and exports, is higher than the revenues accrued to the mode of transport. Cost savings arising from the Plan include fuel and maintenance savings from the phasing out of steam traction and the elimina- tion of freight car rentals payable to other countries. Analysis of all cost items with the investment Plan and without it shows an economic rate of return of 21% on the Five-Year Plan (Annex 16). C. Sensitivity Analysis 5.04 Two factors which could adversely affect the rate of return - increasing costs and reduced traffic - were considered: (a) The first test assumes that railway costs will increase by 15% over the Investment Plan period, while costs of road transport will remain constant. The resulting rate of return on the investment is 18%. (b) In the second test, even if the forecast freight traffic growth rates in the period 1973-1977 were considerably reduced, from 4.5% per annum on the West Line and 6.5% per annum on the East Line to 3.5% and 4% respectively (significantly lower than those experienced in the past), the rate of return would still be an acceptable 16%. It is not expected that any lower traffic growth rate is likely. 5.05 Another important factor to examine is the assumption of ENFE's ability to rent foreign cars. If, beyond 1973, ENFE were able to rent only 300 cars instead of the assumed 500-600 cars, the economic rate of return would increase to 29%. The availability of rented freight cars depends on the good will of neighboring countries; in light of the high impact that such availability has on the rate of return, it is clear that ENFE should be provided with an adequate fleet of cars, despite the low rates currently charged by Argentina and Chile for the rented cars. D. Improvement of the Oruro-Cochabamba Line 5.06 The improvement of the Oruro-Cochabamba line to be carried out over the Plan period is estimated to cost about US$2.9 million equivalent. The economic justification of this investment has been examined in the light of the possible construction of the Oruro-Cochabamba highway, an economic study of which is presently being conducted. The benefits of the improvements on the line were quantified; they yield an economic rate of return of 18% over a period of 20 years, and at least 8% on the extreme assumption that all traffic  - 14 - would be diverted to a new road in 1982. This return, supported by the fact that the highway would not be a complete substitute for the railway (although joining the same cities, the modes will not be parallel), is considered satis- factory to justify the investment. 5.07 The high costs expected in constructing the Oruro-Cochabamba high- way (US$35-45 million) and the pQssibility that this highway would not gen- erate traffic, but rather would divert it from the railways, require that the Association should be consulted on the conclusions of the economic study of this highway before construction. Agreement on this was reached during nego- tiations. The economic study is currently under way and is financed by IDB, which has been requested to finance the highway. E. Dieselization 5.08 The program of dieselization will eliminate the use of steam locomo- tives for main line operations by 1977. The resulting savings in fuel, main- tenance and labor yield a rate of return of 182 on the dieselization scheme. This rate of return is computed on the assumption that the alternative to dieselization is carrying all the traffic projected with the existing fleet of locomotives. F. Uneconomic Lines 5.09 The Sucre-Tarabuco Line, 77 km, has no freight traffic and carries only about 20 passengers a week, requiring expenditures of about $b 300,000 (US$25,000) a year. There is a parallel road which can carry all passenger traffic, and it was agreed at negotiations that service on the line will be terminated by June 30, 1973. 5.10 The Cochabamba-Aiquile Line, about 217 km, earned revenues of about $b 360,000 (US$30,000) in 1970 against working expenditures of $b 1,635,000 (Us$ 136,250). Freight traffic has ceased and passenger traffic has been de- clining. It was agreed at negotiations that (a) the Ministry of Transport would carry out a study of the highway between Cochabamba and Aiquile; (b) the railway line would be closed if the study shows that provlsion of a 50-km road extension is the more economic alternative; and (c) should the study show that the railway line is a more economic alternative, and ENFE be compelled to con- tinue operations on the line, then ENFE would be given specific subsidies to cover the resulting deficitsi.- 6. FINANCES A. Introduction 6.01 ENFE's financial position is poor and its cash position has steadily deteriorated over recent years. This has been due to deficits in operations, affected by failure to raise tariff levels to compensate for inflation since 1958, and to the inadequacy of subventions from Government to meet these  - 15 - deficits plus investment costs. Future prospects will depend on the ability to increase traffic and revenues through improved operations together with some tariff increases, and also on receiving from Government adequate and prompt financial support, particularly in the years 1973-1975. Thereafter the need for such support should decline, and it should be possible for the railway to become financially viable 8soo after 1977. 3. Present Financial Position V.02 Summary balance sheets for ENFE are given in Annex 17, together with detailed notes on particular items. That of December 31, 1971 is given below: $b millions Fixed assets, gross book value 542 Current assets: Cash and bank balances 4 Receivables 65 Inventories - Railway 39 - "Pulperias" 6 45 114 Suspense Accounts - net 11 Total Assets 667 Capital 480 Reserves 35 Long-term debt 80 Current Liabilities: Creditors and accrued expenses 40 Retirement and other social benefits 32 72 Total Liabilities 667 6.03 Although the current ratio is good (1.6/1.0), a large part of cur- rent assets is railway stores, which would not be easily realizable, and the value of receivables ($b 65 million) is high in relation to annual revenues of under $b 150 million; it reflects delays in settlement of accounts owed by state enterprises (including COMIBOL, the state mining concern), Govern- ment departments, and commercial mines and includes some old and doubtful balances. During negotiations, it was agreed that the accounts of Government departments and state enterprises with ENFE would be settled more promptly and arrears would be cleared up by December 31, 1973. 6.04 The value of railway inventories seems high in relation to operating costs. It includes work in progress, material in transit, major spares and maintenance equipment for the Japanese locomotives, and many obsolete and slow moving items which are to be examined for ultimate disposal. Shown separately is the value of stores of foodstuffs, held for the "pulperias" (commissaries, which provide foodstuffs for ENFE staff at low, subsidized prices).  - 16 - 6.05 ENFE's liquid position is poor; the cash and bank balance represents only about one-third of average monthly cash requirements. No provision is included for the liability for retirement benefits due to 800-900 staff who should be retired - the exact figure is unknown, but is estimated at about $b 40 million. 6.06 The long-term debt consists mainly of a loan from Mitsubishi to finance diesel locomotives and freight cars, repayable over 10 years, ending in 1978. The remaining items of debt will be repaid by the end of 1972. Debt service of about $b 20 million annually is presently met wholly by Government. 6.07 Fixed assets book value, although expressed as gross value, with depreciation reserve shown separately, includes (a) net written-down book values of assets taken over from the previous owners; and (b) an arbitrary, understated value for the Santa Cruz-Corumba line, built by Brazil. It does not yet include the value of the Santa Cruz-Yacuiba line, built by Argentina. The cost of both of these lines is being repaid by Bolivia over a long term; that of the Santa Cruz-Corumba line has been passed on to ENFE as equity, and the outstanding debt does not appear in ENFE's accounts. No inventory of fixed assets, agreeing with accounting records, exists, but ENFE is presently preparing one. During 1971, ENFE commenced revising the book values of fixed assets, and the reduced figures shown in the 1971 balance sheet reflect the preliminary results. Corresponding reductions were made to the book value of "Capital". Further revisions are being made in 1972. At negotiations, agreement was reached that ENFE will clear up and reconstruct its balance sheet, using more realistic values for fixed assets, by the end of 1972. o.08 Annex 18 illustrates the deterioration in ENFE's financial position over the last six years, caused by operating deficits and by the insufficiency of annual Government subventions to cover such deficits plus debt service and capital investment. Particular deterioration occurred in 1971 due to (a) lower revenues in the first six months; (b) higher costs, affected by the national wage award of January 1; and (c) delays in obtaining funds from the Govern- ment. After repeated requests from ENFE management, the Government increased the amount to about $b 43 million, and these funds have now been made avail- able to ENFE, with about $b 8 million for debt service being provided in early 1972. C. Tariffs and Costs 6.09 ENFE's tariff structure remained basically unchanged between 1959 and 1972. It was based on six commodity classifications varying according to the route of shipment; it failed to reflect the costs of carrying different commodities. Additionally, the stability of rates resulted in a decreasing revenue per unit-km in real terms from $b 0.237 per ton-km in 1961 to $b 0.170 in 1970 on the Western System, an annual decrease of about 4%. 6.10 A new freight tariff structure, prepared by ENFE with the help of the consultants, SOFRERAIL, became effective on July 15, 1972. The new rates are based on, and at least cover, marginal costs of transporting each commodity (long-run marginal costs, including depreciation of renewable assets) and take account of competition by other modes of transport.  - 17 - 6.11 Under the new tariff, most commodities bear increased rates, except for basic commodities which affect the cost of living - wheat, flour, potatoes, fruits, vegetables, salt and kerosene - which, at the insistence of Government, bear little or no increase in rates. There is a reasonable margin for reduc- tions to shippers who load cars more productively, thereby improving car load- ing factors. The overall increase in revenue per ton-km ranges from about 10% to 15%, depending largely on the extent of such reductions. As noted in Annex 20, future revenues have been calculated on the basis of a 10% rise in revenue per ton-km. 6.12 Passenger fares are sufficient to cover marginal costs on second class traffic; those for "Ferrobuses" are even more profitable (Annex 2). For first class passenger services, revenues are well below marginal cost. However, first class travel is being discontinued in 1972 except on interna- tional trains. Any substantial overall increase in passenger fares between the major cities in the west seems unfeasible in view of road competition but, with the planned improvement in passenger services, the commercial department should undertake a study to determine where selective fare increases can be introduced. The most likely areas are (a) second class services in the east where, in many places, no competing road exists and where tariffs do not cover average total costs; and (b) "Ferrobus" services in the west, which provide a more comfortable ride than buses but charge much lower fares per pass-km than equivalent services in the east. At negotiations, agreement was reached that this study would be completed by March 1973 and, thereafter, any proposed tariff changes would be promptly implemented in consultation with the Association. Do Past and Future Earnings (i) Past Earnings 6.13 ENFE has faced financial difficulties since its creation in 1964. By nature of the difficult terrain traversed by some railway lines, and the low level of traffic on most of these lines (averaging 92,000 pass-km and 134,000 ton-km per route-km on the West Line and 52,000 pass-km and 75,000 ton-km on the East Line in 1969, Annex 1), it is a high cost railway. Recur- ring annual deficits can be reduced or eliminated only by reducing costs, in- creasing traffic and charging realistic tariffs - matters over which ENFE has only limited influence. However, there is scope for reductions in unit costs through increasing efficiency of operations, the prospects of increased traffic are favorable and, with the introduction of a new, cost-based tariff, realistic rates should be charged. 6.14 Annex 19 shows the income accounts of ENFE for the years 1966- 1970, for West and East Lines separately. Results for ENFE as a whole are summarized on the following page:  - 18 - Net Net Operating Working Operating Working Operating Interest Net Working Year Revenue Expenses Expenses Revenue Revenue Charges Deficit Ratio % (Loss) (Loss) -------------- ($b million) ------ 1966 105.6 120.8 120.8 (15.2) (15.2) - 15.1 114 1967 115.8 123.4 123.4 ( 7.6) ( 7.6) 0.3 8.6 106 1968 125.9 139.9 140.1 (14.0) (14.2) 3.6 17.5 111 1969 147.7 136.8 144.5 10.9 3.2 6.8 0.2 93 1970 138.9 142.5 150.0 ( 3.6) (11.1) 6.1 20.6 103 1971 139.1 162.6 169.6 (23.5) (30.5)/l 5.5 36.9 117 /1 About US$2.5 million equivalent. Between 1966 and 1969, traffic and revenues rose steadily by 40% and, with expenses rising by only 27%, the working ratio improved from 114 to 93. In 1970, traffic declined slightly, affected by the slowdown in economic growth discussed in paragraph 2.02, but expenses rose, and the working ratio deteriorated to 103. In 1971, traffic and revenues were similar to those of 1970, but with a wage award effective January 1, 1971, costing about $b 8 million, working expenses rose to about $b 163 million and the working ratio deteriorated to 117. 6.15 Freight is the dominant traffic, providing about 75% of the operat- ing revenues, with passengers accounting for about 20%. The average revenue per ton-km rose slightly, from $b 0.298 in 1967 to $b 0.301 in 1971 (US4 4.1 per ton-mile). Average revenue per pass-km rose between 1967 and 1971, from $b 0.089 (US4 1.19 per pass-mile) to $b 0.103 (US4 1.38 per pass-mile), due mainly to the introduction of better paying ferrobus services. These average unit revenues are higher than in some other Latin American countries (Argentina, Brazil and Mexico) but are in line with those in Peru and Colombia - countries with similar topography. 6.16 Average total unit costs before depreciation remained fairly steady over the period 1967-1970 ($b 0.237 per unit-km in 1967, $b 0.243 in 1970), but rose to $b 0.264 in 1971. 6.17 Armual depreciation charges are too low - ENFE did not begin charging depreciation until 1968, and then only on newly acquired equipment such as locomotives and rolling stock. For this reason it has not been practicable to quote operating ratios. Interest charges are largely those payable on loans from Japan and Germany for motive power and rolling stock. 6.18 With working costs generally exceeding revenues, ENFE has not been able to provide any funds for debt service or replacement of equipment; there- fore, such ratios as times interest earned, debt service and earnings cannot be quoted.  - 19 - (ii) Future Earnings 6.19 Income projections for the years 1973-1977 illustrating the improve- ment expected to arise from the proposed investment and technical assistance are given in Annex 20, together with the detailed assumptions used, and are summarized below: Net Work- Opera- Work- Net Opera- Opera- ing ting ing ting Inter- Work- Opera- ting Expen- Expendi- Reve- Revenue est Net ing ting Year Revenue ses ture nue (Deficit) Charges Income Ratio % Ratio % (Deficit) (Deficit) ------------------- - ($b million)