Colombia - Sixth Railway Project

REOTURN TO DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION A rp6 1 WT , Not For Public Use Report No. P-129 7-CO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO COLOMBIA NATIONAL RAILWAYS WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE SIXTH RAILWAY PROJECT July 25, 1973 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 It may not be published, quoted or cited without Bank Group authorization.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 EQUIVALENTI/ Currency Unit = Colombian Peso (Col$) US$1.00 = Col$23.54 Col$1.00 = us$o. 0425 Col$1,000,000 US$422,500 Colombia's Fiscal Year = January 1 to December 31 2/ June 30, 1973.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RCOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRBCTORS ON A PROPOSED LOAN TO COLOMBIAN NATIONAL RAILWAYS WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR THE SIXTH RAILWAY PROJECT 1. I submit the following report and recommendation on a pro- posed loan to Ferrocarriles Nacionales de Colombia --the Colombian National Railways-- with the guarantee of the Republic of Colombia for the equivalent of US$25.0 million to help finance a sixth railway project. The loan would have a term of 25 years, including four years of grace, with interest at 7-1/h percent per annum. PART I: THE BCONONY 2. An economic report entitled "Economic Position and Prospects of Colombia" CR73-116), dated May 15, 1973, was distributed to the Executive Directors on May 18, 1973. A country data sheet is attached as Annex I. A review of Colombia's macro-economic performance, its structural problems and economic policy was contained in the President's Report on a loan for a Third Education Project (R73-169) which was approved by the Board on July 17, 1973. The passages concerned are reproduced in Annex I of this report. PART II: BANK GROUP OPERATIONS IN COLOMBIA 3. A description of the Bank's lending strategy in Colombia was also contained in the President's Report on the Third Education Loan, and is reproduced in Annex I. 4. The proposed loan --the fifty-fifth to be made to Colombia-- would bring the total amount of Bank loans to Colombia to US$1,073.9 million (net of cancellations). Of the foregoing amount, US$855.0 is now held by the Bank. IDA hade one credit of US$19.5 million for highways in Colombia in 1961. 5. Disbursements have been completed on 29 loans and the one IDA credit. IFC has made effective investments and underwriting commitments in 19 enterprises in Colombia, totalling about US$20.0 million of which IFC now holds US$8.9 million. Annex II contains a summary statement of Bank loans, the IDA Credit, and IFC invest- ments as of June 30, 1973 and notes on the execution of the 23 on- going projects.  -2- PART III: TRANSPORTATION IN COLOM3IA 6. Colomnbia has the advantage of coastlines on both the Pacific and the Caribbean but this is offset by the difficulty of movement between the coasts and the interior. The three'massive ranges of the Andes Mountains which run from South to North present formidable barriers to communication between the main areas of population which until recently developed as separate and almost isolated communities. Transport investment policy in the past 20 years has been aimed at national integration and at overccaning the situation imposed by geography. 7. Inland communications in Colombia were histor-cally developed to connect Bogota and Medellin with the Northern Atlantic ports of Santa Marta, Barranquilla and Cartagena through the Magdalena River, and Cali with the Pacific port of Buenaventura. In the last 20 years the original scheme was canpleted by building railway and highway links to the Atlantic Coast and by improving connections in the high central valleys between Bogota, Medellin and Cali. With the trunk system of highways and railway lines, the basic transport network has been largely completed but substantial investments will cortinue to be needed to improve the quality and increase the capacity of transport facilities. 8. Total freight traffic, including pipelines (which carried about 35 percent of total ton km in 1970), has grown at 4.6 percent per annum between 1965 and 1970 reaching a level of 11.8 billion ton km. A similar rate of growth is expected through 1975. Road transport by carrying more than 55 percent o-&' the total (excluding the pipelines) is the most important transport mode, followed by river transport (17.5 percent) and the railways (i5.5 percent). This interrnodal split has shifted only slightly towards highways since'9f6i5. It is not expected to change significantly over-the next 5 years'if proper investments are carried out in all modes. 9. The railways carry long haul bulk commodities, and eight com- modities including wheat, coffee and fertilizers represent about 65 per- cent of total railway freight traffic. Marginal costs for long distance freight traffic carried by the railways are estimated at Col$0.25 per ton km compared with Col$0.42 for trucks. The railways thus have clear advantages over compe-ting modes of transport more specifically on the Atlantic railway and its connection to Medellin, and their traffic should increase in the futare. The railways are also serving as an alternative to river transport on the Magdalena river; low water level in 1973, coupled with a large increase in export- import traffic resulted in a railway freight  - 3 - traffic increase of 28.7 percent during the first four months of 1973. Finally, the railways consume less fuel per ton/km than road users and this is likely to become significant in the next few years, since it seems inevitable that by 1975 or 1976 Colombia will have to begin importing crude petroleum on a substantial scale. 10. The Government's development program will require further large investments in the transport sector which will continue to be the largest recipient of public investment funds. However, the desirable degree of effective sector investment planning in transportation is yet far from being achieved. In retrospect, some transport investments in railways and highways over the last 20 years have been made in a somewhat unintegrated manner. As in most other countries, transport coordination has not been very effective and transport investments and operations have not always reflected coherent sector policies. 11. The various transportation modes are managed as follows: the Ministry of Public Works is responsible for the national highway system and finances construction and maintenance of national roads through the National Highway Fund. It is also responsible for the National Feeder Road Fund to which local government bodies also contribute. Railways and ports are the responsibility of autonomous agencies under the Ministry, while airports constitute a separate authority and river transport is private. Pricing policies for the transport system do not fully reflect economic cost. There are indications that road users (mainly trucks) are more subsidized than other modes. The retail price of gasoline in Colombia is still the second lawest of the world, even after the 45 percent increase in June 1971. Air services and pipelines seem underpriced. 12. Although the Bank is placing increasing emphasis in its lending program on the productive sectors and on investments with more social benefits it still has an important role to play in assisting the continuing investments in transportation infrastructure which are neces- sary to support economic growth in Colombia. In Bank lending for transportation, the main objectives are: (a) effective planning and coordination of investment for different transport modes; (b) improved maintenance and operation policies in both railways and highways; and (c) better institutional arrangements in both subsectors. An example of the type of over-all transport planning needed is the Magdalena River Study which will result in preparation of an investment plan and pricing policies to promote the optimum development of the various transport modes in the country's main transport corridor in the Magdalena Valley. This study will review the feasibility of extending railway access to Cartagena and Barranquilla. The study is being carried out  by Dutch consultants and financed by the Netherlands government. The Colombian authorities have undertaken to consult the Bank on the conclusions and recornmendations of the Magdalena River Study and on their implementation; they have also undertaken to employ the Colombian counterparts working on the study in the Planning Office of the Ministry of Public Works, after conclusion of the study. 13. The Government has become increasingly aware of the problems of transport coordination and is taking steps needed to correct the situation. Thus, during negotiations for the proposed loan, agreement was reached that the Colombian authorities would centralize in the Ministry of Public Works all of its transport planning activities. Bank staff have recently made additional proposals to the Government on the subject and the Bank intends to continue the discussion with the Colombian authorities on transport coordination. PART TV: THE PROJECT 1a4. The Bank has made b loans for the railways. The first three --made between 1952 and 1960, totalling US$46.3 million-- helped finance the Atlantic line linking Bogota with Santa Marta on the Atlantic Coast. The last two loans --US$30 million (1963) and US$12.4 million (1968)-- were rehabilitation loans which made an important contribution to dieselization and modernization of CNR's facilities. The Atlantic Railroad has hacd an important impact on the development of the region, by inducing increases in agricultural production, mainly rice, corn and cattle which were significant for the national foodstuffs supply; the railroad also helped promote a major increase in cotton production for export. T4he Bank-supported rehabilitation programs were generally well conceived but their implementation and execution were inadequate. .L,. The justification of further Bank lending to CNR has been seriously examined. The reduced importance of the railways in the transport sector, the failure in achieving modest financial targets and. moreover, the poor quality of the railway services were major problems to be taken into consideration by the Bank when CNR requested financial support for a very ambitious invest- ment plan. After a -Protracted analysis, lhe conclusion was reached that the continuing important economic role for CNR justified a minimum investmen -olan to defeat the cycle cf deteriorating infrastructure, derailmie.ts, poor service and loss of traffic. This is, however, a project that. will require a continuous effort :in supervision to increase the probability of achieving the  -5- operational and financial targets proposed. Particularly close attention will have to be given to management improvement. 16. The proposed Project consists of a two-year segment of a railway rehabilitation program, which is part of CNRIs investment plan for 1973-76, and of a Program of Action. The Project was first appraised by the Bank in 1971; the ap- praisal made it clear that the project execution would have to concentrate on (a) the ability of CNR's management to achieve the desirable operating targets and financial results (b) the need to reduce losses on, and ultimately close, certain uneconomic lines and (c) the need for continued substantial financial contributions frcm the Government to CNR. These issues were thoroughly considered by the Government and CNR who agreed in principle with the Bank on an appropriate course of action for dealing with them. Consequently, a reappraisal mission visited Colombia in November-December 1972. Loan negotiations were held in June 1973. The Borrower's delegation was led by Dr. Alfonso Orduz Duarte, General Manager of CNR, who also represented the Government. A loan and project summary is attached as Annex III to this report and an appraisal report (PTR-116c) is being circulated separately to the Executive Directors. Investment Program 17. The main item in the project is the rehabilitation of 364 km of track and improvements in various sections of CNR's lines. The total investment related to permanent way, including switches, track materials and equipment, bridges and ballast cars would account for 51 percent of the project costs. Other important items are acquisition of 28 diesel locomotives (24 percent) to be financed from other sources, consulting services (5 percent), repair of winter damages (5 percent), spares for freight cars (5 percent) and tele- communications (3 percent). The 364 km of track to be rehabilitated under the two year program compares with-I118 kan in 1969, 185 km in 1970 and 225 km in 1971. Due to lack of funds only 60 km were rehabilitated in 1972. The principal objective is to avoid derailments which have been reduced significantly on the sections recently rehabilitated but remain a very serious problem on other portions of the network because of delayed maintenance combined with difficult terrain and soil conditions as well as severe seasonal rainfall. The project comprises those sections most in need of rehabilitation among the economically viable lines.  18. The 28 diesel locomotives will replace older types and allow an increase in total motive power. Freight cars and passenger coaches are adequate for the foreseeable traffic up to 1976 (except for ballast cars of which 50 are included in the proposed loan); spare parts, mainly roller bearings and bogie castings, are needed and are also included in the loan. Consulting services will be utilized in the field of management and will continue to be employed for improving track maintenance and rehabilitation, as well as work- shops and operations. Program of Action 19. The project also includes a Program of Action which forms part of the Loan Agreement (Schedule 5). The Program co:cnits CNR to achieve certain specific operational and financial targets in 1973-76, including steps to be taken with regard to the uneconomic lines. The Program of Action is described below in paragraphs 20-24. Uneconomic Lines 20. After discussion with the Bank, measures have been initiated under which six uneconomic lines, all of them built before the Bank started lending to the Colombian railways, totalling 662 km (the total network is 3,431 k1m) will be closed or have service curtailed. Those being closed are two lines totalling 117 km (Pereira-Armenia and Pereira-Manizales), and significant reductions in services and closing of stations on 4 other lines will be undertaken within the next three years. The plan will reduce operating costs by about Col$14 million (US$0.62 million) annually. Financial Targets 21. CNR had operating deficits for several years but achieved operating surpluses (after depreciation but before debt service) in 1966 and 1969. After the latter year, there have again been deficits. Poor track and operating conditions and a high rate of accidents aggravated by severe winter damages in 1971-72 and competition fran roads, have rendered it difficult for CNR to offset rising prices and increased staff costs by appropriate tariff adjustments. However, an increase of gasoline prices and progress in ongoing track rehabilitation allowed some tariff increases to be made in the latter half of 1971 and 1972. 22. To offset inflationary cost increases and improve its finances, CNR increased the freight tariff in June 1973 by a further 10 percent (in current terms). It is likely that additional tariff increases will be needed over the next few years. The Loan Agreement commits CNR to set rates at a level sufficient to obtain the operating ratios, set by the Prngram of Action, i.e. 123, 118, 111 and loh in 1973, 197h, 1975 and  -7- 1976. Staff strength has declined from about 15,000 in 1963 to an adequate level of 11,400 in 1972; the Program of Action provides for maintaining staff strength Et about this level through 1976. Improving Operations 23. In the operational sphere there has recently been better performance in track maintenance; together with improved weather conditions, this has contributed to a reduction in derailments. CNR's rolling stock is in very good condition and, if properly utilized on a well-maintained permanent way,could carry substan- tially more traffic. Relations between management and labor unions are good. Management has already initiated certain organizational changes but further efforts could lead to significant improvements, for example through further delegation of management responsibility to divisional and departmental levels and a better system of motivating the staff. 24. The proposed project provides for continuing assistance by the consultants who have worked for the last few years at the operational level with satisfactory results. It also aims at further improvement of CNR's management by employing management consultants to carry out an intensive program in this area, including the study and recommendation of improvements as regards information to management, management structure and planning activities as well as personnel administration. The Program of Action includes targets for such items as the availability of motive power and rolling stock, loads per freight car and pertrain, turnaround time and reductions in time for freight delivery between specific points, such as Santa Marta and Bogota. Provision will be made for an intensified supervision effort by the Bank through the employment of a consultant exclusively for this purpose. There appear to be good prospects that all these measures will reinforce the benefits obtained fram major investments in track rehabilitation of the project, so as to bring about significant improvements in operating and financial results over a two-year period. Project Costs and Financial Plan 25. The total project cost, excluding interest during con- struction, is estimated at US$44.2 million, including local costs of US$12.0 million and foreign costs of about US$32.2 million. Total financing required,including interest during construction on the proposed Bank loan would be US$45.8 million. The proposed Bank loan would finance the following items:  -8 - US$ Million i. Rehabilitation of permanent way 13.4 ii. Parits for rehabilitation of loco- motivrs and railway cars 3.2 iii. Telecommunications 1.0 iv. Consultants 1.5 v. Winter damages 1.0 vi. Contingencies and miscellaneous 3.3 Total 23.4 Interest during construction 1.6 Amount of proposed loan 25.0 26. The 28 locomotives are to be financed through surp- pliers' credits amounting to US$6.8 million. CNR would finance US$1.6 million from existing inventories (mainly rails). The remaining US$12.4 million would be covered by the Government budgetary allocations to CNR. 27. The loan would be used entirely for foreign exchange expenditures, except possibly for US$2 million; of this, US$1.h million would consist of timber sleepers, and US$0.6 million of minor items (such as structural steel for bridges, nuts and bolts for rails) for which Colombian suppliers are likely to win the contracts in international competitive bidding. The Borrower and its Financial Position 28. CNR is an autonomous government entity headed by a five- member Board of Directors with the Minister of Public Works, ex- officio, as Chairman. The other members represent trade, industry, banking and agriculture. The General Manager is appointed by the President of Colombia, as are the Board members. The Board controls the railways' operating and financial policies, including adjustment of rates and fares. However, authority for building or abandonment of railway lines and changes in personnel service conditions rests with the Government. 29. CNR's present financial situation is serious and its unsatisfactory cash position has resulted in CNR's delaying payments to suppliers, deferring some debt service payments (not for Bank loans) and resorting to short-term borrowings at high rates of interest. With the rate adjustments described in paragraph 22 and control over staff strength, CNR is expected to achieve an operating surplus by 1977 but meanwhile it would need the assistance of the Government to meet local currency costs of the investment plan, debt service and  working capital requirements. The Government has set up a special fundinto which it has undertaken to make monthly deposits suffic-ent to maintain in 1973, 1974 and 1975 a balance equal to CNR's peso reouirements not covered from other sources during the succeeding 3 months. The first payment into the fund (of Col$45 million) has already been made. In addition, the Government has assumed the responsibilit-y for servicing two new loans to CNR: one from a US commercial bank in the amount of US$20 million to cover external debt service obligations of C1'R for the next three years, and another from local banks in the amount of Col$85 million to enable CNR to pay outstanding short term bank loans and overdue suppliers' bills. Loan Disbursements and Procurement 30. The proposed loan would be disbursed according to the schedule included in Annex III. All goods financed under the loan would be procured through international competitive bidding except about US$1.4 million for certain replacement parts for locomotives which would be procured from the original suppliers. 31. Colombian firms are not likely to compete except for timber sleepers estimated at about US$1.4 million and certain minor items estimated at about US$0.6 million. Local bidders would be granted a margin of preference of 15 percent or the applicable customs duty, whichever is lower. In the case of timber sleepers, however, no preference would be given since local suppliers of this bulky commodity already have an overwhelming locational advantage. Economic Benefits and Rate of Return 32. The main economic benefits of the project will be obtained by avoiding further diversion of railway traffic to road and by reducing derailments. The economic return on the 1973-76 Investment Plan is estimated at 12 percent. This evaluation does not take into account benefits to users resulting from improved quality of service. The successful implementation of the project will depend to a large degree on lasting improvements in management. 33. Toward the end of the project implementation period a new evaluation would be made, in the light of achievements, of whether to recommend additional Bank financing for the remainder of the 1973-76 investment program of CNR. This two phase approach is being adcpted in view of the BankTs experience with the earlier railway projects when results fell short of the original operational and financial targets.  - 10 - ?ART V: LEGAL !NS1TRUMENTS AND AUTHORITY 3)4. The draft Loarn Agrement between the Bank and Ferrocarriles Nacionales de Colombia and the draft Guarantee Agreement between the Republic of Colombia and the Bank, as well as the Report of the Committee provided for in Article III, Section 4 (iii), of the Articles of Agreement and the texc of a RHsolution approving the proposed loan, are being distributed to the Executive Directors separately. 35. The draft Agreements contain provisions to reflect the various arrangements described in Part IV above, including the usual covenants for railroad projects. 36. I air, satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART TI: RBCOMMENDATION 37. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments July 25, 1973  ANNEX I Page 1 of 6 6/22/73 COUNTRY DATA - COLOMBIA AREA POPULATION DENSITY 1,139,000 kn- 23.0 million (mid-1972) 20 per km2 Rate of Crowth: 3.2% (from 1965 to 1970) 84 per km2 Of land in faars POPULATION CHARACTERISTICS (1968) Crude Birth Rate (per 1,000) 44 HEALTH (1967) Crude Death Rate (per 1,000) 10 Population per physician 2,21.J Infant Mortality (per 1,000 live births) 70 Population per hospital bed 620 TNCOME DISTRIBUTIONL/ .197o) DISI'RIBUTION Or LAND OWNERSHIP' % of national income, highest quintile 59.1X % owned by top 10% of owners lowest quintile 3.5 7. owned by smallest 10% of owners ACCESS TO PI?ED WATER (1967) ACCESS TO ELECTRICITY (1968) % of population - urban 88 '/O of population - urban 70 - rural 46 - rural 7 NUTRITION (1970) EDUCATION (1968) Calorie intake as X4 of reouirements 89 Adult literacy rate 7V 71j Per capita protein intake 55 Primary school enrollment 7. 94 GNP PER CAPITA in 19701/ US$370 GROSS NATIONAL PRODUCT IN 1970 ANNUAL RATE OF GROWTH ('I,, constant prices' US$ Min. % 1960-65 1965-70 1970 GNP at Market Prices 6,865 100.0 4.1 5.1 6.3 Gross Domestic Investment 1,521 22.2 3.0 5.8 15.2 Gross National Saving 1,2 28 17.9 1.3 3.9 -3.5 Current Account Balance -293 -4.3 Exports of Goods, NFS 1,000 14.6 1.7 4.8 0.9 Imports of Goods, NFS 1,149 16.7 5.0 5.5 17.1 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1973 Value Added Labor Force4- -V.A. Per Worker US$ Mln. M. ln. 7. US$ 7. Agriculture 1,885 29.1 2,349 40.7 802 71 IndLustry 1,703 26.2 1,136 19.7 1,499 133 Services 2,900 44.7 2,279 39.5 1,272 113 Unallocated Total/Average 6,488 100.0 5,764 100.0 1,126 100 GOVERNMENT FINANCE General Government-5/ Central Government (Col $ MIn.) Y of CDP (Col $ Mln.> 7. of GDP 1972 1972 1969-72 1972 1972 _1969-72 Current Receipts 39,22 21 .2 21 .6 $cB5 o.7y Current Expenditure 26,39 1.2 14.'J 11 d-7 6.i 6.3 Current Surplus Deficit (-) 1 2,LI86? 7.6 j.,6bt 2.5 2.7 Capital Expenditures 22,853 12.3 11.8 6,562 6.5 4., External Assistance (net) 5.591 3. ) 2.2 .291 1 . 1.2 l/ Estimate of TLA based on 1970 househcld survey of National Statistical Departrrent (DANE). 37 Data not available. Results of the 1570 agricultural census are still incomplete. I'The Per Capita liNP estimate is at 1971 current U.S. dollars, calculated by the same convarsion technique as the 1973 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. V/ Total labor force; unemployed are allocated to sector of their ncrmal occupation. 5/ Consolidated account of national government, national decentralized entities, departments, municipalities, and municipal enterprises. nct available not applicable  ANNEX I Page 2 of 6 COUNT'RY DATA - COLOMBIA March March MONEY, CREDIT and PRICES 1965 1970 1971 1972 1971 1972 (Million Col$ outstanding end period) Money and Quasi Money0' 1.3,360 30,J-IJ2 3X.X72: 4J,57- Bank Credit to Public Sector .. 5,111 t,139 5,62 Bank Credit to Private Sector_/ .. 25,600 J3?)s -4.1.- (Percentages or Index Numbers) Money and OQuasi Money as % ot GDP 22.0 23.3 22. 9 ?).* General P'rice Index (1963 = 1O0)91 126.0 129'.5 217.8 21,.c 2