Colombia - Sixth Railway Project

RETURN TO FILE COPS REPORTS DESK WITHIN ONE WEEK DZJWENT GF INTE NATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. PTR-116c COLOMBIA APPRAISAL OF A SIXTH RAILWAY PROJECT July 19, 1973 Latin America and the Caribbean Projects Department I s report was prepared for official ux only by the Bank Group. It may not be published, quoted | or cited without Bank Group authorization. The Bank Group does not accept responnbflity for the accuracy or cm$etems of the report.p  Currency Equivalents National currency is the Colombian Peso (Col Pes) divided into 100 centavos US$1.00 = Col Pes 22.5 US$49.75 = Col Pes 1 000 (May 19735 Fiscal Year January 1 - December 31 Abbreviations CNR - Colombian National Railways MOP - Ministry of Public Works NPD - National Planning Department (Planeaci6n Nacional)  COLOMBIA APPRAISAL OF A SIXTH RAILWAY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .................i - iii 1. INTRODUCTION ........ ............................ 1 2. BACKGROUND ........ .............................. 2 A. Transport Sector . .......................... 2 B. Transport Coordination .............. 5 3. THE RAILWAY SYSTEM ...... ........................ 6 A. Organization, Management and Staff .... ..... 6 B. Railway Property ........................... 7 C. Productivity, Traffic and Operations ....... 8 D. Uneconomic Lines and Stations .... .......... 9 E. Budget, Accounting and Audit .... ........... 9 4. THE PLAN AND THE PROJECT ........................ 10 A. Traffic Forecasts .......................... 10 B. The Four-Year Investment Plan, 1973-1976 ... 11 C. The Project ................................ 12 D. The Proposed Loan .......................... 13 E. Execution, Procurement and Disbursement ... 14 P. Financing of the Project ...... ............. 14 5. ECONOMIC EVALUATION .......... ................... 15 A. General .................................... 15 B. Economic Benefits of the Plan ..... ......... 16 C. Evaluation of Various Components of the Project .............................. 17 6. FINANCIAL EVALUATION .. .......................... 18 A. Background ..... ............................ 18 B. Present Position . .......................... 19 C. Future Prospects ......... .................. 21 7. AGREEMFNTS REACHED AND RECOMMENDATION ........... 24 This Appraisal Report has been prepared by Messrs. Karman and Buratti (Engineers), Marco and Mates (Economists), Nanjundiah (Financial Analyst), and Diaz del Rio and Aza (Management Consultants), and has been edited by Miss Foster.  TABLE OF CONTENTS (Cont'd) TABLES 1. Colombian Transport Sector 2. Freight Movements in Major Colombian Ports - Imports 3. Freight Movements in Major Colombian Ports - Exports 4. Vehicle Road Economic Operating Costs 5. Railway Cost of Freight and Passenger Services 6. Long-Term Relationship between Freight Traffic, Investment Expenditures and Real GDP 7. CNR's Salary and Control Structure by Department in 1972 8. Selected Operating Statistics, 1965-1972 9. Motive Power and Rolling Stock, 1972 10. Program for Reduction of Services, Personnel and Number of Stations on Uneconomic Lines 11. Freight Traffic 1968-1972 and 1977 Forecast 12. Passenger Traffic 1968-1972 and 1977 Forecast 13. The 1973-1976 Investment Plan 14. The 1973-1974 Project 15. Items to be Financed by the Proposed Loan 16. Revenue, Expenses and Net Income: Actual 1966-1972; Estimated 1973-1977 17. Summary Balance Sheets: Actual 1967-1972; Estimated 1973-1976 18. Cash Flow Forecast, 1973-1976 ANNEXES 1. CNR's Program of Action, 1973-1976 2. Terms of Reference for Management Consultants 3. Track Rehabilitation Program 4. Economic Evaluation 5. Main Items to be Financed by the Proposed Loan 6. Estimated Schedule of Disbursements 7. Principal Assumptions - Financial Forecasts MAPS 1. Colombian National Railroads - IBRD 3667R 2. Colombian Transportation Sector - IBRD 3704(R)I  COLOMBIA APPRAISAL OF A SIXTH RAILWAY PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for the physical, economic and fi- nancial rehabilitation of the Colombian National Railways (CNR), for which a Bank loan of US$25.0 million equivalent is proposed. Transport is a dynamic and essential sector in the Colombian economy. As in most countries, roads have taken a larger share of traffic in recent years, but railways continue to play an important role, carrying 14% of total freight traffic (excluding pipelines) and over 40% of total foreign trade, most of it bulk cododities over long hauls. ii. The Bank's association with the railways in Colombia began in 1951, and the first three railway loans (68-Co, 119-CO and 267-CO) helped finance the construction and equipment of the Atlantic line, which has become the backbone of the railway system and shows good operating results. At the same time, the railways were integrated into a single coherent entity. Two subse- quent loans in 1963 and 1968 (343-CO and 551-CO) contributed to the rehabilita- tion of track and rolling stock of the system, while improving management practices. Performance under the last two loans, however, has been below expectation: implementation of work was frequently slow and financial results have sometimes been disappointing. Derailments increased significantly up to 1970 as a result of delayed rehabilitation, inadequate maintenance, unexpected winter damages to the track, and poor operations. The situation improved in 1971 and again in 1972, although CNR has not yet become financially self-support- ing. iii. After five loans to the Colombian National Railways between 1952 and 1968, for a net total of US$88.7 million, the wisdom of further Bank lending to CNR has been seriously examined, and this report makes a positive recommendation. The reduced importance of the railways in the transport sector, the failure in achieving financial targets and, moreover, the poor quality of the railway services were major considerations confronting the appraisal team when CNR submitted, and requested financial support for, a very ambitious investment plan. After a protracted analysis, the conclusion con- tained in this report is that CNR continues to have an important economic role and that-a minimum investment plan is justified to defeat the cycle of0- deteriorated infrastructure, derailments, poor service and loss of traffic. In formulating this project, which includes physical investments and numerous measures in a Program of Action to improve the services and technical assist- ance, the recommendations of the Operations Evaluation Report have been of considerable help. This is, however, a project that will require a continuous effort in supervision to increase the probability of achieving the operational and financial targets proposed.  - ii - iv. There is a clear economic role for the major lines of CNR, in parti- cular the Atlantic line and its connection to Medellin. However, in certain areas, the existing railway network or service no longer corresponds to the present needs in view of recent road developments. The original Investment Plan proposed by CNR was reviewed in this context, and the complete renewal of several lines as envisaged could not be supported by the Bank. Important issues, such as the size of the track renewal program and other project items, have been discussed extensively with CNR and the Government and agreed upon. For example, six uneconomic lines generate avoidable losses roughly estimated at about US$1 million per year. The Government has now recognized that action is needed, and CNR has prepared and started implementing an acceptable outline of actions to close two lines completely and to reduce services pro- gressively and close stations on the other four lines, all in accordance with a specific timetable. During the preparation of this project, CNR has also set up a much needed railway planning office, has begun a marketing effort to attract additional traffic from major ports, and has started to prepare and implement a program of action directed at achieving equilibrium between operating revenues and expenditures by 1977. v. The proposed project is aimed at increasing rehabilitation of CNR's main lines while improving operating conditions on the most important sections where traffic is increasing. It consists of the first two years of a four- year 1973-1976 Investment Plan and Program of Action and is estimated to cost about US$44.2 million equivalent. The main investment items in the project include improvements to permanent way (53%), plus motive power, rolling stock, and consulting services. The 1970/71 winter was the worst experienced in 35 years, causing severe flood damage and landslides, and rehabilitation of rail- way property accounts for 5% of investments in the project. Total foreign exchange costs amount to US$32.2 million equivalent and are to be financed by the proposed loan of US$25.0 million and suppliers' credits. vi. The proposed loan would help finance the procurement of track and bridge materials, maintenance equipment, 50 ballast cars, parts for the reha- bilitation of freight cars and telecommunications. All procurement would be made following international competitive bidding except for about US$1.5 mil- lion worth of subassemblies for existing diesel locomotives, which would be procured from the original supplier. Local firms are not likely to secure more than about US$2.0 million equivalent of orders, of which about US$0.6 million equivalent would be eligible for a 15% preference. No preference is envisaged for the supply of timber sleepers, estimated to cost about US$1.4 million equivalent. Part of the loan would also be used for continued tech- nical assistance provided to the railways by consultants who started working during the last Bank loan (551-CO) and for direct assistance to the higher management of the railways, under a contract now being negotiated and to be finalized before the proposed loan becomes effective. vii. The main economic benefits of the four-year Investment Plan will be obtained by avoiding diversion of railway traffic to road and by reducing operating costs. The economic return of the Investment Plan is estimated at 12%.  - iii - viii. CNR achieved operating surpluses (excluding interest) in 1966 and in 1969, but this position was reversed in 1970. Poor track and operating conditions and a high rate of accidents, aggravated by severe winter damages and the competitive situation, have rendered it difficult for CNR to offset rising prices and increased staff costs by appropriate tariff adjustments. CNR's financial situation is serious, and the unsatisfactory cash position has resulted in CNR delaying payments to suppliers, deferring debt service payments and resorting to short term borrowings at high rates of interest. The increase in the petroleum dollar exchange rate and progress in ongoing track rehabilitation allowed some tariff increases to be made in the latter half of 1971 and in 1972. Following some improvement in operations, CNR made further tariff increases in 1973. Recent traffic trends have been promis- ing. To offset inflationary cost increases and improve CNR's finances, a freight tariff increase of 12.5% in current terms in January 1974, 1975, 1976 and 1977 would be required; CNR has agreed that, in view of planned service improvements, such increases could be made. Even with such adjustments and control over the staff strength, CNR is not likely to achieve an operating ratio below 100 before 1977 and would need the assistance of Government to cover the local currency costs of the Investment Plan, debt service and working capital requirements. Government has committed the funds needed by CNR: a special "Project Fund" has been constituted. ix. There is a need for a long-term strategy for the development of the whole transport sector. A multi-modal and comprehensive transport study of the Magdalena River area, which started this year under terms of reference drafted by the Bank, will be important for the coordination of investment and pricing decisions. Financing for the study is secured from the Netherlands. x. The Bank will closely supervise the execution of the project. Steps are being taken in Colombia and in the Bank to reduce and control the risks involved in the project. Namely, unexpected delays in procurement are not likely to recur, since barter arrangements are not contemplated, as in the past when complementary goods were procured in this manner. Consultants' action is showing results, and further improvements are expected from the continued technical assistance in the areas of operations and management. Derailments have been almost completely eliminated in the sections recently rehabilitated, and more track rehabilitation is planned during the project. Other measures specified in the Program of Action are expected to help in achieving the anticipated economic benefits and financial equilibrium by 1977. xi. The project provides a suitable basis for a Bank loan of US$25.0 million for a term of 25 years, including a grace period of about four years.   COLOMBIA APPRAISAL OF A SIXTH RAILWAY PROJECT 1. INTRODUCTION 1.01 The Government of Colombia and the Colombian National Railways (CNR) have asked the Bank for a loan of US$25.0 million equivalent to finance part of the foreign exchange cost of CNR's investments during the first and second years of its Four-Year Plan 1973-1976. These investments are estimated at US$44.2 million equivalent, with a foreign exchange component of US$32.2 million equivalent. 1.02 In the early 1950s, the railroad system in Colombia was composed of various disjointed segments, owned by the National Railroads, Departmental Railroads and private companies. Some sections were meter-gauge, others were yard-gauge (914 mm). They were grouped into two major networks, the western system linking Puerto Berrio to Buenaventura and the eastern system radiating from Bogota to Puerto Salgar, Barbosa, Belencito and Neiva. A small line linked Santa Marta to Fundacion and was used for banana traffic (Map 1). With three loans (68-CO, 119-CO and 267-CO), made between 1952 and 1960 and totalling US$46.3 million, the Bank helped finance the construction and equip- ment of what is now known as the Atlantic line, linking Puerto Salgar to Puerto Berrio (connecting the eastern and the western systems) and extending north to Fundacion, thereby linking the Atlantic and Pacific coasts together and to Bogota. The Atlantic line began operation in August 1961, and CNR was fully integrated in 1963 when the Antioquia division (A. Lopez-Medellin-Puerto Berrio) was finally incorporated into the system. The last two loans (343-CO and 551-CO), US$30 million in 1963 and US$12.4 million 1/ in 1968, made an im- portant contribution to dieselization and modernization of CNR. Performance on these projects has been below expectations, since implementation was often slower than anticipated. All procurement under the last loan has now been received (the loan is fully disbursed) and the technical assistance, also financed by the Bank, is an important factor in CNR's present recovery. 1.03 The Operations Evaluation Report on Colombia has been considered in preparing the proposed project. The report points out that the Atlantic Railroad shows a lower return than expected because of cost overruns and delays in construction. On the other hand, the report emphasizes "the At- lantic Railroad's important impact on the development of the region, already during the construction period: important increases in agricultural produc- tion (mainly rice, corn and cattle), were significant from the viewpoint of the foodstuffs supply at the national level" and "the remarkable increase in cotton production, which the Atlantic Railroad also helped promote." The report concludes that, in view of the large sunk investment, the railway's potential for traffic should now be used efficiently. Concerning the evalu- ation of previous Bank-supported rehabilitation programs, the report concludes 1/ The original amount of loan 551-CO was US$18.3 million, but about US$5.9 million was cancelled in 1970 after a barter arrangement with Poland for the procurement of rails.  -2- that "they were probably well conceived but their implementation and execu- tion were inadequate. A different supervision system (by the Bank) in which economic and operational problems are better taken into account, should have been able to spot these problems." More frequent supervision missions will be required if the rehabilitation program now proposed is to be implemented successfully. 1.04 Under the present Plan, repairs of extensive winter damages will be carried out, together with limited track rehabilitation on major sections of CNR's network, and track maintenance equipment, motive power and telecommunica- tions equipment will be procured. Continued technical assistance is required as well as measures to improve operations, including closure of uneconomic lines and stations and reduction of uneconomic services. This is summarized in CNR's Program of Action (Annex 1). 1.05 This appraisal is based on information supplied by the Colombian Government and CNR and on the findings of two Bank missions in May-June and October 1971 comprising Messrs. Karman (engineer), Marco (economist) and Nanjundiah (financial analyst), followed by an updating mission in November- December 1972, in which Mr. Mates (economist), Buratti (engineer), Diaz del Rio and Aza (management consultants) also participated. This report has been prepared by them and has been edited by Miss Foster. 2. BACKGROUND A. Transport Sector (i) General 2.01 The Colombian transportation network developed in an unintegrated manner, especially in the north-south corridor where the Atlantic section of railways, highways, pipelines and the Magdalena River compete for relatively low volumes of traffic (Map 2). In general, transport coordination has been ineffective, and transport investments and operations have not been adequately planned. In particular, operational efficiency has not kept pace with traffic needs, mainly due to poor road maintenance, severe winters, delayed track maintenance and poor management of port operations. 2.02 Inland communications in Colombia were historically developed to connect Bogota and Medellin with the Northern Atlantic ports, through the Magdalena River, and Cali with the Pacific port of Buenaventura. In the last 20 years, this program was completed by building direct 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 highway and railway lines largely completed, the task still remains of providing adequate transport to scattered population areas and integrating thew into the market economy.  2.03 The Government's 1971-1974 Development Plan has given increased emphasis to social and agricultural investments, but the transport sector will still be the largest receiver of funds, with about 30% of public in- vestments through 1974. A national long term strategy will be needed for the development of the transport sector and for a better coordination of transport investments and operations (paras. 2.10-2.11). A detailed analysis of recent economic developments and prospects is given in the 1973 Economic Report on Colombia 1/. (ii) Operations in the Sector 2.04 Total freight traffic, including pipelines, has grown in the past at 4.6% p.a., and a similar rate of traffic growth is also expected through 1975 (Table 1). The present intermodal distribution of traffic is not expected to change significantly in the short run. Based on Colombian sources, the Bank's freight traffic forecasts for 1975 are as follows, compared with 1970 actuals: Highways Rail- Coastal (approx.) ways River Shipping Airways Pipelines Total 1970, billion ton-km 4.24 1.17 1.33 0.79 0.08 4.23 11.84 X 35.8 9.9 11.2 6.7 0.7 35.7 100.0 1975, billion ton-km 5.52 1.37 1.63 1.02 0.12 5.18 14.84 X 37.2 9.2 11.0 6.9 0.8 34.9 100.0 2.05 Ports handled about 1.8 million tons of imports and 0.9 million tons of exports in 1971 (Tables 2 and 3). There are now more port facilities than economically justified, due mainly to inefficient handling and operations. A study of improvements in cargo-handling, which was a condition of the sixth highway loan (680-CO), has been started. Railways, which depend on ports for about half of their tonnage, now have improved facilities in Buenaventura as part of the agreement contained in the last loan to CNR. The Magdalena River transport study (para. 2.11) will review the feasibility of railway access to Cartagena and Barranquilla. In the meantime, CNR, assisted by its consultants (SOFRERAIL), has prepared a short term action plan to secure more long haul bulk traffic to and from these ports by means of truck/railway transshipments (para. 4.01). 1/ IBRD, "Economic Position and Prospects of Colombia," 1973, 138-CO.  -4- 2.06 Trucks carry mostly general cargo and handle much foreign trade via Barranquilla and Cartagena, where there is no rail access, and Buenaventura. In general, there are indications that road users (mainly trucks) are subsidized; road construction expenditures are not fully covered by additional receipts in the form of duties and other taxes levied on road users. The average truck size is small: about 97% of the truck fleet is gasoline powered, and only 7% of trucks can carry more than 10 tons (in particular, the average load of trucks operating in foreign trade in Buenaventura is less than 3.5 tons). Retail price of gasoline in Colombia is still the second lowest in the world, even after the doubling of the petroleum exchange rate and the 45% increase in gasoline retail price which took place in June 1971. This increase com- pensated for the inflationary cost increases which have occurred since 1966, when the retail price of gasoline was last raised. (iii) The Role of the Railways 2.07 The railways' role in the transport sector has decreased in the recent past, partly because of poor service and partly because of highway improvements. However, for long hauls and moving of bulk commodities, there is a clear economic role for the railways, especially for the Atlantic line and its connection to Medellin. This role could be enhanced by improving the quality of service. Grains imported through Santa Marta provide the main source of railway traffic, followed by coffee export through Buenaventura, fertilizers and steel. This traffic in itself represents over half of the total railway freight traffic and is carried over hauls between 470 and 740 km. Tables 2 and 3 show the large volumes of traffic handled by the railways in foreign trade. 2.08 A comparison of road and rail costs (details given in Tables 4 and 5) shows that, for freight that can be handled in carloads (14 tons and more), transport by rail is less expensive than road transport. Truck transport is cheaper for small loads, but these loads constitute only 4% of total rail transport. The comparison also shows that the cost of moving passengers is lower by road than by rail. In line with this, no further purchase of equip- ment for railway passenger transport is now contemplated, and some passenger services which are unduly expensive will be curtailed. 2.09 The future of certain sections of the railway network is doubtful. This is reflected in CNR's plan, agreed on with the Bank, to close two railway lines and to reduce operations significantly on four more lines (para. 3.13). The justification for continuing service on these lines, which are facing (or are soon to face) keen road competition, will depend largely on the ability of CNR's management to improve operations and to adopt an aggressive commercial policy; the Bank plans to review the economic viabil- ity of these lines continuously.  -5- B. Transport Coordination 2.10 The Ministry of Public Works (MOP) is responsible for the construc- tion and maintenance of national roads, which are financed through the National Highway Fund. It is also responsible for the National Feeder Road Fund, to which local Government bodies and road users also contribute. Railways and ports are the responsibility of autonomous agencies within the Ministry, while airports are under a separate authority, and river transport is private. Legislation, dating as far back as 1966, to coordinate the various transport entities with the MOP has been ineffective. The National Planning Department (NPD), which is in charge of budget allocations at sector level, is now screen- ing the projects subject to foreign financial support. The intermodal alloca- tion of public investments follows a traditional budgetary pattern and may not respond to the traffic tendencies and economic needs (Table 6). The Plan- ning Office within MOP acts as a highway investment agency rather than a plan- ning group for the transport sector. Also, there is some overlap in function between INTRA (Instituto Nacional de Transporte) and the Planning Office in MOP, probably due to the higher caliber personnel in INTRA, which is not subject to civil service regulations in recruiting. Ideally, the Planning Office of MOP should be strengthened and charged with evaluating all transporta- tion projects and allocating resources among modes within the transport sector. Agreement was reached with the Government during negotiations to centralize in MOP all of its transport planning activities and to transfer the Colombian counterparts who will be working on the Rio Magdalena study to the MOP Planning Office once the study is terminated. 2.11 The transport system in the Magdalena River area is particularly complex and constitutes a test case for Government's transport coordination. Navigation on the river represented about 13% of total freight traffic in 1971, in competition with a parallel pipeline not fully utilized; nevertheless, plans had been advanced for infrastructure investments in the river. A part of the paving program planned by MOP through 1974 is for the completion of ongoing projects between Fundacion and Bucaramanga. As a result, the railway trunk line in the Magdalena Valley, which is the financial backbone of the railway system, will face increased competition in the corridor. Recently, the Govern- ment engaged consultants to conduct a comprehensive study (to be completed early in 1974) of user charges, operations, traffic and required investments inclusive of, but not limited to, possible railway extension to Cartagena and Barranquilla. Terms of reference for the study have been prepared with the assistance of Bank staff, while financing for the study is provided by the Netherlands Government. During negotiations, it was agreed that the Bank will be given an opportunity to comment on the conclusions and recommendations of the study, and that the recommendations will be implemented in accordance with a schedule to be agreed upon with the Bank. 2.12 Transport data in Colombia are abundant, but the information is not centralized. The Bank has agreed recently to include Colombia in the program sponsored by the Bank and ECLA (Economic Commission for Latin America) for improvement in the collection of transport data; this will facilitate efficient transport planning and coordination. This information base will be maintained in the MOP Planning Office.  -6- 3. THE RAILWAY SYSTEM A. Organization, Management and Staff 3.01 The Colombian National Railways 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 are appointed by the President of Colombia from a list submitted by private interests representing trade, in- dustry, banking and agriculture. The General Manager is also appointed by the President. The Board controls the railways' operating and financial policies, including adjusting of rates and fares. However, building or abandonment of railway lines and changes in personnel service conditions rest with Government. The railways are organized into five divisions: Pacifico (Cali), Antioquia (Medellin), Central (Bogota), Santander (Buca- ramanga) and Atlantico (Santa Marta). Until recently, each division was headed by a Divisional Manager, except the Central Division, in which the various department heads shared the burden of day-to-day operations. This has now been corrected, and a qualified manager was recently appointed for the Central Division. 3.02 The improvement of CNR's management remains the central issue of the project. In the Bank's opinion, CNR has many good and dedicated people in its ranks, but they suffer, basically, from a severe lack of motivation. This problem received much attention during project preparation. Both CNR and the Government have now recognized the need for strengthening CNR's management. Some steps, such as the creation of a Planning Office, have already been taken at the Bank's suggestion and under terms of reference prepared by the Bank. Before negotiations, CNR agreed to strengthen its Planning Office with qualified personnel. As a first task, the Planning Office provided the General Manager with a Program of Action for 1973 on a divisional basis. The Program sets targets for revenues, expenditures and reduction of derailments for each Division. The General Manager controls the execution of the Program in monthly meetings with the Divisional Managers. 3.03 Management at the intermediate level, which is of crucial importance for daily operations of the railways, is weak, since engineers and experienced technicians can easily find better-paid positions in the private sector. CNR is now selecting management consultants acceptable to the Bank in order to help improve these and other aspects of the railways' management in accordance with terms of reference proposed by the Bank (Annex 2). During negotiations, agreement was reached on the timely implementation of the expected recommenda- tions of the manaaement consultants. SiRning of the contract between CNR and the consultants is a condition of effectiveness of the proposed loan. Foreign costs for this assistance are included in the proposed loan. 3.04 In 1968, CNR agreed that technical assistance was needed in the fields of track (maintenance and renewals), workshops and operations. Con- sultants (SOFRERAIL, France) were selected and financed under the last loan.  - 7 - They started working in 1968 with two teams: track and workshops. In early 1971, after continued insistence by the Bank, CNR appointed a third SOFRERAIL team for operations. Immediate improvement was not to be expected, but the action of the consultants is now showing practical results. More track re- habilitation is being done each year (para. 4.04) and the quality of the work has improved. Workshops have been organized and time for overhauls has been reduced, thereby increasing the availability of locomotives and rolling stock. Operations in general have been reviewed and block trains have been introduced on the main Atlantic line. Continued technical assistance is, however, con- sidered essential, at least during the coming two years, and its foreign exchange cost is included in the proposed loan. 3.05 Total staff of CNR decreased from about 15,000 in 1963 to an ade- quate 11,400 in 1972. Staff in operations decreased almost 20% over the last five years, in spite of an increasing traffic. Total staff is expected to decrease further in 1974 when modern track maintenance equipment is put into service. The structure of salaries and responsibilities in the Engineering and Commercial Departments is somewhat distorted, due to lack of interesting openings for middle management and excess of unskilled labor at the bottom of the salary scale (Table 7). About 95% of the labor force is in the lowest salary bracket (basic wages equal to 1/10 of wages in the highest salary bracket). Low salaries are partly compensated by overtime remuneration, which is about 15% of basic wages. CNR's management is attempting to improve the general quality of the staff by extensive training and continued technical assistance (paras. 3.04 and 4.09). 3.06 About 90% of railway workers are unionized in two large workers' unions; the relations with management are good. Labor disputes are solved through management-union committees, and no serious conflicts have arisen for the past seven years. B. Railway Property 3.07 Total length of CNR's network is 3,436 route-km, all single track and very narrow gauge, 914 mm as against 1,435 mm in Europe and North Amer- ica. Some sections in mountainous areas have gradients of 3% and more. About one-third of the track is laid in 75 lb rail, less than 15 years old, but another third is in 60 lb rail, and the remainder is laid with 55 and 50 lb rail, most of it about 50 years old. All track renewal is now made with 75 and 60 lb rail, which is adequate for the 16-ton maximum axle load presently used. Sleepers are of local wood, which has been treated only in the past few years, and have a relatively short life in tropical areas. Crushed stone ballast has been introduced recently, but most of the network has only uncrushed river stone, or no ballast at all. 3.08 The general condition of the track, except on the Atlantic line, is poor. Delayed maintenance, combined with difficult terrain and soil condi- tions, and severe seasonal rainfall have caused an alarming increase in de- railments (Table 8). This situation already existed in 1968 at the time of  - 8 - the last Bank-financed project, which was largely intended to help improve it. Its implementation has been very slow, mainly because rails and accessories supplied from Poland under a barter deal arrived about two years later than expected. After about one year of service, the rail wear is comparable to that of 15 years of service on other rails; the Polish rails must now be with- drawn from curves and used only on straight track. Switches were to be in- cluded in the Poland deal, but, after long discussions, had to be procured from France and the USA; however, the US firm ceased operations after the order was placed and new tenders had to be issued, so that the switches were available only in late 1972. Procurement of ties on the local market was very difficult until 1970, because CNR did not pay the suppliers on de- livery. Of the six track maintenance machines to be procured, three were so badly damaged during sea travel that they had to be returned to the manufac- turer in Europe for repair; they were received only in mid-1972. Ballast crushers, purchased with Bank financing from a reputable manufacturer, gave constant trouble until they were finally adapted to local conditions by the maker. Dumping of earth and rocks in the Cauca and Dagua rivers, during con- struction of parallel highways, resulted in floods over the lower railway track, interrupting traffic for several months during 1971. A huge landslide south of Medellin caused a railway viaduct to collapse and interrupted traffic from October 1970 to January 1973. The need to give priority of finance and manpower to correcting accident damage has resulted in a further deferring of maintenance. Less maintenance has meant that the railroad has been less efficient and less able to carry traffic than it might have been, thereby earning less revenue. This has led, in turn, to a further skimping of maintenance. 3.09 Derailments are concentrated in certain areas, as shown in Annex 3. It can be seen, however, that they have been sharply reduced on the sections recently rehabilitated; this confirms the fact that poor track was the main cause. The increase of derailments on the Cali-Buenaventura section is due to the abnormally short life of inadequate timber sleepers. Action is being taken to intensify track rehabilitation together with measures to improve rolling stock safety and operations control. 3.10 Motive power and rolling stock at the end of 1972 are shown in Table 9. Steam traction was completely phased out in early 1973. About 28 more diesel locomotives will replace older types and allow an increase in total motive power, in line with the traffic requirements. Freight cars and pas- senger coaches are adequate for the foreseeable traffic up to 1976, with the exception of ballast cars (50 of which are included in the proposed loan). Spare parts, mainly roller bearings and bogie castings, are needed. C. Productivity, Traffic and Operations 3.11 The availability of locomotives and freight cars has been steadily increasing over the past few years and is now acceptable at 85% and 84% re- spectively. A further increase is expected as a result of the completion of the new workshops at Facatativa, with modern equipment replacing older ma- chine tools and new methods being introduced by CNR's consultants.  -9- 3.12 Other operating statistics are summarized in Table 8, which shows an increase of 45% in the average net load per freight car between 1965 and 1972, due to the replacement of older stock by heavier cars. There is room for substantial improvement in turnaround time of loaded wagons (12.7 days), average net load per train (268 tons), and locomotive utilization (186 km per day). CNR, with the help of SOFRERAIL, is setting up and implementing a plan for improvement of scheduling of trains, train composition, cargo handling in terminals, and yard switching. CNR has also prepared, as part of the Program of Action, a time-phased plan of operation improvements coordinated with action to be taken on closure of uneconomic lines (para. 3.13) and reduction of un- economic passenger - and other - services. This plan was discussed, and agreement on its implementation was reached during negotiations. D. Uneconomic Lines and Stations 3.13 One of the most crucial issues in determining the future role of the Colombian Railways is its size. The unit operating costs on different lines vary to a large extent depending on traffic density; on some low density lines, the costs are extremely high (Annex 4, Chart 1). CNR has suggested a program for redimensioning the system, which will reduce operating costs on 662 km of low density lines by about Col Pes 14 million (US$0.62 million) annually. This program (already started and detailed in Table 10) specifies total closure of two lines (Pereira-Armenia and Pereira-Manizales), totalling 117 km, and significant reductions in services and closure of stations on four other lines (Cartago-Pereira, Cali-Popayan, La Caro-Barbosa and Espinal-Neiva). In addition, no extensive maintenance or rehabilitation will be carried out on those lines which remain open. This program is generally acceptable and was finally agreed upon during negotiations; provisions concerning its imple- mentation are included in the proposed loan agreement. 3.14 The redimensioning of the system is a continuous program that should be adjusted in the future to reflect changes in traffic patterns on all lines and any change in the social objectives of the Government. During supervision of the project, special attention will be given to changes in traffic and cost patterns on various lines so that further line closure or reduction of services could possibly be implemented during the second part of the 1973-1976 Investment Plan. E. Budget. Accounting and Audit 3.15 CNR prepares annual operating and investment budgets which are in- cluded as a separate annex to the national budget; their form and content need improvement and CNR has agreed to effect some changes suggested by the Bank. The operating budgets are within the competence of CNR. The budget of investment is examined by the Planning Office of the Ministry of Public Works and the National Planning Department. The amount of Government sup- port is then decided and included in the general Government budget. This amount is made available monthly (on a pro rata basis) to CNR. The balance of the requirements for investment is met from borrowings from external and internal sources (para. 6.15), since CNR is not currently able to generate its own resources for this purpose.  - 10 - 3.16 CNR's accounting system is structurally sound and is generally patterned after that prescribed for private commercial railroads in the USA. Monthly audited accounts are published within 30 days. Operating statis- tics and financial iecords are processed mechanically. Fixed assets re- cords enable CNR to charge depreciation on a realistic basis. 3.17 The previous practice of capitalizing interest on suppliers' credits in- some cases was discussed with CNR and is now discontinued. CNR has also agreed to maintain from 1973 a separate head of account for special and an- usual expenditure, such as repair of extensive winter damages which are now merged in operational expenditure. 3.18 Inventory control is deficient. In June 1971, CNR had inventories valued at about Col Pes 11 million not drawn for use for over five years, Action in regard to disposal of obsolete items has been inadequate and slow. CNR has engaged a firm of Colombian consultants (IDEAS Ltd.) for reviewing inventory management and control procedures and suggesting steps to be taken. The firm started work in 1971, recommended some measures for inventory management and is assisting CNR in their implementation. 3.19 CNR's accounts are examined by the "Auditor General", who is re- sponsible to the Controller General of the Repubic. Audit procedures are generally satisfactory, an! contribute little or no delay to the production of periodic accounts, but are extremely detailed and tend to duplicate the internal check performed by CNR. The question of simplifying the audit and reducing the cost thereof (presently Col Pes 4.5 million per annum) was discussed during negotiations. It was agreed that this matter would have to be separately pursued further with the Government, since this is a general issue affecting other Government undertakings as well as legislative matters. 4. THE PLAN AND THE PROJECT A. Traffic Forecasts (i) Freight Traffic 4.01 CNR has been adjusting freight tariffs as necessary to cover long- run marginal costs; selective increases took place in every year since 1968. CNR has prepared, as part of the Program of Action, a time-phased commercial plan through 1976, ensuring that each freight tariff will continue to cover, as a minimum, the long-run marginal costs of providing the service, and con- centrating marketing efforts on (a) major lines (the Atlantic line carries about half of total freight traffic); (b) major commodity groups (13 com- modities generate 80 of the revenues); and (c) major customers (50 customers provide two-thirds of the revenues). Efforts are also being made to secure traffic to and from Cartagena and Barranquilla by means of a road/rail com- binati-n administered by CNR. On this basis, the Bank has prepared freight  - 11 - traffic forecasts by major commodities through 1977 (Table 11). Account has been taken of past experiences in traffic projections which proved to be either too optimistic or reversed by severe winter damages as in 1970, and of potential traffic losses on lines not to be rehabilitated or facing keen competition from highways paved or in the process of being paved. Traffic elasticity to GDP and tariff level have also been tested (Table 6). Total traffic for 1977 is projected at about 3.3 million tons (1,485 million ton-km) compared to 2.7 million tons (1,200 million ton-km) in 1972. This yields a traffic growth of 4.4% p.a. between 1972 and 1977, equal to the actual growth between 1965 and 1972 under very difficult conditions. Major traffic increases are foreseen in agricultural products, fertilizers, steel and, in general, long distance trade traffic between Santa Marta, Medellin and Bogota. On other sections, mainly Cali-Buenaventura and branch lines, traffic has been assumed constant or slightly decreasing, in spite of service improvements, in view of growing paving programs and truck competition. (ii) Passenger Traffic 4.02 On average, passenger service has been barely covering avoidable costs, and there is a cross-subsidization from first class and "autoferros" to other traffic. Total number of passengers decreased from 6.5 million in 1965 to 3.0 million in 1970 (Table 12), as a result of new paved roads link- ing the main cities, reliable and subsidized bus operations, and often defi- cient radlway service, lately aggravated by delays and derailments. Shortly after the introduction of new petroleum exchange rates in mid-1971, total rail pass-km increased substantially over that of 1970. This trend continued in 1972 and total traffic for this year reached 4.3 million passengers. This large increase is due partly to large tariff increases on buses and partly to better service and introduction of fast trains and better train schedules. CNR raised its passenger fares selectively on long distance trains from October 1972. However, to make this service sufficiently profitable to justify renewal of passenger rolling stock, further substantial tariff increases will be needed. Thus, it was decided to observe the passenger traffic trend in the future before commiting new investments, and the traffic forecast for 1977 assumes a slightly lower traffic level than in 1972, fol- lowing proposed tariff adjustments (para. 6.12). B. The Four-Year Investment Plan, 1973-1976 4.03 In order to break out of the self-defeating cycle of shortcomings described in paragraph 3.08, a series of actions is needed, including concen- tration of investments on the most important sections of the railways, clo- sure or service reduction on low traffic density lines, technological changes intended to reduce derailments and track maintenance costs, in particular welded rails and concrete sleepers (provided mechanized maintenance equipment is available), better maintenance of rolling stock and more discipline in train operations. CNR has therefore prepared a Four-Year Investment Plan 1973-1976 which provides for capital investment of Col Pea 2.1 billion (US$94.0 million equivalent) with a foreign exchange component of US$60.4 million (Table 13). The original Investment Plan prepared by CNR was more ambitious and has been amended with the help of the Bank. Some investments have been reduced or  - 12 - postponed. In its present form, it has been approved by the Government, and will be accompanied by a series of measures intended to improve the general efficiency of CNR: these measures and the objectives to be pursued are dis- cussed in various sections of this report and are summarized in the Program of Action (Annex 1). To avoid possible excess investments, the last part of the Plan (1975 and 1976) should be reviewed and agreed upon by CNR and the Bank in mid-1974 in the light of revised traffic forecasts and in accordance with the implementation of the Program of Action. This was agreed during negotiations. 4.04 Several factors indicate that shortcomings in the implementation of past projects can be avoided. Delays in procurement are not likely to occur, since barter arrangements are not contemplated. Technical assistance is a key feature as it was in the last loan, and consultants (SOFRERAIL) are now in the field. Their action is beginning to show results and it is reasonable to expect further improvements in the near future, especially concerning track mainte- nance and train operations. Derailments have been reduced significantly on the sections recently rehabilitated (para. 3.09 and Annex 3), and it is planned to rehabilitate 364 km more of track during the project period. This is a re- alistic figure compared with 118 km done in 1969, 185 km in 1970, and 225 km in 1971. (Due to lack of funds, only about 60 km were rehabilitated in 1972.) Management improvement (Dara. 3.03) and closer Bank supervision (para. 4.09) will be important means of achieving these targets. 4.05 The main item in the Plan is track rehabilitation, including renewal of 434 km of track and laying of concrete sleepers on a total of 576 km of track. Total investment related to permanent way, including switches, track maintenance equipment, bridges, and ballast cars, accounts for 52% of the Plan. Other important items are diesel locomotives (9%), telecommunications (10%), and consulting services (5%). Winter damages have been so great that they surpass normal maintenance and are, therefore, included in the Investment Plan. They account for about 2.5% of the Plan. 4.06 The cost estimates have been based on current 1973 prices. Physical contingencies have been estimated at 1 to 2%, because CNR's budget is expressed more in monetary than in physical terms and because civil works (which would normally require higher physical contingencies) represent only a very small portion of the investments. Price contingencies were based on separate es- timates for foreign and domestic costs, respectively 6.5% and 14% per year. No contingencies have been allowed for the locomotives (the contract is signed at fixed prices) and for track materials in stock, mainly rails procured under the Polish barter arrangement. Total contingencies over the 1973-1976 period represent about 21% of the estimated cost of the Four-Year Plan. C. The Project 4.07 The Project consists of the first two years of CNR's Four-Year Invest- ment Plan and of a Program of Action (Annex 1). It is a program aimed at improv- ing the physical condition of important sections of the network, without any in- vestment in uneconomic lines. As shown in Table 14 and summarized below, its  - 13 - total cost is estimated at US$44.2 million equivalent, with a foreign exchange component of US$32.2 million. Contingencies have been estimated as explained in paragraph 4.06 preceding, and represent about 10X of the Project. Proposed Col Pes million US$ million Loan Local Foreign Total Local Foreign Total US$ million 1. Track materials 148.0 276.3 424.3 6.6 12.3 18.9 10.8 2. Maintenance equipment - 43.3 43.3 - 1.9 1.9 1.9 3. Ballast cars - 15.1 15.1 - 0.7 0.7 0.7 4. Diesel locomotives - 160.5 160.5 - 7.1 7.1 - 5. Spares for locomotives - 43.7 43.7 - 1.9 1.9 1.9 6. Spares for freight cars 14.8 28.7 43.5 0.6 1.3 1.9 1.3 7. Telecommunications 8.7 23.1 31.8 0.4 1.0 1.4 1.0 8. Consultants, training 14.3 34.2 48.5 0.6 1.5 2.1 1.5 9. Winter damages 20.2 23.0 43.2 0.9 1.0 1.9 1.0 10. Miscellaneous 24.1 29.7 53.8 1.1 1.4 2.5 1.4 230.1 677.6 907.7 10.2 30.1 40.3 21.5 Contingencies: physical 4.6 5.0 9.6 0.2 0.2 0.4 0.1 Contingencies: price 36.0 42.3 78.3 1.6 1.9 3.5 1.8 Total 270.7 724.9 995.6 12.0 32.2 44.2 23.4 Interest during construction 1.6 Amount of proposed loan 25.0 The proposed loan covers only the part of the foreign exchange cost of the Project not already financed by other sources (para. 4.13). D. The Proposed Loan 4.08 As shown in detail in Table 15, US$8.6 million would be for track materials, mostly rails, fastenings, switches, and steel components for con- crete sleepers, while US$1.3 million would be for infrastructure and bridges, US$0.9 million for rail welding equipment, US$1.9 million for track main- tenance equipment including ballast crushers, and US$0.7 million for 50 ballast hopper cars. These five items combined represent about 62% of the total and reflect the emphasis given to the much needed improvement of CNR's permanent way. Other items to be financed by the proposed loan are parts for rehabili- tation of locomotives and freight cars (US$3.2 million), telecommunication equipment (US$1.0 million), and consulting services (US$1.5 million). Due to the tight financial situation of CNR, commitment charges and interest on the Bank loan during the Project period (about US$1.6 million), have been included in the proposed loan. A detailed description of the Bank-financed items is given in Annex 5.  - 14 - E. Execution, Procurement and Disbursement 4.09 With the aid of consultants, CNR should be able to implement the Project adequately. On the technical side, the SOFRERAIL teams are already in the field. On the management side, consultants should start working soon after the proposed loan is signed. Close Bank supervision would also help in implementing the Project. Since the preparation of this loan took longer than expected, the two-year Project is likely to run into 1975. 4.10 Procurement of timber sleepers has always been a problem: quantity and quality have often been inadequate, with disastrous consequences to track condition. It is now proposed, therefore, to purchase the 570,000 sleepers needed for the Project under international tendering, with strict specifications and quality control. Since it is unlikely that foreign suppliers will show interest, invitations to bid for sleepers would be advertised in Colombia only, in order to save time and money. The cost estimates assume that sleepers will be procured locally (through competitive bidding). This local procurement will be financed with the proposed loan. 4.11 All other goods financed under the loan would be acquired through in- ternational competitive bidding, except about US$1.4 million for locomotive sub- assemblies, which would be procured from the original supplier. Colombian firms are not likely to compete except for timber sleepers estimated at about US$1.4 million and for minor items estimated at about US$0.6 million. Local bidders (except timber sleeper suppliers) would be granted a margin of prefer- ence by adding 15% or the applicable customs duties, whichever is lower, to the CIF value of the foreign bids. If local bidders are successful, corresponding procurement would be financed with the proposed loan. Colombia is a member of the Latin American Free Trade Association (ALALC) and of the Andean Pact. Preferential trade agreements under these treaties are, however, irrelevant in the case of CNR, because it is exempted from duties on imported equipment. 4.12 Cost estimates are based on recent quotations obtained for similar goods under international competitive bidding. If any savings result from favorable prices in competitive bidding, the corresponding savings in the loan account would be used to finance additional but similar Project items subject to review and agreement with the Bank. For imported goods, disburse- ments would be made on the basis of CIF costs. For goods procured locally, disbursements would be made on the basis of total costs. Annex 6 shows an estimate of disbursements assuming the proposed loan is approved in July 1973. F. Financing of the Project 4.13 The proposed Project would be financed as follows:  - 15 - (US$ million) Local Foreign Total % IBRD - Proposed loan (excluding interest during construction) - 23.4 23.4 52.9 Bilateral sources for locomotives and spares - 6.8 6.8 15.4 CNR (utilization of Polish rails, etc.) - 1.6 1.6 3.6 Government 12.0 0.4 12.4 28.1 12.0 32.2 44.2 100.0 Twenty-eight locomotives are to be obtained from the Spanish supplier of an earlier lot of 60 locomotives purchased in 1968, under international competi- tive bidding, at the same original price, except for escalation. The sup- pliers' credit and related arrangements have already been completed. The proposed loan would cover about 73% of the total foreign exchange component of investment during the Project period. 5. ECONOMIC EVALUATION A. General 5.01 The Colombian railways, which move more than 2.7 million tons per year over hauls extending up to 900 km, are an essential part of the Colombian economy. Traffic moving in the trunk system connecting Santa Marta, Bogota, Medellin, Cali and Buenaventura is mostly long haul and bulk, and is moved at lower operating costs than by road. This trunk system has a clear economic role; traffic on its lines increased at more than 4% p.a. between 1965 and 1972 at rates always covering long run marginal costs. On the other hand, some branch lines have operating costs higher than those for existing parallel roads; as a result of poor service and uncompetitive rates, a large part of the traffic on those branch lines has been diverted to road, and service is to be reduced further (para. 3.13). 5.02 For the purpose of economic analysis, total freight traffic has been projected through 1977 by major commodity groups and main railway links, subject to covering, at least, operating expenditures and to generating suf- ficient revenue for the whole network to ensure financial equilibrium. In cases where transport by road is more economic, it was assumed that the rail- way traffic will be progressively diverted. Passenger traffic declined in the past because of deficient service but recovered in 1971 and 1972 and is expected to decrease following rate adjustments which will assure the covering of marginal cost. The Project is therefore based on traffic for which CNR assures the lowest economic transport cost and for which users are prepared to pay.  - 16 - 5.03 During the Project period, major rehabilitation is contemplated on five lines. The rehabilitation is aimed at assuring a safe traffic on the lines, i.e., reducing the number of derailments, increasing operating speeds and facilitating increased traffic. On most of these lines, rehabilitation is a continuation of work which was started in former years. The lines to be rehabilitated are: El Cruce-Bucaramanga, which feeds the Atlantico lines; Zarzal-Armenia, which carries mainly coffee destined for export through Buenaventura; Medellin-A. Lopez, which carries traffic mostly composed of manufactures from Medellin exported through Buenaventura; Medellin-Grecia on which traffic is mostly long haul to and from Bogota and Santa Marta; and La Dorada-Buenos Aires, which provides an outlet for the agricultural production of the Tolima region to Medellin. B. Economic Benefits of the Plan 5.04 Since 1969, when CNR last achieved an operating surplus, total costs of railway service have increased sharply, due to a growing number of derail- ments which damaged rolling stock, track and cargo; provoked traffic inter- ruptions; and impaired the traffic growth of recent years. The 1973-1976 In- vestment Plan and the Program of Action aim at preventing CNR from further defaulting on its proper role in the Colombian economy. The main objective is to increase efficiency and quality of service and to reduce operating costs. To this end, derailments and accidents must be curtailed, uneconomic services reduced and operations concentrated on the most efficient sections of the net- work. Finally, a strong commercial action is designed to improve and maintain the public attitude toward the railways in order to make use of the existing competitive advantage of the trunk railway system and to avoid a costly traffic diversion to road. 5.05 For the economic analysis, the Investment Plan was broken up into two parts: (a) investment pertaining to the Santa Marta-Bogota line (Annex 4, Table 1), and (b) investment for the whole system (as given in Table 13). The Santa Marta-Bogota line (969 km) carries about 60% of total railway traffic and its density is high (738,000 ton-km per km in 1972); its traffic is long haul and the operating costs on the line are low (Col Pes 0.28 or USJ 1.3 per ton-km). The investment required, even if only the Santa Marta- Bogota trunk line will be maintained, amounts to 48% of the total Investment Plan, and its benefits are mainly cost reduction and avoidance of traffic diversion to roads (average road cost is about Col Pes 0.50 or USJ 2.2 per ton-km). This investment yields a 13% economic rate of return (Annex 4, Table 2). In the second stage, the alternative of going ahead with the com- plete system (exclusive of lines to be closed as mentioned in paragraph 3.13) was examined and compared to the alternative of maintaining only the Santa Marta-Bogota line. The additional investment, which will prevent unjusti- fied diversion of traffic to roads, yields an 11% economic rate of return (Annex 4, Table 3). Thus, the weighted average rate of return on the In- vestment Plan is 12%.  - 17 - 5.06 The economic rate of return is underestimated for the following reasons: (a) The better quality of service to traffic already moving on the railways (i.e., increase in user surplus) was not quantified. (b) It is likely that road carriers will be unable to absorb in time all traffic diverted from the railways, and some temporary loss of transport capacity will emerge; this loss also was not quantified. (c) Rail traffic has been assumed constant beyond 1977. 5.07 The sensitivity of the economic rate of return to changes in invest- ment cost, railway operating cost and railway traffic growth was tested (Annex 4). The results show that the return is acceptable even under pessimistic assumptions. A shadow foreign exchange rate was also tested, but the results demonstrate that the return is not affected because the alternative road costs have a fairly high foreign exchange component (about 30%). C. Evaluation of Various Components of the Project General 5.08 Although the Investment Plan is justified as a whole, an attempt was made, whenever possible, to determine whether some items in the Project other than track rehabilitation could be substituted by other measures without affecting the overall capacity of the railways. The items for which this analysis was not done are those combinations for which benefits are joint (an exclusion of one item will eliminate benefits of others as well). Concrete Sleepers 5.09 The Project includes 253,000 concrete sleepers at a total cost of Col Pes 76.5 million. These sleepers can be substituted by cheaper wooden sleepers but with shorter life and higher maintenance cost. The economic rate of return on the additional outlay is about 14.1%. This return does not take into account the faster service made possible by the better sleepers. Hard Rails 5.10 Hard rails, costing Col Pes 81.4 million, are to be used on curves where rail is damaged most. Hard rails cost about 45% more than ordinary rails, but their life in sharp curves is more than double. The rate of return on this item is estimated at 16.5%.  - 18 - Ballast Cars 5.11 Fifty ballast cars are to be purchased in the Project at a total cost of Col Pes 15.1 million. Ballast can be transported in less expensive gondola cars. However, this results in lesser quality of ballasting and requires addi- tional labor. Taking account of the availability of gondola cars, an economic rate of return of over 10% is reached even if the shadow price of labor is measured at one-third of actual wages. Locomotives 5.12 According to a contract signed with a Spanish manufacturer, 14 diesel locomotives will be delivered in 1973 and 14 in 1974. The second delivery is premature by about three years considering future needs for motive power (Annex 4, Table 4), but the favorable price under the contract (US$255,000 each) justifies the early purchase of the locomotives, and the rate of return on the early purchase after accounting for locomotive maintenance is at least 9%. Targets for improvement in locomotive usage were agreed upon with CNR as part of the Program of Action. During negotiations, CNR also agreed to consult the Bank regarding any future locomotive purchases before 1977. Trucks and Trailers 5.13 This investme :t (Col Pes 26.1 million) is intended to provide CNR with trucks and trailers for combined road/rail shipments. This refers to the ports of Cartagena and Barraquilla where no direct rail connection is avail- able, and to the road connection between Ibague and Armenia. Currently this transport is performed by private companies, but difficulties are encountered in getting trucks whenever necessary. The financial rate of return for CNR is 24%, and this investment will not create over-capacity in the trucking industry since it will affect less than 1% of total highway traffic. Conclusion 5.14 The Investment Plan and the Project as presented in this report ex- clude some investments which were requested by CNR, but whose viability could not be demonstrated, such as passenger railcars, and some rehabilitation work. As it now stands, the Investment Plan is justified, and no substitution of individual items in the Project can be made without reducing the overall ex- pected benefits. 6. FINANCIAL EVALUATION A. Background 6.01 CNR is an autonomous enterprise, with its finances separated from those of Government, but it depends on Government and borrowings for its in- vesemant needs. CNR had operating deficits for several years, but improvement in freight traffic and the introduction of a new tariff in 1966 led to a small  - 19 - operating surplus (after depreciation and before debt service). The railways again had an operating deficit in 1967, brought about by rising staff costs and increases in prices, coupled with a reduction in traffic and inability to raise the tariffs to an adequate level in view of competitive conditions. CNR's financial expectations had, however, improved at the time of sanction of Loan 551-CO and it was considered in the Bank that CNR could earn a financial rate of return of 1% on net fixed assets in 1969, 3% by 1972 and 6% by 1976. These objectives, incorporated in the loan documents, were considered "ambitious but capable of realization," provided the momentum for change and improvement then in evidence was maintained. They were not actually achieved, but CNR main- tained a working ratio of less than 100% during 1968-1970. B. Present Position (i) Actual Operating Results 6.02 The actual operating results for the years 1966-1972 are summarized below (Table 16 gives the details): (Million Col Pes) 1966 1967 1968 1969 1970 1971 1972 Operating revenue 305.5 312.2 364.6 419.3 440.8 467.6 P508.7/1 Working expenses 266.6 316.3 344.8 363.6 438.9 493. 3,539.&- Depreciation 35.9 42.6 41.8 53.0 65.2 78.7 85.8 Operating expenses 302.5 358.9 386.6 416.6 504.1 572.0 625.6 Net operating revenue (loss) 3 (46.7) (22.0) 2.7 (63.3)(104.4)(116.9) Other income 13 16.0 11.9 31.3 20.4 10.2 25.4 Interest charges 29 39.9 44.6 53.3 58.1 61.2 98.2 Net loss 13 (70.6) (54.7) (19.3)(101.0)(155.4)(189.7) Working ratio % 87.3 101.3 94.6 86.7 99.6 105.5 106.1 Operating ratio % Actual 99.0 115 106 99.4 114.3 122.3 123.0 /1 Excludes winter damage repair. 6.03 Increases in freight ton-km and tariff adjustments enabled CNR to improve its financial situation in 1968 and 1969, despite growing costs; CNR had an operating surplus for the second time in four years. The position was reversed in 1970, however, because of increased working expenses: (a) increases in general price levels; (b) increased wage and social benefits and some in- creases in the number of permanent way maintenance staff (on the recommenda- tions of consultants SOFRERAIL); and (c) an accounting change, under which some expenses relating to the Atlantic line, which had been previously charged to "Investment", were now charged to working expenses, the construction and the consolidation of the line having been completed. The unusually severe winter damages of November/December 1970 also adversely affected CNR. Tariff adjustments made in 1970, limited by competitive conditions and the quality of service, were inadequate to cover the increases in costs, and the operating results deteriorated considerably. The adverse conditions persisted in 1971,  - 20 - with a high number of derailments, the winter damages not fully repaired and increases in staff costs and in price levels not adequately compensated by tariff adjustments. During 1972, CNR controlled its staff strength and reduced derailments. There was a significant increase in passenger traffic and rev- enues, but freight traffic growth was small, and staff and material cost rises were barely covered by tariff adjustments. 6.04 Freight ton-km (which accounts for about 90% of CNR's operating revenue) increased only slightly during 1968-1971, but grew 4% in 1972. Freight tariffs were increased on a selective basis every year; however, these were inadequate to cover the rise in staff costs and price levels. CNR controlled the staff strength: in 1971, the staff was less than in 1967 and it was further reduced in 1972. Fuel costs decreased during the period, with increased diesel- ization. The depreciation charge rose with increased investments; the level of depreciation charge is generally satisfactory. (ii) Summary Balance Sheets 6.05 CNR's balance sheets for the last six years are shown in Table 17. The balance sheets for the years 1968-1972 (since the last Loan 551-CO) may be summarized as follows: (Million Col Pes) 1968 1969 1970 1971 1972 Net working capital 252 215 477 508 375 Miscellaneous and deferred assets 46 63 62 90 226 Net fixed assets 2,068 2,555 2,909 3,125 3,211 TOTAL 2 366 2,833 ,448 3 723 3,812 Long term loans 890 1,165 1,500 1,673 1,961 Equity 1,346 1,505 1,587 1,613 1,668 Reserves for Social Security, etc. 130 163 361 437 183 TOTAL 2,366 2,833 3,448 3,723 3,812 Ratios: Liquid assets/current) Liabilities ) 1.5 1.2 0.96 0.78 0.77 Debt/equity 40/60 44/56 49/51 51/49 54/46 6.06 CNR's financial position has been weak; it had a serious cash posi- tion, especially during the last three years, with current operations yielding insufficient cash to meet the needs. CNR has been delaying payments to sup- pliers (the amount of suppliers' bills outstanding for over three months has been over Col Pes 20 million), deferring debt service payments, reschedul- ing some debts (e.g., with the Coffee Federation and Constructora de Carros de Ferrocarril S. A. de Mexico) and resorting to short term borrowing from local banks at high rates of interest (such borrowing amounted to about Col Pes 53 million on December 31, 1972). Until recently, Government assistance to CNR has been only toward the local currency costs of the investment program and  - 21 - debt service obligations of the first three Bank loans (68-C0, 119-CO and 267-CO). CNR has been meeting its obligations under the last two Bank loans (343-CO and 551-C0), but this has been extremely difficult and often achieved by postpon- ing payments to others. Government assistance toward winter damage repair by CHR has been subject to protracted negotiations and has been provided in small installments. Measures to improve the liquidity position are discussed in paragraph 6.15 following. 6.07 The long term debt as of December 31, 1972 includes US$51.1 million of Bank loans to CNR; it also reflects the purchase of locomotives and freight cars under suppliers' credits, and of rails and accessories from Poland under a coffee barter arrangement with the Coffee Federation of Colombia, which pro- vided financing for CNR under a loan with repayment now spread over 15 years. 6.08 Of the gross fixed asset value, Col Pes 3,755 million as of December 31, 1972, approximately 20%, represents nondepreciable assets (mainly land, ties and ballast, including laying charges). 6.09 The Col Pes value of assets acquired with foreign loans is adjusted periodically to reflect devaluation. However, a revaluation of assets is necessary, and CNR has initiated action on this matter. During negotiations, it was agreed that the revaluation of assets would be completed within six months of the proposed loan agreement. C. Future Prospects 6.10 Much of the CNR network is underused; the competitive situation and the quality of railway service limit CNR's ability to raise revenues. The Project investments coupled with the Program of Action should enable CNR to improve its operations and quality of service and, consequently, its traffic. Even so, CNR would have to control its staff costs and also effect tariff adjustments in order to improve its finances. CNR was able to reduce its staff strength by about 2.5% during 1972; it intends to bring about a further reduction in personnel. Following the change in the "petroleum dollar" ex- change rate in mid-1971, which affects highway trucks to a greater extent than the railways, and some progress in track rehabilitation, CNR was able to raise the freight tariff on a selective basis in September 1971 and again in the latter half of 1972. Following some improvements in operations, tariff in- creases have also been made in 1973, including a general freight tariff in- crease of 10% from June 1973. However, costs have been rising in accordance with price level increases and increases in staff costs following agreements with labor. A new agreement has now been concluded with labor, effective for 30 months from January 1973. Under this agreement, the increase in staff remuneration levels would be about 12.2% in 1973, 11.8% in 1974 and 11% in 1975. These increases have been taken into account in the financial forecasts. In addition, it has been assumed that, during the years 1976 and 1977, there would be an increase in staff remuneration levels by 2% in real terms (10% in current terms). The principal assumptions on which the financial forecasts are based are outlined in Annex 7. 6.11 The forecast income accounts are in Table 16 and are summarized on the following page.  - 22 - (Million Col Pes) 1973 1974 1975 1976 1977 I. Operating Revenue 579.8 681.0 787.5 919.3 1,052 II. Operating Expenses /1 Working Expenses 621.0 - - 705.4 777.6 852.8 937.7 Depreciation 93.0 104.0 113.0 118.0 120.0 Less Reduction of Losses with respect to Uneconomic Lines 5.0 9.0 14.0 16.0 16.0 Total Operating Expenses 709.0 800.4 876.6 954.8 1,041.7 III. Net Operating Revenue (Loss) (129.2) (119.4) (89.1) (35.5) 10.3 IV. Non-operating Revenue (Net) 19.0 19.0 15.0 10.0 10.0 V. Interest 87.6 97.5 129.9 143.6 143.8 VI. Net Income (Loss) (197.8) (197.9)(204.0) (169.1) (123.5) Ratios: Working % 106.2 102.3 97.0 91.0 87.6 Operating % 122.3 117.5 111.3 103.9 99.0 [I Excludes winter damages repair. 6.12 The forecast income accounts take into consideration the projected traffic growth, best estimates (paras. 4.01 and 4.02) and incorporate the effect of tariff increases which are considered feasible and necessary. Table 16 shows separately the additional freight revenue to be raised, over and above the revenue expected at the present freight tariff rates. The freight tariff increases thus incorporated are selective adjustments to yield increases (in current terms) of average revenue per ton-km of 12.5% each from January 1974, 1975, 1976 and 1977. These tariff increases were discussed and agreed with CNR. They would be revised as necessary in the light of traffic and changes in price levels so that the specific operating ratio targets are achieved. CNR has recently increased some passenger fares (especially diesel rail car). These increases have been included in the forecasts. Additionally, passenger tariff increases (in current terms) of 10% each from January 1974 and January 1976 have been included in the forecasts. The forecasts also incorporate the reduction of losses on certain uneconomic lines (para. 3.13) that are, on the basis of data now available, considered feasible and necessary; these are shown separately in Table 16. 6.13 Tariff adjustments as proposed above imply that, in the competitive situation prevailing in Colombia, the quality of railway service would improve adequately. The trend in recent months has been favorable; both freight traffic and passenger traffic have substantially increased in the first four months of 1973 compared with the corresponding period of 1972. Sustained attention to operational improvements, commercial drive and determined efforts on the part of management to control staff and other costs are essential in order that the forecast improvement in the financial situation can be achieved. CNR's financial needs are such that greater improvement than that forecast above is desirable; however, with the prevailing limitations, the forecast financial improvement is what can reasonably be expected. Specific financial and operating ratio targets for each of the years 1973-1976 are incorporated in the Program of Action (Annex 1).  - 23 - 6.14 The forecast operating results show that, even with the tariff increases and other measures referred to, CNR would not be able, during the next five years, to earn net revenues sufficient to cover interest charges. The debt service coverage would vary from 0.1 in 1975 to 0.4 in 1977 because CNR's debt is substantial, and the ratio of debt service to forecast gross operating revenues would vary from about 45% in 1973 to about 34% in 1977. Most of CNR's debt consists of foreign loans, and any further Peso devaluation would increase the ratio. Under the circumstances, Govern- ment has to arrange assistance to CNR to meet debt service obligations (in- cluding increases due to any further Peso devaluation) as part of the total arrangements for the physical and financial rehabilitation of CNR. 6.15 The question of provision of adequate funds to CNR to improve its liquid position and to meet its financial requirements, including debt service and investment needs, was discussed and agreed with CNR and the Government. The arrangement covers, inter alia, a loan of US$20 million from a US commercial bank to CNR, with the Government assuming the debt service. This loan is to be utilized by CNR mainly to meet its debt service payments during 1973, 1974 and 1975 with respect to external loans (and, in addition, to import some operational spares). Another loan of Col Pes 85 million from local banks, with the Government assuming the debt service obligations, will enable CNR to pay outstanding short term bank loans and overdue suppliers' bills. In addition, a special "Project Fund", with an initial deposit of Col Pes 45 million, has been constituted by the Government in the Banco de la Republica to cover CNR's requirements. A separate account of this fund will be maintained. It has also been agreed that, during 1973, 1974 and 1975, monthly contributions will be made so that the fund will be able to meet the expected financial require- ments of CNR (not covered by other sources of financing) during the next following three months. Government contribution to the "Project Fund" is currently estimated at Col Pes 128 million during each of the years 1973, 1974 and 1975 (in addition to the amount of Col Pes 90 million already provided to C2NR by the Government during 1973). Provision of further funds during 1975 and 1976 will be determined when the Investment Plan for 1975 and 1976 is reviewed in mid-1974 (para. 4.03). 6.16 During the period 1973-1975, when project disbursements are expected to occur, the position regarding sources and application of funds in accordance with arrangements already made is expected to be as follows. (The cash flow forecast for each of the years 1973 to 1976 is in Table 18.)  - 24 - (million pesos) Sources Proposed IBRD 562.5 Suppliers' Credit for 28 locomotives, etc. 152.6 Commercial bank loan - US$20 million 450.0 Loan from local banks 85.0 Utilization of rails, etc. in stock 36.0 Government - Debt service of 68-CO, 119-CO and 267-CO 245.5 - Funds already provided in 1973 90.0 - Project fund contribution 384.0 Total 2,005.6 Application Investments - Project 995.7 - Other investments in 1975 128.1 Debt service - Total 903.6 Less met from inter- nally generated 94.8 808.8 Improvement in liquid assets 73.0 2,005.6 Since the investment needs during 1975 are now expected to be more than the amount of Col Pes 128 million referred to above, further arrangements would be needed in 1975 (para. 6.15 preceding). 6.17 Summary tentative balance sheets for the years 1972-1976, based on the availability of Government assistance to CNR, are given in Table 17. The current ratio would be satisfactory and the liquid ratio would improve. The debt equity ratio would go up to 61/39 in 1975 and decline to 59/41 in 1976. Most of the long-term debt would consist of foreign loans, including those for which the Government meets the debt service obligations (such as the US commercial bank loan referred to in paragraph 6.15 preceding); loan repayments, when made by Government, will be added to equity. 6.18 In view of the financial situation of CNR, the question of debt limitation was discussed with CNR during negotiations. It was agreed that the Bank's approval would be obtained before incurring any debt, if the net cash revenue of CNR for the fiscal year or the 12 consecutive months immediately before the date of incurrence, whichever is greater, would be less than 1.25 times the maximum debt service requirements of any succeeding fiscal year on all debt of CNR, including the debt to be incurred.  - 25 - 7. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations, agreement was reached on the following principal matters: (a) with Government: (i) the functions of the planning unit within MOP and incorporation of Colombian counterparts from the Rio Magdalena study (para. 2.10); (ii) the opportunity for the Bank to comment on the conclusions and recommendations of the study, and an agreement on its timely implementation (para. 2.11); (iii) deposit, by the Government, of the initial contribution to the "Project Fund" and provision of further amounts to be deposited monthly for CNR (para. 6.15). (b) with CNR: (1) the timely implementation of the expected recommenda- tions of the management consultants (para. 3.03); (ii) a time-phased plan of operation improvements (para. 3.12); (iii) specific steps related to closure and rationalization of uneconomic lines (para. 3.13); (iv) review in mid-1974 of the last two years of the 1973-1976 Investment Plan (para. 4.03); (v) consultation with the Bank before any further procurement of locomotives is decided (para. 5.12); (vi) revaluation of assets (para. 6.09); (vii) debt limitation (para. 6.18). 7.02 Before the proposed loan is made effective, CNR will sign the con- tract with the management consultants (para. 3.03). 7.03 The Project provides a suitable basis for a Bank loan of US$25.0 million for a term of 25 years, including a grace period of about four years. July 19, 1973   COL.OMIA SIXTH PAILWIAY PROJCT Colombian Tr-,-sport Sector Tot1l Freight T,affic Prjectians Exludirg Pipelins GP I nves t ment s i t h e S ec t or (in million tkm) (in millions) (in million Col Pea) Railways Highways River Caostal Shipment Airways Totel Current Total M a d a 1 i u r r e n t 7 Gross MiMed =Hih /. I7 Rsilways 9./ Shipping A Pve Ye.r ski k tkm % tin % tkm % tim % tks 1968 Cal Pea Current Col Pea Cal Pee GODP Investment ColL.VW ColPjir Col Pii Cal Pea 196o 768 20 0 1,900 50.0 776 20.0 311 9.0 45 1.0 3,833 65,739 26,717 - - - - _ _ _ - _ - 1961 769 17.0 2,560 54 0 835 18.0 o01 10.0 19 1.0 )l,713 69,n85 30,121 - - 1962 918 18.0 2,6'9 52.o 872 17.0 626 12.0 51 1.0 5,149 72,P24 31,,199 - - _ _ _ - _ _ _ _ 1963 891 1?.0 2,931 55.0 919 17.0 490 10.0 67 1.0 5,301 75,217 IJ3,525 719 1.65 10.03 558 78 91 13 37 5 78 4 196h 952 i6.5 3,o60 53.0 950 16.5 717 13.0 /l 1.0 5,70 79,856, 53,760 075 1.55 9.60 61 71, 145 17 17 2 57 7 1965 890 15.0 3,210 55.o 887 15.0 791 14,0 14 1.0 5,812 92,730 60,7aF Q3)1 1.59 9.E3 711 76 106 11 89 10 28 3 1966 1,113 17.0 3,383 52.0 1,125 17.0 837 13.0 71 1.0 6,532 87,161 73,612 1,063 l.44 R.614 760 "n 90 9 157 15 56 '5 1967 996 14.6 3,566 52.0 1,317 19.0 860 13.4 69 1.0 6,808 90,82h 83,525 1,501 1.89 10.19 R87 59 355 24 189 12 77 -5 1968 1,124 16.o 3,770 53.0 1,312 18.0 890 12.0 72 1.0 7,168 96,422 96,427 1,591 1.65 8,1,5 1,174 74 169 11 113 7 135 8 1969 1,158 16.0 3,985 55.0 1,311 18.0 736 10.0 75 1.0 7,269 102,555 110,759 2,059 1.86 7.78 1,295 63 166 23 170 8 128 6 1970 1,172 15.5 4,236 55.5 1,333 17.5 786 1i.5 80 1.0 7,607 110,953 128,217 2,431 1.90 7.93 1,556 64 125 17 1261/ 5 324 4/ 14 1971 1,150 14.5 4,497 56.7 1,359 17.1 843 1i.6 88 1.1 7,837 117,610 145,424 2,854 1.96 8.21 2,163 76 348 12 174 4! 6 169 W 6 1972 1,180 14i1 4,765 56.9 1,439 17.2 892 10.7 95 1.1 8,371 125,842 166,490 3,244 1.95 8.17 2,578 2/ 79 364 U 82 4/ 3 220 4/ 7 1973 1,240 14.1 5,009 56.9- 1,497 17.0 940 10.7 - ito 1.3 8,796 134,652 190,533 ?47c 1.82 8.50 2,858 2/ 82 311 9 83 k/ 3 219 k/ 6 1974 1,305 14.1 5,285 57.1 1,564 16.9 985 10.7 110 1.2 9,2h9 144,o78 218,141 3,920 1.80 9.71 2,964 j/ 76 636 16 85 / 2 235 J/ 6 1975 1,370 14.2 5,518 57.1 1,632 16.9 1,9020 0. iao 1.2 9.6o 154,163 249,926 3,898 1.56 p.28 3,f9 - / 7? 573 15 85 / 2 310 j/ 6 1/ Inoludes feeder roads; MOP figures thrumgh 1972, mission's estimates thereafter. 2/ IDclude an estimated Col Pee 300 million for feeder road. 3/ Includes rehabilitation and winter damages from 1970 on. I/ From Table T-1, Tramsport Seator, Roameic Report WA-200a. I/ Estimated by mission. Sources,: 1960-1971, Ministry of Public Worki. #zraes, Ministry of Public Works and Planning Office. 1972-1975, Mission Eatimates (GDP, frsm economic mission). February 1973  COLOMBIA SIXTH RAILWAY PROJECT Freight Movements in Major Colombian Ports Imports (In Thousand Metric Tons) Jan.-Nov. Ports 1966 % 1967 % 1968 % 1969 % 1970 % 1971 % 1972 % Buenaventura Railway 245.5 38.4 185.4 46.4 238.6 48.6 202.4 37.5 248.2 35.7 242.1 34.5 228.6 36.0 Highway 394.5 61.6 214.1 53.6 252.1 51.4 336.8 62.5 447.2 64.3 460.5 65.5 407.0 64.0 Total 640.0 100.0 399.5 100.0 490.7 100.0 539.2 100.0 695.4 100.0 702.6 100.0 635.6 100.0 Santa Marta Railway 272.9 89.2 182.2 84.4 255.4 87.4 306.7 89.4 365.8 90.5 384.1 92.5 321.8 93.9 Highway 33.0 10.8 33.5 15.6 36.7 12.6 36.3 10.6 3B.4 9.5 31.1 7.5 21.1 6.1 Total 305.9 100.0 215.7 100.0 292.1 100.0 343.0 100.0 404.2 100.0 415.2 100.0 342.9 100.0 January-June 1972 Barranquilla 317.2 236.9 218.0 257.0 303.1 311.8 281.1 Cartagena 147.4 83.1 100.0 110.0 93.0 135.0 117.7 Source: CNR June 1973  COLOMBIA SIXTH RAILWAY PROJECT Freight Movements in Major Colombian Ports Exports (In Thousand Metric Tons) January-June Ports 1966 % 1967 % 1968 % 1969 % 1970 % 1971 % 1972 % Buenaventura Railway 257.3 64.0 346.3 68.4 375.3 63.3 297.2 53.8 286.2 56.8 237.0 43.3 246.7 41.4 Highway 144.4 36.0 159.7 31.6 217.5 36.7 255.4 46.2 217.5 43.2 310.6 56.7 3349.0 58.6 Total 4ol.7 100.0 506.o 100.0 592.8 100.0 552.6 100.0 503.7 100.0 547.6 100.0 595.7 100.0 Santa Marta Railway 160.4 97.8 153.1 95.6 154.7 94.5 160.7 88.5 112.8 85.3 126.1 89.7 155.4 87.3 Highway 3.6 2.2 7.0 4.4 9.0 5.5 20.9 11.5 19.4 14.7 14.5 10.3 22.6 12.7 Total 164.0 100.0 160.1 100.0 163.7 100.0 181.6 100.0 132.2 100.0 14o.6 100.0 178.0 100,0 Barranquilla 32.7 54.0 65.3 95.5 106.6 90.7 160.4 Cartagena 54.9 48.4 60.9 75.9 92.3 68.3 87.3 Source: CNR June 1973  COLOMBIA SIXTH RAILWAY PROJECT Vehicle Road Economic Operating Costs (In Col Pes/100 Km) Small Trucks Medium Trucks Large Trucks Buses Capacity 3.5 ton Capacity 7.5 ton Capacity 18 ton Over 40 Seats Paved Road Unpaved Road Paved Road Unpaved Road Paved Road Unpaved Road Paved Road Unpaved Road Variable Cost Fuel 12.56 15.31 21.26 29.25 26.73 39.77 21.68 27.66 Oil 3.87 4.72 6.55 9.01 10.36 15.42 6.69 8.54 Tires 8.68 20.74 13.31 33.65 29.o4 72.66 15.44 39.22 Maintenance and repair 18.64 30.76 34.46 56.62 74.77 121.65 45.14 75.52 Fixed Cost Salaries 66.73 95.36 69.Co 84.30 80.77 117.45 63.80 95.66 Insurance 7.57 10.82 10.24 12.52 18.33 26.65 6.61 9.92 Depreciation and interest 35.77 55.26 54.50 72.02 130.26 208.68 53.03 89.89 Other annual costs 26.01 37.17 39.43 48.18 47.52 69.o9 48.12 72.19 Total 179.83 270.14 248.75 345.55 417.78 671.37 260.51 418.60 Average load (in ton or pass) 3 3 5.0 5.0 10 10 24.4 24.4 Cost per unit-km o.60 0.90 0.50 0.69 0.42 0.67 0.11 0.17 Sources: "El Parque de Vehiculos y su Evolucio6n Futura"t, Ministry of Public Works, September 1972. "Costos de Operacion de los Vehiculos"i, Ministry of Public Works, January 1973. Bank estimates. February 1973  TABLE 5 COLOMBIA SIXTH RAILWAY PROJECT Railway Cost of Freight and Passenger Services (Per ton-Im and pass-km in 1971) % in Average total cost Long run marginal cost Avoidable cost total without with ton-ko/pass-km interest interest without with without with Type of service carried charges charges depreciation depreciation depreciation depreciation Freight Less than car-load up to 0.1 ton 0.1 2.01 2.23 1.33 1.38 0.19 0.24 0.1 - 1.0 ton 0.4 1.41 1.56 o.85 0.91 0.19 0.24 1.0 - 7.0 ton 1.3 0.80 0.88 0.38 0.43 0.18 0.24 7.0 - 14.0 ton 2.2 0.71 0.78 0.32 0.37 0.18 0.23 Average less than car-load 4.0 0.83 0.92 0.42 o.47 0.18 0.23 1971 average adjusted to 1972 prices 4.0 0.91 1.01 o.46 0.51 0.20 0.25 1972 adjusted average* 4.0 1.00 1.10 o.48 0.54 0.20 0.25 Car-load Livestock 2.0 0.68 0.75 0.32 0.36 0.17 0.22 Other car-load 94.0 0.37 o.4o 0.16 0.19 0.09 0.12 Average car-load 96.0 0.37 0.41 0.17 0.19 0.09 0.12 19'71 average adjusted to 1972 prices 96.0 0.41 0-45 0.19 0.21 0.10 0.13 1972 adjusted average* 96.0 0.50 0.54 0.21 0.24 0.10 0.13 Total freight Average total freight 100.0 0.39 0.43 0.18 0.20 0.09 0.12 1971 average adjusted to 1972 prices 100.0 0.43 0.47 0.20 0.22 0.10 0.13 1972 adjusted average* 100.0 0.52 0.56 o.22 0.25 0.10 0.13 Passengers Lunrary 15.4 0.51 0.56 0.24 0.29 0.18 0.23 Special 21.3 0.53 0.58 0.25 0.27 0.15 0.20 General 32.6 0.54 o.60 0.25 0.27 0.12 0.16 Railcars 30.7 0.41 o.46 0.23 0.28 0.15 0.16 Average passenger service 100.0 0.49 0.54 0.24 0.28 0.15 0.18 1971 average adjusted to 1972 prices 100.0 0.54 0.59 o.26 0.31 0.17 0.20 1972 adjusted average* 100.0 0.17 0.20 0.17 0.20 0.17 0.20 * Assuming that passenger traffic is charged only with avoidable cost. Source: CNR, November 1972 and Bank estimates. February 1973  COLOMJTA SIXTH 9AIAl2AY PROJECT Lang-Te= Relationship between Freight Traffic, Invest-ent ERendltlree end Reel GDP (a)"' leseatesent irwotib in Real Terms (bf Freight T f r (a) Wravth of Ietant Capital Cts in Real Tent ner Freight Trffic Unit GDP Gratbh in Real Ten GD racR Real leTee GDp itiLh in Real PeacTs Period Total Sector Highways Railcayc River *nd Airvays Peri-d Total Sector Highcy PRil.7ys River and Airways Tota1 Sector Highya Railway River and Airwy 1i611971 1.'0 1*On 0.7P 1.3S 1963-1969 i.66 0.90 2.57 3.30 1965-1971 / 0.78 0.91 G.7 0G.90 G.88 -O.G4 1.87 2.40 1963-1971 1.21 1.16 1.27 1.53 1965-1973 5/ 0.49 o.52 0.41 0.52 0.72 0.64 o.86 1.01 3/ 1967-1973 1.40 i.40 0.78 1.36 1969-1975 5/ 0.70 0.83 0.57 0.48 0.70 0.57 0.19 oi88 Hit-orical Tendency: Decreasing Tanreasing Decreasing D-ereo.ing Decreasing Slightly diecresing Decreo.ing Decreasing Decr..aing Increo.nkg Rapidly Recreasing Decreasing 1/ An exponential model wae uead ti abtiin thRe fnalnS ef (a) with 4/ The model seed taoobtain thRe enlae of (b) wee, detc taken free Table 1: Traffic - C-nstant a Reel GDP Exp. (a), inseatsnat in Reel Terms - Conett a Roal GDP ECp. (a) ate! the data' mmi Raken from Tablo 1. All correlation cefficienta obtained ware satisfactory. 2/ Very high becoese cf high onge-diteres incurred by wnitremati-a of Atlntico line. 3/ 1973 woe take. as last year with reliable i-.ntsient penjectiens. 5/ T.. yaara after inveatsect hba taken plane. 6/ (a) * (a) - (b). pebmary 1973  COLOMBIA SIXTH RAIIWAY PROJECT CNR's Salary and Control Structure by Department in 1972 (Salaries Expressed in Col Pes ) Directors Chief of Sections Qualified workers and Depart- and Senior (Including White Collar Total ment Heads Professionals Technical Staff Workers) Unskilled Workers Workers Monthly Monthly Span of Salary Monthly Span of Salary Monthly Span of Salary Monthly Span of Salary Department No. salary No. salary control ratio No. salary control ratio No. salary control ratio No. salary control ratio No. (1) (2) (3) (4) (3):(4) (2):(4) (5) (6) (5):(3) (4):(6) (7) (8) (7):(5) (6):(8) (9) (10) (9):(7) (8):(10) _ Administration 14 7,550 151 5,100 10.7 1.5 82 3,000 0.5 1.7 294 1,800 3.6 0.7 44 1,159 0.1 1.5 585 Commercial 11 8,000 33 4,300 3.0 1.9 49 4,000 0.1 1.1 2,124 1,500 43.3 2.7 1,766 1,175 0.8 1.3 3,983 Engineering 21 8,000 143 3,350 6.8 2.4 91 1,514 o.6 2.2 2,505 1,428 2.7 1.0 3,449 1,159 0.4 1.2 6,209 Finance 4 8,900 39 4,000 9.7 2.2 64 4,000 0.2 1.0 375 1,850 5.9 2.2 110 1,166 0.3 1.6 592 Total Enterprise (Oct. 15, 1972) 50 8,000 366 3,350 7.4 2.4 266 4,000 0.8 0.8 5,298 1,428 18.5 2.8 5,369 1,159 0.1 1.3 11,369 Source: CNR February 1973  TABLE 8 COLOMEIA SIXTH RAITWAY PROJECT Selected Operating Statistics, 1965-1972 1965 1966 1967 1968 1969 1970 1971 1972 (Jan.-Aug) I. SYSTEM Total route km 3,435 3,435 3,4l3 3,436 3,436 3,436 3,431 3,431 Total starf 13,802 12,937 12,161 11,549 fl,387 11,526 11,654 11,437 II. TRAFFIC Passengers carried (milliom) 6.47 5.76 4.76 3.69 2.65 2.10 2.27 2.08 Passenger km (million) 513 491 418 351 273 235 267 249 Arerage journey (ion) 79 85 88 95 103 112 118 120 Net paying tons 3.06 3.31 3.17 3.24 3.05 2.78 2.65 1.80 Net paying too km 890 1,114 996 1,126 1,159 1,173 1,150 769 Total gross ton icm 1,925 2,214 2,051 2,160 2,197 2,190 2,159 1,375 Loaded freight car km (million) 51.91 54.87 49.49 50.01 50.58 47.14 L6.28 29.29 Average haul (km) 291 336 314 347 380 422 434 415 Empty freight sea km (sifliss) 27.20 28.83 23.97 21.71 22.03 23.28 23.61 13.20 III. TRAFFIC DENSITY Pase.km per route km (000) 149.3 142.9 128.5 102.2 79.5 68.4 77.8 72.6 Freight net ton km per route lo (000) 259.1 324.3 291.8 327.7 337.3 341.4 335.2 224.1 IV. OPERATIONS Train km, passengers (sillin) 2.63 2.21 2.26 2.09 1,99 1.92 2.16 1.53 Train ks, freight (million) 6.1u 6.22 6.99 7.80 7.48 6.47 5.45 2.68 Train km, total (million) 8.714 8.43 9.25 9.85 9147 8.39 7.61 4.21 Loco. km, steam (million) 3.04 3.73 3.68 3.38 1.83 0.45 0.40 0.20 Loc. Icm, diesel (iullion) 5.98 6.30 7.45 8.42 9.52 10.47 9.72 5.35 V. OPERATING EFFICIENCT (FGEIGHT) Griws ton lo/train la. 3114.70 355.95 293.42 276.92 293.72 338.49 396.0 514.5 Net ton km/train kh 1145.58 179.10 142.49 144.36 154.95 181.30 211.0 267.9 Net ton km/loaded car la. 18.03 20.30 20.13 22.52 22.91 24.88 24.86 26.26 Car ts-nrosd time (day) 12.0 11.0 10.0 10.3 12.0 14.2 i5.8 12.7 Average speed (kmA/) 19.70 18.49 21.58 22.92 22.25 20.77 20.26 19.72 Loto. kh/day, steam 65.2 93.0 68.2 63.o 36.4 5.0 1.1 1.9 Loco. im/day, diesel 184.0 198.5 234.5 265.2 181.2 196.4 221.9 185.70 Traffic osits/esployee (000) 101.7 124.1 116.3 127.9 125.8 122.2 121.5 89.0 VI. AVAILABILITY Steve locomotives (S) 55.2 55.3 50.1 45.3 25.4 7.0 7.0 15.1 Diesel locomotives (%) 69.3 76.6 79.6 79.5 83.3 85.2 85.4 85.1 Freight cars (9) n.a. n.a. 78.8 75.3 80.9 33.9 85.7 83.6 VII. DEPAIIMENTS Total unber/year 1,855 1,981 2,555 5,947 4,694 7,116 5,969 2,901 Total hours lost 9,092 9,893 9,829 15,083 16,024 25,759 18,263 10,823 Hours lost/deraislment 4.90 4.99 3.85 3.82 3.41 3.62 3.06 3.73 Vehicles damaged 4,418 3,368 4,806 7,170 7,585 11,569 9,462 4,956 Sousce: CNE February 1973  TABLE 9 COLOMBIA SIXTH RAILWAY PROJECT Motive Power and Rolling Stock, 1972 Yeazs in service Total 0-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 Locomotives steaml/ 15 1 8 5 1 Diesel, up to 800 hp 10 8 2 810-1330 hp 126 60 29 32 5 2000 hp 10 10 Total diesel 146 60 39 40 5 2 Hailcars 40-seater 27 21 6 146-seater (trailers) 23 23 Total 50 44 6 Passenger coaches 40-seater 114 73 10 31 45-seater 146 146 Sleepings 14 12 2 Restaurant 27 8 4 15 Bar 5 5 Baggage 26 11 15 Total 332 109 14 209 Freight Cars (CNR) Box cars 2,551 896 1,313 334 7 1 Gondolas 1,164 152 713 268 31 Cattle cars 380 339 41 Flat cars 1,041 247 242 2 519 31 Hopper cars 358 110 158 90 Tank cars 487 4 483 Total 5,981 1,409 2,909 431 894 268 38 1 31 Privately owned tank cars 2/ Fuel 191 Propane gas 7 Tar 8 Honey 24 Total 230 1/All to be phased out in 1973 2/ Age unknown Source: CNR February 1973  COLOMBIA SIXTH RAILWAY PROJECT Prozram for Reduction of Services, Personnel and Number of Stations on Uneconomic Lines Actual situation in 1972 Target for end of 1973 Target for end of 1974 No. of No. of No. of No. of No. of No. of freight passenger freight passenger freight passenger trains trains No. of No. of trains trairs No. of No. of trains trains No. of No. of Line per monthl/ per month personnel stations per monthY per month personnel stations per monthV/ per month personnel stations Cali - Popayan 49 181 197 17 24 60 138 16 24 60 92 9 Pereira - Manizales 0 0 28 9 o 0 3 3 0 0 3 j / La Caro - Barbosa 97 142 162 28 48 142 162 28 48 71 152 18 Pereira - Cartago 43 13 60 7 4 0 34 1 4 0 34 1 Armenia - Pereira 14 66 109 11 0 0 50 1 0 0 20 1 Espinal - Neiva 85 221 215 13 68 150 172 11 68 150 172 11 1/ Including mixed trains. '/ To be eliminated in 1975. June 1973 0C  COLOMBIA SIXTH RAILWAY PROJECT Freight Traffic 1968-1972 ard 1977 Forecast 1968 1969 1970 1971 1972 1977 000 Million ALH 000 Million ALH 000 Million ALH 000 Million ALH 000 Million ALE 000 Million ALH ton ton-km km ton ton-km km ton ton-km km ton ton-km km ton ton-km km ton ton-km km Maize and other cereals 104 55 529 99 59 595 154 109 709 103 57 553 83 60 724 100 56 560 Wheat 249 140 565 205 102 498 288 140 487 284 176 620 376 204 550 370 222 600 Coffee 284 147 516 273 147 540 252 137 543 236 120 508 246 135 547 280 151 538 Rice 40 16 405 43 16 360 35 18 518 61 33 541 81 38 1.75 150 77 513 Cotton 40 24 600 43 25 572 40 24 590 46 26 565 50 26 562 55 31 571 Sugar 270 90 334 208 74 355 130 44 341 140 43 307 166 62 373 181 62 340 Livestock 148 28 192 148 33 220 134 30 225 112 23 205 112 24 210 159 32 203 Salt 97 33 342 107 39 370 108 40 370 115 52 452 85 34 397 120 44 370 Other minerals 66 29 444 85 36 424 91 42 465 113 54 478 101 5o 495 129 64 495 Fertilizers 161 74 460 207 93 452 237 113 4.79 277 133 480 272 128 469 415 203 488 Steel and iron 74 52 700 112 8i 721 114 80 704 113 87 770 105 78 745 186 144 774 Petroleum products 461 86 186 450 88 194 316 67 214 266 54 203 251 63 252 270 57 211 Asphalt 92 33 357 90 32 360 86 29 334 75 25 333 107 37 352 106 37 349 Cement 128 20 160 113 20 176 90 15 169 87 15 172 75 15 194 143 27 190 Paper 31 28 914 40 33 945 41 38 926 43 38 884 44 38 848 51 47 925 Sub-Total 2,245 855 381 2,223 883 397 2,116 926 438 2,071 936 452 2,154 997 463 2,715 1,255 462 Others 995 269 270 827 276 334 665 247 371 582 214 368 577 201 348 577 231 400 Grand Total 3,240 1,124 347 3,050 1,159 380 2,781 1,173 422 2,653 1,150 433 2,731 1,198 439 3,292 1,485 451 Source: CNR and mission forecast. June 1973  DOLOMBLA SIXTH RAIIWAY PROJISCT Passenger Traffic 1968-1972 and 1977 Forecast 1968 1969 1970 1971 1972 1977 000 Million AJ 000 Million kJ 000 MilDin AJ 000 Million AJ 000 Mi1lion AJ 000 Million AJ Pass Pass-Km Km Pass aass-Kn Km Pass Pass--K Km P. P m Kmn Pass Pass-Km Km Pass Pass-Km Km Special 739 60 81 554 46 83 419 38 90 462 41 90 483 43 89 362 35 97 General 2,158 132 61 1,356 81 60 915 57 62 908 57 63 1,155 73 63 875 65 74 Autoferros 657 91 138 602 78 130 628 77 123 745 87 117 971 117 120 794 103 130 Express 136 69 507 139 68 491 136 63 466 154 82 532 254 129 507 157 110 700 Rapid