Mexico - Pacific Railroad Rehabilitation Project

T.O. 58 CONFIDENTIAL This report is limited to those members of the staff to whose work it directly relates. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE REHABILITATION PROGRAM FOR THE PACIFIC RAILROAD OF MEXICO July 13, 1954 Department Of Technical Operations  CONVERSION RATES FOR MEXICAN CURRENCY U.S. $1 a Pesos 12.50 Peso 1 = 8 U.S. Cents Pesos 1,000,000 = U.S. $80,000  TABLE OF CONTENTS Paragraphs I. Introduction 1 - 3 II, Ownerslhip of The Railroad 4 - 6 III. Area Served 7 - 16 IV. The Property - General description 17 - 19 Roadway and track 20 - 22 Locomotives 23 Cars 24 - 25 Shops 26 Communications 27 Physical requirements 28 V. Management and Organization 29 - 33 VI. Financial Situation and Earnings Record 34 - 39 VII. Traffic 4o - 44 VIII. The Rehabilitation Program - Physical Program 45 - 5 Recent Developments 52 Conditions of Success 53 IX. The Cost and Financing of the Program _ Cost estimates and expenditures to date 54 - 60 Income estimates 61 - 65 Cash Requirements and sources 66 - 72 Financial conclusions 73 - 78 X. Conclusions 79 - 83 Appendices: see next page  L I S T O F APPEINICES Appendix 1 : Ilap - JFerrocarril del Pacifico It 2 : LMap sLiowing Irri.gation 'Areas if 3 : Condensed Profile and Track Data it 4 : Estimated iTheiLx1t Traffic "t 5 : Esbimated Cost of Rehabilibation Cor I 954-58 Program to 6 : Estimated Income Account ti 7 : Cash Requirements and Sources t' S : List of conditions  I. INTRODUCTION 1. In April 1954, the Mexican Government asked the Bank to consider a loan to meet the foreign exchange costs involved in rehabilitating the Pacific Railroad of Mexico (Ferrocarril del Pacifico, Sociedad Anonima de Capital Variable), the loan to be made to the Railroad and guaranteed by the Mexican Government. 2. The prooosed rehabilitation program is based upon the recommenda- tions of an exdaustive study prepared for the railroad by Coverdale and Colpitts, railroad consultants. Their report was submitted in December 1953, and has since been brought up to date. The program is designed to be carried out in four years. It envisages nrincipally the reconstruction of the per- manent way, and the substitution of diesel locomotives for steam. The main items which would need to be uurchased abroad would be rails, ties, diesel locomotives and freight cars. Total foreign exchange costs are estimated at P61,000,000 equivalent, and total local costs at pesos 98,000,000 ($8,000,000 equivalent), A further $7,500,000 would be needed for the purchase of freight cars in the years 1960 through 1964. 3. A Bank mission visited Mexico in May 1954 in order to investigate the nroject on the spot and to discuss it with representatives of the Govern- ment and the Railroad. TI. OiNERSHIP OF THE RAILROAD 4. The Government of Mexico decreed the formation of the Ferrocarril del Pacifico in March 1952, to own and operate the railroad system in the northwest of Mexico which it had purchased for $12,000,000 from the Southern Pacific Railroad Company in December 1951. The Southern Pacific had purchased the Droperty in 1909, and extended the lines during the period of its ownership. 5. The Ferrocarril del Pacifico was established with an initial capital of slightly more than pesos 240 million, of which the bulk (nesos 230 million) was held by the Mexican Government in the form of "B" shares, the balance of some pesos 10 million, in the form of "A" shares with a guaranteed dividend of 9% ner annum, being issued to the States of Sonora and Sinaloa (and an insignificant amount to private investors)* 6. By the end of 1953 the Government's capital stock in the railroad had increased to about pesos 260 million, the increase representing mainly the amount of equity investment required to meet deficits.  - 2 - III. AREA SERVED 7. The railroad operates in the four states of Sonora, Sinaloa, Nayarit and Jalisco, in the northwest of Mexico (see map, Appendix I). The area served comprises about 18% of the land surface of the country. The railroad parallels the coastline, and the coastal plain is traversed by numerous rivers flowing from the Sierra Madre maoumtains to the Pacific Ocean and the Gulf of California. 8. This coastal nlain contains about 3,500,000 hectares (8.75 million acres) of land suitable for agriculture. It is already one of the most im- portant agricultural surplus areas of Mexico, and thle irrigation works now being constructed and planned for the future should increase its production very considerably. 9. Annual rainfall is light in the north, about 4 inches, and increases to over 40 inches in the south. It is concentrated in the summer months and if proDerly conserved is generally adequate for agricu'tural purposes, except in the north where the water level is near the surface and irrigation has been successfully developed by pumping from wells. 10. A comprehensive system of dams and canals for irrigation has been developed by the Government. Some 700,000 hectares (about 1.75 million acres) is already irrigated and projects now under construction and planned for the future should raise this figure within the next ten years to about 1.8 million hectares (4.5 million acres) (See map, Appendix 2). By this time about half the land suitable for agriculture would be irrigated, and about half the average annual flow of the rivers utilized. 11. The dominant crop in the north is cotton. Further south wheat takes first place, and exceeds 25% of the country's total production. Still further south sugar cane and winter vegetables (mainly tomatoes, of which the area prodaces more than 50% of total Mexican production) are the main crops. Corn and beans are also major oroducts. The average size of farms is large; most farms are mechanized; standards of tillage and cultivation seem to be high; and in general, the farmers show initiative and resilience. The variety of crops which can be grown makes balanced systems of crop rotation Dossible, but they are not at present in general use. 12. There is a well develooed livestock industry in the north, but else- where in the area livestock is not important. Some 85% of the total fish catch in the country is landed on the coast of the area. 13. Industry is relatively unimportant, the main products being sugar, beer and cement.  - 3 - 14. The caoacity of electrical generating plants in the area is at pres- ent about 50000 kilowatts. New plants are planned to raise capacity to some 300,000 kilowatts by 1960; but some of this additional power may be transmitted to other areas. 15. The population of the four states rose from 1,087,000 in 1930 to 1,845,000 in 1950, an increase of 70%. During this period the population of the whole country increased 56%. This reflects the high rate of development in the economy of the area, There is reason to believe that this trend will continue. 16. To sum up, the area is one which produces a large and growing volume of agricultural products destined for outside markets, while most of the con- sumption of manufactured products has to be supplied from sources outside the area. Its rate of development has been and is likely to continue to be more rapid than that of the country as a whole. IV. THE PROPERTY General description 17. From Nogales on the U.S. frontier, at an elevation of about 41,000 feet, the railroad descends some 40O kilometers to sea level at Empalme (see map, Appendix 1 and nrofile, Appendix 3). From Empalme the line follows the sea coast for a little over 1,000 kilometers to Roseta. From this point it climXbs about 325 kilometers to an elevation of about 5,000 feet at Guadala- jara, where the railroad terminal facilities are located. The last 38 kilom_- tdrs of track (from Orendain Junction to Guadalajara) are the Oroperty of the Mexican National Railroads. The total length of the main line is 1,728 kilometers. The total length of branch lines is 244 kilometers. The track is standard gauge, 4 ft. 82 inches. 18. The northern stretch from Nogales to Empalme, and the southern from Roseta to Guadalajara, traverse mountainous country, and in the south in particular there is very difficult terrain, requiring maany tunnels and high bridges. The location of the line in these sections is lwell selected. Between Empalme and Roseta the central 1,000 kilometers of territory is flat. The railroad serves two excellent ports: Guaymas (9 kilometers by branch line from Empalme) and Mazatlan. Other important towns served are Hermosillo, Ciudad Obregon, Navajoa, San Blas, Culiacan and Guadalajara. The important interchanges with other railroada are Nogales (with the Southern Pacific Lines of the U.S.A.), and Guadalajara (with the National Railways of Mexico). 19. Although the line is well laid out, both it and the operating equip- ment have deteriorated to the point where the railroad can barely be operated.  4 14- Roadway and Track 20. The chart at Appendix 3 shows that 46% is in Door condition, 45% fair, and less than 10% in good condition. Most of the track is of rather light rail (65 lb. per yard), which is worn out, with joints in very bad condition. Inferior, untreated ties have been used for renewals during the last ten years. They do not hold the spikes which should keep the rails in position. Many ties are brolken. The quality of the stone ballast is good, but in most places it is laid too thinly. Bridge timbers require renewals. 21. The condition of the track slows down traffic very much. The efficiency of the service is further reduced by many accidents, more than 40% of which are due to bad track, many being the result of broken rails. In the last two years there have been more than 800 breaks in rails. 22. Large amounts have been sDent on track maintenance during the last five years. They would have sufficed to maintain a line which was in good condition to begin with. This track has deteriorated to the Doint where maintenance is uneconomic. Only complete rebuilding of the line, with ade- quate ballast, good quality ties and heavier rail can prevent complete break- down. Locomotives 23. The railroad owns 131 steam locomotives. Their average age is 43 years. More than 25% of them are normally out of service for repairs. They are most uneconomical and inefficient. Cars 24. The exact number and location of all cars owned cannot be established. As of July 1953 the best record available shows that the railway owned 1,174 box cars and 558 freight cars of other types. Their average age was about 34 years. At the time of the consultants' inspection in the fall of 1953, more than 40% of the box cars were out of service. As of the same date the rail- road owned 124 passenger cars. Though these are on the average 39 years old, they are generally in good condition. 25. In addition, there are 667 units of work equipment (ballast cars, push cars, motorcars, etc,.,) which are old but in fair condition; and about 730 old box cars used to house maintenance of way laborers, most of which are in very poor condition.  Shops 26. The main shops are at Empalme. Smaller facilities exist at Mazatlan and Guadalajara. The Southern Pacific used to carry out many repairs at its shops in the U.S.A. The shop facilities of the Pacifiq Railroad have conse- quently been inadequate ever since the Mexican Government acquired the rail- road. Communications 27. The communications system is antiquated and inadequate. It needs to be reDlaced by a modern system. Physical requirements 28. If the physical equipment of the railroad is to be put into good operating condition: i. a new track must be laid on augmented ballast, using treated ties and heavier rail; bridges must be reoaired; ii. the steam locornotives must be scrapped and replaced by diesels; iii. where it is economical, freight cars must be repaired; in addi- tion, new freight cars must be purchased; iv. new shops must be built to service the diesels, and the old shops imnroved to handle the reoair of freight cars, etc.; v. a new communications system must be installed. V. MANAGENENT X,D OIGANIZATION 29. The original statutes of the Pacific Railroad provided for a board of 9 directors, of whom 5 represented government denartments, one the rail- road workers' syndicate, one the Chambers of Commerce and Industry, and two the holders of "A" shares. The seat of the board was Mexico City. These arrangements resulted in a board which was mostly "absentee" and contained too heavy a government representation and too little representation of interests from the area served by the railroad.  - 6 - 30. Before the mission's visit, the management of the railroad had not been organized in the best way. Too many officers had been renorting direct to both the General Manager and the Assistant General Manager. Confusion about exact lines of authority and overlapping of responsibility had resulted. There have been changes which are discussed later. 31. In the operations of the railroad there has been a most serious lack of good supervision at every level. 32t:,, The booldkeeping and statistical departments have been operating in an efficient way, with the result that essential reports on operations and filancial results, urgently required as tools of management, have either not been available or else have been submitted too late to be of any practical use. 33. The administration of the railroad has been hampered by the fact that under the contract with the syndicate, some twenty important supervisory posts have 1had to be filled by members of the syndicate, each one by a man designated from a particular trade.  -7- VI. FINTANCIAL SIrLTUATiO-1M AND EARiJINGS RECORD 34. The main headings in th