Mali - Third Railway Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2068-MLI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALI FOR A THIRD RAILWAY PROJECT May 4, 1977 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Mali Francs (MF) US$1 - MF 490 MF 1 million - US$2,041 FISCAL YEAR July 1 - June 30 SYSTEM OF WEIGHTS AND MEASURES: Metric 1 meter (m) 3 3.28 feet (ft) I cubic meter (m ) 35.29 cubic feet (cu ft) 1 kilometer (km ) 2 0.62 mile (mi) I square kilometer (km ) = 0.386 square miles (sq mi) 1 hectare (ha) 2.47 acres-(ac) 1 metric ton (t) 2,204 pounds (lb) ABBREVIATIONS AND ACRONYMS CANAD Canac Consultants Limited CCCE Caisse Centrale de Cooperation Economique CFM Regie du Chemin de Fer du Mali CFS Regie du Chemin de Fer du Senegal CIDA. Canadian International Development Agency COFACE Compagnie Francaise de Credit pour l'Exportation DN Dakar-Niger Railway EDI Economic Development Institute FAC Fonds d'Aide et de Cooperation GDP Gross Domestic Product MTPW Ministry of Transport and Public Works NTO National Transport Office OFERMAT Office Central des Chemins de Fer d'Outre Mer Service Technique et du Materiel SOFRERAIL Societe Francaise d'Etudes et de Realisations Ferroviaires SOMIEX Societe Malienne d'Import Export TD Training Division UNDP United Nations Development Programme FISCAL CFM - January 1 through December 31 Ministere des Transports et des Travaux Publics - " " Project t  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALI FOR A THIRD RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Republic of Mali in an amount equivalent to US$10.5 million on standard IDA terms to help finance a Third Railway project. The IDA credit will be on-lent by Government to the Regie du Chemin de Fer du Mali (CFM) for 20 years including 4.5 years of grace at an interest rate of 6%. To cofinance the project, the French Fonds d'Aide et de Cooperation (FAC) and the Canadian International Development Agency (CIDA) would make grants equivalent to US$1.9 million and US$5.3 million respectively; the Caisse Cen- trale de Cooperation Economique (CCCE) and the Compagnie Francaise de Credit pour l'Exportation (COFACE) would provide loans amounting to US$5.4 million and to US$3.5 million respectively. PART I: THE ECONOMY 2. A report on "Recent Economic Developments in Mali" (233a-MLI) was distributed to the Executive Directors on September 27, 1973. An economic mission visited Mali in March 1976 and again in February 1977. Its con- clusions are reflected in the following paragraphs. An Economic Memorandum will be distributed to the Executive Directors shortly. 3. With a per capita GNP of $95 Mali is one of the poorest countries of Africa and amongst the 29 least developed countries identified by the United Nations. It is handicapped by serious obstacles to development. The extreme variability of rainfall causes sharp fluctuations in crop and livestock production. Access to foreign markets is made difficult by its landlocked position and the long distances - more than 1000 km - to the nearest seaports, Abidjan and Dakar. Development is also constrained by the shortage of skilled manpower and the narrow domestic market for indus- trial products. About 90% of the population depends for livelihood on crop farming, animal husbandry, forestry and fishing. Exports consist almost entirely of agricultural commodities and livestock. In 1972, the primary sector accounted for 43% of GDP. The relative contribution of the primary sector declined in 1973 and 1974 owing to widespread drought; in 1975 it was somewhat lower than in 1972. 4. Over the fifteen years following independence economic growth has barely kept ahead of the growth of population. During the 1960s GDP, in real terms, increased at an average annual rate of 2.8% as compared to the average population growth rate of 2.1%. During the drought of the early seventies, GDP declined; and Mali's problems were further aggravated by international inflation, excessive credit expansion and growing budget and balance of payments deficits. The Government has initiated action to redress major financial imbalances through credit restraint, substantial Thb document has a restricted distribution and may be used by recipients only in the performance of their officb dutim. Its contonts mmy not oth rwi" be discblosd without World Bank authormtbn.  - 2 - reduction of the subsidy element in the prices of essential consumer goods, fertilizers and agricultural equipment and improved tax collection. Good crop seasons in 1975 and 1976 facilitated the implementation of these measures. Though the growth potential is significant, serious structural problems remain. The drought years: 1972-1974 5. All economic sectors have in varying degrees been affected by the recent drought, and their recovery is following different patterns. The extent of losses of human lives is not known but has been severe among some groups, particularly nomads and among them more so the elderly and the children. From an estimated 5.5 million head in 1971 the cattle herd was reduced to only 3.5 million head in 1974. 6. During the drought years the rate of investment was maintained at about 16% of GDP with the aid of an increasing inflow of external resources. The resource gap is estimated to have widened to nearly a third of GDP in 1974, an extraordinary level by any standards. In an effort to keep essential supplies at a sufficient level and retail prices for basic goods low, especial- ly in urban centers, the government resorted to large imports of cereals, only partly financed by external aid, and consumption subsidies. Thus, cereal imports shot up from 64,000 tons in 1972 to 235,000 tons in 1974, at a time when the average import price trebled and the bill for imported petroleum doubled. To finance losses incurred by state enterprises charged with imports and sales of subsidized goods, growing amounts of bank credit were used. With the subsidies, price inflation was contained within strict limits, the GDP deflator varying around 5-6% between 1970 and 1974. As supplies of exporta- bles were affected by the drought, exports receipts did not increase as much as the favorable world prices would have permitted and the policy of price containment and subsidization translated into very large external deficits. At the end of 1974, net foreign assets of the banking system were minus MF 64 billion (US$133 million), principally in the form of liabilities with the '"operations account" at the French treasury. Uneven recovery: 1975-1976 7. Normal rainfall resumed in 1975 and primary production--cereals, as well as cotton and groundnuts--increased by more than 20% and total GDP by an estimated 12%. Recovery of physical production, however, has been accompanied by higher rates of inflation resulting from both the substantial reduction in Government subsidies and the delayed impact of international inflation, and the GDP deflator is estimated to have jumped by 18% in 1975. While the resource gap was reduced it remained very high, representing about 20% of GDP and foreign assets declined further to minus MF 90 billion (US$190 million). Public dissaving continued to increase as growth of revenues lagged behind fast rising expenditures, particularly expenditure on personnel. The wage bill increased rapidly because of cost of living adjustments and the policy of government to serve as residual employer of nationals who complete secondary or higher education. Current revenues did increase as a result of  - 3 - efforts to improve tax collection, but not enough to keep pace with rapidly growing expenditures. The current budget deficit widened from 3.6 billion MF in 1972 to 7.6 billion MF in 1975, or about 27% of total current revenues. 8. In 1976, real growth of GDP continued though at a moderate pace (4 to 5%). At the same time, a slower rate of world inflation and redressal measures by the government have begun to have a favorable impact in the financial sphere. 9. Credit expansion was reduced sharply, the overall increase in outstanding indebtedness of the economy to deposit banks being of the order of 10% over the first nine months of 1976. At the beginning of the year the Central Bank discount rate was raised from 3.5 to 6.0% with correspond- ing increases in the whole set of borrowing and lending rates of deposit banks. And a new banking law, providing for legal minimum cash reserve and liquidity ratios, is to be promulgated soon. The rate of inflation slowed in 1976, even though prices of sugar, soap and groundnut oil had been raised in 1975 and power tariffs as well as prices of gasoline and kerosene were increased last year. Producer prices of agricultural products, with the exception of groundnuts, remained unchanged. The combined losses of state enterprises are expected to have been much lower in 1976 despite marketing problems still experienced by some of them. 10. The balance of payments deficit in 1976 is provisionally estimated to have come down to US$32 million from US$43 million in the preceding year. As in the past the deficit was largely financed through the "operations account". The improvement in the balance of payments despite larger imports is attributable to higher volume and prices of cash crop exports, exports of foodgrains, some debt rescheduling, larger capital inflows and higher transfer receipts. Despite this, Mali's net foreign assets have somewhat further decreased, and at the end of 1976 were practically at minus MF 100 billion (US$200 million). The budget deficit for 1976 was still uncomfortably large (MF 10 billion) and it is unlikely to be significantly smaller in 1977. Foreign capital and debt 11. Public investment is mainly financed by foreign aid. During most of the sixties the USSR and the People's Republic of China were the most important aid donors. At the end of 1973, they held about one-third each of Mali's external public debt' disbursed and outstanding. Gross disburse- ments (grants and loans) from DAC sources increased from US$24 million in 1969 to US$108 million in 1974. Roughly 60% came from bilateral sources (mainly France, United States, Germany and Canada). Since the early seventies the amount of public aid received by Mali has increased very rapidly and grants account for most of the increase. The average annual gross inflow of aid was less than US$20 million in the early 1970-71, reached US$50 million during the first years of the drought (1972-73), peaked at US$112 million in 1974 and has decreased only marginally since then. Four-fifths of total aid since 1970 has been in the form of grants. 12. Mali's external public debt outstanding at the end of 1973 (ex- cluding drawings on the operations account with the French treasury) was  US$368 million, including an undisbursed amount of US$85 million. IDA's share in the total amount disbursed and outstanding was 17.4%. Repayments of principal and interest due in 1973 would have claimed about 19% of foreign exchange earnings (15% in 1972), but actual debt service payments were small (1.2% in 1972, 1.5% in 1973) owing to the rescheduling since 1970 of Chinese, Russian and some other debts under short-to medium-term arrangements. How- ever, debt service projections indicate that the ratio may go up to about 19% by 1980, unless some further rescheduling of debt takes place. Mali received five stand-by credits from the IMF between 1964 and 1971 which have been repaid. Apart from the stand-by credits Mali drew SDR 5.00 million under the 1974 oil facility and obtained another credit of SDR 3.99 million (in March 1976) under the 1975 oil facility. Development prospects 13. The return of more normal weather conditions has strengthened the economy's short run position. In the medium and long term, the government must address two sets of interrelated objectives. The first is the need to correct the profound financial imbalances that have developed over the years, especially since the early seventies; the second is the need to accelerate the pace of economic growth against a background of minimal improvement in per capita income since 1960. 14. The government has, since 1975, begun to tackle its financial problems and has been relatively successful in re-establishing more economic price relationships internally and relative to the rest of the world. Thus, incentives to agricultural production are stronger; consumer prices more closely reflect economic costs, the burden of subsidies has been somewhat alleviated and credit expansion has slowed down. Reform of public enter- prises has been undertaken, but is unavoidably a very gradual task; the budget is still basically unbalanced but the government is now seriously reconsider- ing its employment policy with a view to make it more selective; the external accounts now benefit from a stronger export performance which is expected to continue; it would be unrealistic to expect dramatic progress in the reconsti- tution of external reserves in a matter of months or even a few years, but the Franc area arrangements should provide the framework within which to undertake this long-term task. 15. Prospects for real long term growth are probably better than in other Sahelian countries. Agriculture has considerable potential for expansion both in the South where rainfed agriculture meets favorable conditions and in the vast inland delta of the Niger river. The river also offers much potential for power development to support industrial and mineral development. Planned investment in new capacity for cotton seed oil extraction, cotton textiles for export and sugar production, together with growing crop and livestock produc- tion, will eventually strengthen the balance of payments. Mineral resources (iron ore, phosphates) remain at present unexploited but may offer interesting longer term development possibilities. 16. The Five-Year Social and Economic Development Plan (1974-1978) gives high priority to agriculture, water and power development, industries  - 5 - processing agricultural materials and road transport. The pattern of invest- ment is well conceived, and allocation conforms broadly to the resource en- dowment of the economy, but the investment target of MF 395 billion (about US$783 million) in 1972 prices is no doubt over-ambitious, which means that difficult choices will have to be made. Implementation of the plan has en- countered serious internal and external resource constraints, and the objec- tives for investment outlays are being revised downward. At the same time, with regard to new investments, priority is being given to projects and poli- cies that will help correct over time the structural weakness of the balance of payments, with greater emphasis on export crops, animal husbandry, minor irrigation works and the more efficient manufacturing activities. However, the selection of projects, especially capital intensive undertakings, needs to pay more attention to economic factors. 17. The prospects for the Malian economy have improved following the marked increase in output over the last two years and the stabilization measures taken by the Government. Nevertheless, sustained and viable growth in the longer run depends crucially on investments that will strengthen the economy's export base and reduce its dependence on imports. Mali's capacity to finance new investment, however, is severely constrained by the limited savings potential resulting from the extremely low per capita income level, a situation further complicated by serious financial difficulties in the public sector. Borrowing on conventional terms would add considerably to the burden of servicing an already sizeable external debt. External aid, accordingly, should be on soft terms and finance, besides foreign exchange outlays, a significant proportion of local currency costs. PART II: BANK GROUP OPERATIONS IN MALI 18. The proposed credit would be IDA's thirteenth operation in Mali, which would bring total commitments of IDA funds to US$119.2 million. Actual commitments so far amount to US$108.7 million, most of which were made during the past three years. Of this amount, US$53.2 million has been disbursed as of February 28, 1977. Of twelve credits already approved by the Board, five have been directed to the transport infrastructure, five to agriculture, one in telecommunications and one in education. Transportation represents the largest share (56%) of our past commitments followed by agriculture (nearly 45%). A summary statement of these credits as well as notes on the execution of ongoing projects are set out in Annex II. 19. Experience with most ongoing projects has been satisfactory. How- ever, a telecommunications project experienced some difficulties which have now been remedied as reflected in an amendment which was approved by the Board on July 21, 1976. The Second Highway Project faced some cost overruns due mainly to a delay of more than one year, and the Board of Directors ap- proved in June 1975 a supplementary Credit of US$8.3 million to cover part of these overruns. In addition, a dispute between the contractor and the Gov- ernment was recently settled following extensive discussions between the two parties. Other items of the project are either completed or well under way.  - 6 - 20. The Bank Group and other external aid agencies have financed some ten major development projects which geographically cover most of the coun- try's cultivable area and benefit the majority of farm families, or about 90% of Mali's population. Bank Group's operations in this sector include the Mopti Rice Project, the Integrated Rural Development Project and the Live- stock Project which were designed to assist the Government in its efforts to achieve self-sufficiency in food and to improve export earnings. A fourth IDA financed project, Mali Sud (Credit 669-MLI) for US$15.5 million, was approved by the Board in December 1976. A Drought Relief Project composed of more than 20 subprojects aiding the most adversely affected rural popu- lation was approved by the Board in 1973. In addition three of the five projects financed in the transportation sector are directly related to the rural sector. 21. Agriculture and livestock undoubtedly will continue to provide the main development possibilities for Mali's largely rural population; the largely semi-autonomous state corporations ("Operations") are the main channel for external investment in these sectors. Because of the droughts in the 1968-74 period, these "Operations" have broadened their activities to include food crops and livestock to permit farmers greater self-sufficiency. They provide a reliable means for communication and logistics in remote rural areas, as their networks of extension agents reaches down to the villages. Increasingly, these "Operations" are being used by the Government as vehicles for delivery of social services, specifically functional literacy for adult farmers and preventive health care at the village level. 22. The main objectives of Bank Group lending in the future are: (a) to promote agricultural development so as to help the country attain some degree of food self-sufficiency as well as generate adequate supplies of agri- cultural materials for processing industries and exports; (b) to strengthen the infrastructure facilities; and (c) to mobilize resources from other donors through co-financing. In keeping with these overall objectives and in line with the priorities established in the Government's Five-Year Development Plan, Bank Group lending will continue to support the Government in its efforts to increase agricultural production and rural incomes. Preparation is underway for a Rice Project in FY 78 and a Groundnuts/Cereals project in FY 79, the former consolidating and extending the first Mopti Rice Project, and the latter a follow-up of the Integrated Rural Development Project. As for infrastructure, a fourth highway project which might include primary road rehabilitation and a program of road maintenance, is being considered for FY 79. The emphasis on rural development and infrastructure, however, does not preclude Bank Group financing in other areas. In this context we are considering an Urban/DFC project for FY 79 designed to improve living con- ditions through a basic package of urban services emphasizing environmental sanitation and rehabilitation of existing facilities, and to assist Government in creating new employment. Needless to say, successful achivement of these objectives will depend, to a large extent, on the availability in sufficient numbers of qualified manpower to design and carry out development projects. A Second Education Project currently under preparation for FY 78 would address priority manpower needs of the economy, specifically: the training and  - 7 - upgrading of managers and planners for all priority sectors; the training of an increased number of junior agricultural and livestock field technicians; and the extension of functional literacy and numeracy to additional groups of farmers in the Integrated Rural Development Project area (Credit 491-MLI). 23. The proposed project would be the third railway project in Mali since the country became independent in 1960. Execution of the two previous railway projects has been disappointing. The first project (Credit 95-MLI) was completed two years behind schedule, and the second (384-MLI) suffered severe cost overruns that led to reduction in its scope and incorporation of deleted items in the proposed third project. However, these projects, together with two parallel lending operations for the Senegal Railway, have been the vehicle for Bank Group advice and assistance which has done much to keep the vital Dakar-Bamako line from total collapse. The proposed project would provide for continuation of this action and for redoubled efforts to improve the Regie du Chemin de Fer du Mali (CFM)'s operating and financial efficiency. PART III: THE TRANSPORT SECTOR IN MALI The Transport System 24. The Malian transport network is fairly extensive and consists of the following infrastructure: 13,000 km of roads, of which 1,600 km are paved, 3,300 km all-weather roads and the remainder dirt roads and tracks; a 644 km railway linking Koulikoro and Bamako with the Senegal railway and the port of Dakar; about 1,650 of inland waterways, which are navigable less than seven months per year; and an international airport at Bamako and about a dozen airfields for domestic commercial services. The two main international routes are: (a) the railway from Bamako to the Port of Dakar about 1,280 km, 644 km of which are in Mali; and (b) choice of all road service or a road/rail combination from Bamako to the Port of Abidjan, approximately 1,230 km in length (a paved road leads from Bamako to Ouangolodougou, Ivory Coast, which is on the Railway to Abidjan). The road system and the railway are the principal means of transport. The paved roads are concentrated in the Bamako-Sikasso-Mopti triangle, the fastest growing area in Mali. The all-weather and dirt roads link outlying areas to the paved road system or are feeder roads west of Bamako connecting agricul- tural areas to the railway. 25. The Government controls the major transport companies: Regie du Chemin de Fer du Mali (CFM) or Mali railways; Compagnie Malienne de Transport Routier (CMTR), a trucking company carrying about 20 percent of total road freight; Compagnie Malienne de Navigation (COMANAV), a navigation company  - 8 - handling about 70 percent of waterway traffic; and Air Mali, the only locally based air carrier, which handles both domestic and a considerable amount of international traffic. The Ministry of Transport and Public Works (MTPW) exerts full control over Malian transport enterprises, tariffs and traffic regulations and allocations. MPTW will prepare a National Transport Plan 1978-84 based on an IDA study financed under Credit 599-MLI (Third Highway Project). It has been agreed that this plan should not include any major road construction parallel to the railway unless in consultation with the Associa- tion (Section 3.05 of the draft Development Credit Agreement). Within the MTPW, the National Transport Office (NTO) is responsible for regulating transport entities, approving tariffs and allocating export-import traffic between the competing routes. Enforcement of regulations and control of rates is generally effective but does not result in an economic route allocation of international traffic. Road transport policies will be reviewed in a consult- ing study financed under the Second Highway Credit (Credit 383-MLI) to be completed in mid 1977. 26. The Government's transport strategy has focussed on developing local transport infrastructure in support of overall economic growth, on promoting regional integration, and on building an appropriate international network to link Mali with the coast. In addition to the two previous railway projects, the Association has also financed three highway projects. The Role of the Railway 27. The railway provides the only mode of transport in the western part of Mali, providing a link between Bamako and Kayes (second largest city in the country), and numerous small towns and villages in between. It also provides practically all domestic passenger and freight transport to the Senegalese border. There is no road on this route, and the existing tracks can only be traveled by jeeps and only during part of the year. 28. The railway's main activity is carrying international traffic to and from Dakar, the most economic route for most exports originating at Bamako and west to the Senegalese border, and for all imports destined as far as Segou, about 200 km east of Bamako. For imports, the cost differential between the Dakar and Abidjan routes ranges from MF 7,200/ton for cement to MF 20,300/ton for petroleum products. However, CFM has not carried as much international traffic as this cost advantage would suggest as appropriate. Inefficiency in terminal operations in Dakar and Bamako, as well as along the international line, and the mandatory allocation of traffic by the Malian Government instead of permitting normal market mechanism to operate explain this shortfall. In addition, cumbersome customs procedures between Mali and Senegal which started in January 1976, further hampered international traffic. In relation to these problems, the proposed project provides for (a) consult- ing services aimed at improving operations in both Mali and Senegal; and (b) specific measures to reroute petroleum traffic from the more expensive Abidjan route to the Dakar route. In March 1977, the Malian and Senegalese Govern- ments decided to suspend temporarily application of the customs procedures until revised, simpler procedures can be drafted in agreement with the Asso- ciation (Section 3.04 draft Development Credit Agreement).  -9- Railway Administration 29. CFM was established in 1960 after the Dakar-Niger Railway was par- titioned between Senegal and Mali. It is a government-owned public enterprise operated on a commercial basis with a General Manager, who reports to a Board chaired by the Minister of Transport and Public Works and who has sufficient autonomy to permit effective management. CFM is being reorganized under a CIDA-financed technical assistance program into five departments each headed by a director. There are 1,500 permanent and 600 auxiliary employees. Man- agerial and senior staff are well trained, but do not have enough experience. Most mid-level staff need either theoretical or specialized training. Theoretical training is provided by the Training Department (TD) which is short of facilities and instructors. Fourteen technical assistants supply on-the-job advice and some training. 30. CFM's budgeting, accounting and auditing procedures are generally satisfactory; some deficiencies mainly in cost accounting are being overcome under the CIDA-financed program. CFM's track, fixed installations, motive power and rolling stock are generally well maintained except for bridges, some of which need emergency repairs, and some old passenger cars. The proposed project includes bridge repair and the replacement of old passenger equipment. 31. Except for a substantial improvement in the mainline locomotive availability, CFM did not achieve the operating and traffic performance anticipated under the two previous railway projects because of the lack of resources to complete rehabilitation of the track and equipment and the weakness of its operational management which resulted in poor staff motivation and discipline further aggravated by inadequate training standards. The consequent increasing diversion of traffic to the Ivory Coast route and the reluctance of the Government to implement recommended tariff increases resulted in CFM's failure to meet agreed financial objectives. Operations 32. Physical constraints only partly explain the unsatisfactory turn- around time of freight cars which is the main cause of CFM's inadequate operating performance. Other reasons include: (a) lack of operational management experience resulting in poor staff motivation and discipline; (b) inadequate training standards; and (c) inefficient operations at Dakar port and along the Senegalese part of the international line. A plan aimed at improving CFM's operations is proposed under the project. A parallel project for the Senegal Railway appraised in February 1977 will similarly emphasize the improvement of operational efficiency. PART IV: THE PROJECT 33. The project is based on information supplied by the Government and CFM and the findings of an appraisal mission in July 1976. Negotiations  - 10 - were held from March 28 to March 31, 1977, with a Malian delegation led by His Excellency M. Karim Dembele (Minister of Transportation and Public Works). The Appraisal Report (No. 1355-MLI) is being circulated separately to the Executive Directors. Annex III provides a credit and project summary. Project Description 34. During appraisal of the proposed project CFM agreed to a 1977-81 railway investment plan estimated to cost MF 20 billion (US$40 million equiv- alent) with a foreign exchange component of about MF 14.5 billion (US$29.6 million equivalent). The proposed project covers the first three years (1977-79) of this plan. 35. The proposed project comprises (a) track work to complete the rehabilitation of CFM's track begun under the First and Second Projects (US$3.83 million); (b) a bridge rehabilitation program, part of which was deleted from the Second Project (US$7.32 million); (c) procurement of loco- motives, railcars, coaches, tank wagons, and of spare parts (US$10.46 mil- lion); (d) miscellaneous equipment (US$0.09 million); (e) training (US$0.35 million); and (f) consulting services to study (i) the joint operations of the Senegal and Mali railways and (ii) the future of the Bamako-Koulikoro line (US$0.39 million) and (g) contingencies (US$5.81 million). Prolect Cost and Financing 36. Total project costs excluding duties and other clearly identifiable taxes are estimated at US$28.2 million. The foreign exchange cost is US$25.3 million or 90%. The financing plan is summarized below: US$ million % of total IDA 10.5 37 FAC/CCCE 10.8 38 CIDA 5.3 19 CFM 1.6 6 28.2 100% The proposed credit would finance 37% of total costs, consisting of US$9.5 million of foreign exchange costs and US$1.0 million of local costs. Spe- cifically it would be used to finance bridge rehabilitation (US$9.7 mil- lion), track maintenance equipment (US$0.1 million) and the foreign compo- nent of consulting services for studies and training (US$0.7 million). The Credit proceeds would be relent to CFM at an interest rate of 6% p.a. for a term of 20 years including 4.5 years of grace. Finalization of the onlending agreement is a condition of effectiveness. The proposed relending rate is the highest CFM could afford under present productivity, traffic and finan- cial performance assumptions. The co-financing in the financing plan is ex- pected to be made available under the following terms: FAC and CIDA would  - 11 - make grants equivalent to US$1.9 million and US$5.3 million respectively; CCCE would provide a loan of US$5.4 million for 10 years including 5 years of grace at an interest rate of 5.5%; and COFACE would provide a loan of US$3.5 million for 5 years at an interest rate of 8%. Prolect Execution, Procurement and Disbursement 37. CFM will be responsible for execution of the project. Track re- newal, ballasting and rail joint welding would be performed by CFM's own staff which produced an acceptable quality of work under the two previous projects. Bridge repairs and reinforcements will be executed by an expe- rienced firm, to be selected following the Association's guidelines on international competitive bidding, except for minor related works and mate- rial in a total amount not exceeding US$940,000 equivalent. Execution of bridge rehabilitation and reinforcements will be supervised by Sofrerail experts. Track maintenance equipment may be purchased by international shopping, spare parts for track maintenance machinery will be purchased from the original supplier. For the rehabilitation of training facilities competitive bidding advertised locally and in accordance with local pro- cedures acceptable to the Bank will be followed. The consultants and in- structors providing technical assistance and training courses respectively will be selected on terms and conditions acceptable to the Association. The cost of items not subject to international competitive bidding will be reviewed by the Association on the basis of international market prices. The items being financed under bilateral aid and supplier credits will fol- low donors' guidelines. 38. The funds from the credit account would be disbursed as follows: 100% of foreign expenditures and 74% of local expenditures for bridge rehabil- itation - US$6.6 million; 100% of foreign expenditures or 74% of local expend- itures for track maintenance equipment - US$0.1 million; 100% of foreign ex- penditures for consultants' services and training - US$0.4 million; and 100% of foreign expenditures or 74% of local expenditures for rehabilitation of training facilities and training equipment - US$0.1 million. US$3.3 million of the proposed credit would be unallocated to cover contingencies and price increases. The Credit would be disbursed during the period 1977-82. Training and Technical Assistance 39. Systematic training of CFM staff started only after the Training Division (TD) was officially established in early 1969, but was limited by meager facilities and the shortage of qualified instructors. Most of the activities of the TD have been concentrated on the training and retraining of skilled labor and low-level staff to meet the most pressing needs of CFM's operations and on organizing courses for supervisory staff. The TD has also implemented special programs to train and upgrade Malian instructors. The training component included in the proposed project will improve the quality of CFM's staff training by expanding physical facilities, providing training equipment and adding new programs for middle-level staff.  - 12 - 40. The training plan, which will enable the training and retraining of some 400 personnel each year, involves (i) centralizing all the required training facilities (previously scattered); (ii) relocating the TD offices in the new center; (iii) building a small, secondary center in Kayes; and (iv) purchasing training equipment for these facilities. Studies 41. The proposed project includes consulting services for about 65 man months (at an average US$70,000 per man year) for a study aimed at improving joint operations of the Senegal and Mali railways along the in- ternational line and to review the financial and economic justification for rehabilitating or closing the Bamako-Koulikoro line. Implementation of the consultant's recommendations on the latter study by the Government and CFM will be done in consultation with the Association (Section 3.07 draft Develop- ment Credit Agreement). The joint operations study would recommend measures for improving the terminal operations and train operations in Mali, Senegal and along the line. Within this framework the consultants should assess all areas where increased cooperation between Mali and Senegal would improve operations (e.g., unifying traffic rules, establishing specialized workshops, increasing inter-penetration of locomotives, and improving train schedules) and should make specific recommendations. They should also investigate the possible advantage of partial containerization of international traffic. The Senegalese and Malian Governments and Railways would, in consultation with the Association, jointly set (a) the objectives of the study; (b) its terms of reference; and (c) implementation of consultant's recommendations on the operational study (Section 3.06 draft Development Credit Agreement). Traffic Forecast 42. Freight traffic should reach 465,000 tons and 211.6 million ton-km by 1981. This would represent an annual growth rate of 4.8% in tonnage and 5.5% in ton-km based on the 1975 level (compared with 4.9% in tonnage and 4.1% in ton-km average annual growth rate during the period 1966-1975). Imports of petroleum products will be the fastest growth element, climbing from 32,000 tons in 1975 to 75,000 tons in 1981. Achievement of this forecast traffic will require, in addition to the procurement of tank wagons under the project, that the Government and CFM make long-term arrangements for the transport by CFM of the petroleum products. This would include inter alia modifications to the system of price stabilization for petroleum products, which presently does not encourage the oil companies to use the cheapest transport route for such products. Finalization of these arrangements would be a condition of effectiveness of the proposed Project. Passenger traffic is expected to grow at an annual rate of about 3%, reaching 140 million passenger-km in 1981 as opposed to 103 million passenger-km in 1975. Collection of passenger fares has deteriorated in recent years and CFM agreed at negotiations to promptly implement a program satisfactory to the Association to ensure the regular collection of fares (Section 3.06 draft Project Agreement).  - 13 - Financial Situation and Risks 43. CFM's inadequate traffic performance and tariff-setting policies over the past 10 years resulted in an unacceptable financial position. The Government has already waived about MF 2.2 billion of CFM's debts. The Government and CFM have also agreed during negotiations to (a) revalue CFM's fixed assets as of December 31, 1976 and enter this revaluation in CFM's 1977 accounts; (b) undertake future revaluations of fixed assets when appropriate in consultation with the Association; (c) achieve working ratios of no more than 67% for 1977, 70% for 1978, 61% for 1979, 64% for 1980 and 60% for 1981 and 1982; (d) maintain CFM's working capital at stated levels; and (e) discuss draft annual budgets with the Association prior to submitting them to CFM's Board, and if necessary, CFM and Government will agree with the Association on remedial actions (legal covenants on these points are reflected in Sections 4.06 (i), 4.06 (ii), 4.04, 4.05 and 3.05 respectively of the draft Project Agreement). To achieve the 1977 working ratio target, the Government would have to increase CFM tariffs in mid 1977 to produce a 23% increase in reve- nues. 44. A sensitivity analysis of financial forecasts was conducted under the following assumptions: (a) stagnation of petroleum traffic at the 1976 level; (b) 15% decrease in revenues generated by exports; (c) 10% increase in working expenditures; and (d) 20% increase in the cost of the bridge component and 10% increase in the cost of the remaining components of the project. The analysis showed that simultaneous materialization of all four assumptions would result in an accumulated MF 5 billion (US$10 million) deficit over 1977-81. This could be overcome by tariff increases 20% above those assumed in the main analysis. 45. While the project is relatively straightforward to implement in physical terms, there is a risk that CFM will not attain the operating and financial targets set under the project, as reflected by the disappointing performance under the first and second projects (see para 23 above). However the operating and financial targets have in this case been set conservatively, based on the experience of the earlier projects, and it is expected they will be largely met. In addition, CFM's operating performance should be strength- ened by: a) the measures included under the proposed project to ensure mate- rialization of forecast increases in petroleum and other traffic; and b) man- agement and organizational improvements to be undertaken under the parallel Senegal railway project now under preparation. On the other hand, failure to proceed with the project, particularly the bridge rehabilitation program, would soon result in the total collapse of operations and the cutting of Mali's main transport access to the sea. On balance, therefore, the risk of not proceeding with the project appears to outweigh the risk of a short- fall in operiting or financial performance. Benefits and Justification 46. Benefits from the project will be continued operation of the line, reduced maintenance and operating costs, new equipment and substantially increased capacity for petroleum traffic. The economic rate of return of  - 14 - the entire project is estimated to be 23%, and individual components are economically justified even under slow traffic growth assumptions utilized for sensitivity analysis purposes. PART V: LEGAL INSTRUMENTS AND AUTHORITY 47. The draft Development Credit Agreement between the Republic of Mali and the Association, the draft Project Agreement between the Association and Regie du Chemin de Fer du Mali (CFM), the Recommendation of the Committee provided in Article V, Section I (d) of the Articles of Agreement of the Association and the text of a draft resolution approving the proposed Devel- opment Credit are being distributed to the Executive Directors separately. 48. The following will be special conditions of effectiveness: that a subsidiary loan agreement has been concluded between the Government and CFM; that long-term arrangements be finalized for the transport by CFM of petro- leum products including, inter alia, modification to the system of price stabilization for such products; and that assurances satisfactory to the Association have been received in respect to the financing which will be provided by the co-donors (FAC, CCCE and CIDA). 49. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI: RECOMMENDATION 50. I recommend that the Executive Directors approve the proposed development credit. Robert S. McNamara President Attachments Washington, D.C. May 4, 1