Argentina - Second Railway Project

Document of n The World Bank O Cle-Tv"kY FOR OFFICIAL USE ONLY Report No. 2155b-AR STAFF APPRAISAL REPORT SECOND RAILWAY PROJECT ARGENTINA March 14, 1979 Projects Department Latin America and the Caribbean Regional Office 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 aythorization.  Currency Equivalents I Argentine Peso ($a) = US$ .0025 US$1.00 = $a 400 $a I million = US$2,500 Fiscal Year January 1 to December 31 Units of Weight and Measures: Metric I kilometer (km) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 ton = 2,205 pounds Abbreviations AGP Administracion General de Puertos DNCPVN Direccion Nacional de Construcciones Portuarias y Vias Navegables ELMA Empresa Lineas Maritimas Argentinas FA Ferrocarriles Argentinos (Argentine Railways) FF Flota Fluvial del Estado Argentino FONIT Fondo Nacional de Infraestructura del Transporte JNG Junta Nacional de Granos NTP National Transport Plan SEIM Secretaria de Estado de Intereses Maritimos SST Subsecretaria de Transporte STPO Sectoral Transport Planning Office VN Vialidad Nacional YPF Yacimientos Petroliferos Fiscales  FOR OFFICIAL USE ONLY ARGENTINA STAFF APPRAISAL REPORT SECOND RAILWAY PROJECT TABLE OF CONTENTS Page No. I. THE TRANSPORT SECTOR .................................. 1 A. General .......................................... 1 B. Railways ......................................... 2 C. Roads ............... **.... *....................... 2 D. Ports ............................................ 3 E. Inland Waterways . ........................ .. ...... 3 F. Sea Transport .... ... . ............................ 4 G. Air Transport .......................... 4 R. Pipelines ........................................ 4 I. Urban Transport in Buenos Aires .................. 5 J. Planning and Coordination ..... ................... 6 II. THE RAILWAY SUBSECTOR ................................. 6 A. Background ..............-. 6 B. Redimensioning . .............. .O..-. . . . ................. . 7 C. FA Organization ....................................... 9 D. Management, Staff and Training ................. .. 10 E. Railway Facilities ............................... 11 F. Traffic .............. ......................................... 14 G. Intermodal Freight Competition ................... 18 H. Operations ....... ................................ 21 I. Commercial Department ............... ....... .. 21 J. Tariff and Costs ...... ........................... 22 K. Budgets, Accounting and Audit ................. ... 23 III. THE INVESTMENT PLAN AND THE PROJECT ................... 25 A. FA's Investment Plan (1979-1983) ................ . 25 B. The Project and the Proposed Loar ....... .. ....... 26 C. Main Project Items ..... .......................... 27 D. Cost Estimates ...... ........................... 28 E. Financing Plan .. . ............ 29 F. Project Implementation ..... ...................... 30 G. Plan of Action ................................... 30 H. Procurement ........ ............................... 32 I. Disbursements ....... ............................. 32 This report is based on the findings of an appraisal mission which visited Argentina in January-February 1978 and a followup mission in May 1978. The mission comprised Messrs. M. Lal and E. Karman, Deputy Division Chief (railway engineers), H. Jones (financial analyst), M. Staab (transport economist), and J. Kesson (consultant). The report has been edited by Miss V. Foster. 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.  (ii) TABLE OF CONTENTS (Continued) Page No. IV. ECONOMIC EVALUATION ...... ............................. 33 A. General Methodology .............................. 33 B. Economic Benefits and Costs ...................... 33 C. Economic Rates of Return ......................... 34 D. Sensitivity Analysis and Risks .... ............... 34 V. FINANCIAL EVALUATION .................................. 35 A. General .......................................... 35 B. Past Financial Performance ....................... 36 C. Forecast Financial Performance .... ............... 39 D. Pricing and Subsidy Policies ..................... 44 E. Sensitivity Analysis ............................. 45 -F. Conclusion ....................................... 47 VI. AGREEMENTS REACHED AND RECOMMENDATION ........... ..... 47 TABLES 1.1 - Modal Composition of Traffic .49 2.1 - Route and Track Data .50 2.2 - Motive Power and Rolling Stock. 51 2.3 - Steam Locomotive Scrapping Program .52 2.4 - Diesel Locomotive Requirements .53 2.5 - Age of Freight Wagons 54 2.6 - Freight Wagon Scrapping Program 55 2.7 - Freight Traffic Statistics (2 pages) .56-57 2.8 - Freight Traffic Forecasts (2 pages) .58-59 2.9 - Forecasts of National Production of Commodities Used to Forecast Freight Traffic .60 2.10 - Intercity Passenger Traffic .61 2.11 - Suburban Passenger Traffic .62 2.12 - Summary of Operating Statistics .63 2.13 - 1977 Operating Statistics by Gauge .64 3.1 - Investment Plan (1979-1983) .65 3.2 - Investment Plan and Project (2 pages) .66-67 3.3 - Project and Bank Loan .68 3.4 - List of Goods for Bank Financing .............. - 69 3.5 - Project Implementation Schedule .70 3.6 - Procurement Schedule .71 3.7 - Estimated Schedule of Disbursements .72 4.1 - Economic Evaluation (5 pages) .73-77 4.2 - Economic Rates of Return ......................... 78  TABLE OF CONTENTS (Continued) (iii) Page No. TABLES (Continued) 5.1 - Summary Cash Flow Statements - 1974-1977 ............ 79 5.2 - Income and Expense Statements - Actual 1974 to 1977 (pesos) ............... ....... 80 5.3 - Income and Expense Statements - Actual 1974 to 1977, Forecast 1978 to 1983 (US$ equivalent) ....81 5.4 - 1976 Revenues and Costs by Service ...........82 5.5 - Balance Sheets as of December 31, 1971 to 1977 ...... 83 5.6 - Balance Sheets as of December 31, 1973 to 1976, 1977 Estimated and 1978 to 1982 Forecast .......... 84 5.7 - Analysis of Operating Results by Gauge 1979-1982..... 85 5.8 - Forecast 1980 Operating Results by Railway Service .. 86 5.9 - Forecast Cash Flow 1978-1982 ............87 ANNEXES 1 Technical Assistance and Studies ....... . .................. 88 2. Selected Documents and Data Available in the Project File. 91 CHARTS 1. Organization of FA 2. Organization of Component Railways of FA MAPS IBRD 13699 - Argentina - Argentine Railways IBRD 13700 - Argentina - Argentine Railways Buenos Aires Metropolitan Area  I. THE TRANSPORT SECTOR A. General 1.01 Argentina is characterized by a very high degree of population and economic concentration in and around Buenos Aires and by a high level of specialization of production among its various geographical regions. About 70% of the country's 26 million inhabitants live within a 600-km radius of Buenos Aires; this region also generates almost 85% of the country's GNP. The transport system reflects this spatial pattern of development. The bulk of freight generated by the economy consists of agricultural products and other raw materials moving from the interior to the lower Parana River and the Atlantic coast around Buenos Aires, 1/ and of machinery and other production inputs, vehicles and manufactured consumer goods moving in the opposite direction. With its population of about 10 million, a port handling more than one-quarter of total port traffic and its role as administrative, industrial, financial and commercial center of the country, metropolitan Buenos Aires is the focal point for transport in Argentina. The La Plata-Buenos Aires-Rosario- Santa Fe-Cordoba corridor generates the main intercity passenger traffic demands. Trade among the country's various specialized regions continues to increase, but is comparatively less important. A Government estimate of the modal composition of traffic for 1976 is summarized below: Water Total Road Transport Pipelines Rail Air (billions) (%) (%) (%) (%) (%) Ton-km 102.2 42 35 12 11 - Inter-city pass-km 64.1 86 - - 10 4 1.02 Traffic decreases were experienced by almost all modes of transport during the early 1970s, including roads (between 1973 and 1975), railways, coastal shipping and ports, generally reflecting the effects of changes in the international oil market and the overall condition of the Argentine economy during this period. River transport remained relatively constant, pipeline traffic (oil and gas) continued to increase (5.3% per annum) and domestic air traffic grew substantially (12% per annum). Traffic is now increasing in all modes (Table 1.1). 1/ Livestock and grains from the provinces of Buenos Aires, Cordoba, Entre Rios, La Pampa and Santa Fe; wine and edible oil from the region of Mendoza, San Juan and San Luis; mutton and wool from the region of Patagonia; tea from the province of Misiones; cotton from the Chaco region; sugar from the region of Tucuman and Salta; zinc, lead, sulphur and manganese from the Northwest; and petroleum from the Northwest, Central West and South.  - 2 - 1.03 The distribution of investment among the modes has remained rela- tively constant in the last few years with roads acounting for about 56%, railways 16%, ports 11%, aviation 9%, water transport 7%, and subways 1%. Total investment in the transport sector has accounted for about 20% of total public investment and for some 3% of GNP. These are rough approximations, but they do suggest that the claims of the transport sector on national resources have been quite substantial in the last several years. Furthermore, not only have such expenditures accounted for a large proportion of total public investment, but ithey have not always been used to the best advantage. The National Transport Plan, now under preparation (para 1.18), is expected to improve coordinal:ion within and among the modes and thereby lead to a more efficient use of resources. B. Railways 1.04 The ra:ilway subsector is reviewed in detail in Chapter II. C. Roads 1.05 The road network expanded very rapidly in the 1960s and early 1970s with the construction of modern, limited-access multi-lane facilities at the entrances to the main urban centers and along a few of the most heavily traveled routes. In 1976, Argentina had a system of about one million km of roads (national and provincial), of which about 50% of the national network and 2% of the provincial network were paved, totaling about 42,000 km. Except for some peripheral areas, the present road system is generally adequate, although there are mounting requirements for rehabilitation and strengthening of existing roads. The numerous interruptions of the road network and the lack of lateral links which earlier hampered coinmunications and transport between urban centers have been largely corrected in recent years by the expansion of the primary and secondary networks, 1.06 The road vehicle fleet increased from 1.0 million vehicles in 1961 to 3.4 million vehicles in 1976, an average annual growth of 8%. The vehicle- population ratio of about one vehicle per eight inhabitants, approximately the level of motorization of Southern Europe, corresponds to the country's rela- tively high per capita income (US$1,550 in 1976) and advanced development of the automobile industry. The geographical distribution of the vehicle fleet is similar to the distribution of economic activity: 60% of the fleet is registered in the Federal Capital and Buenos Aires Province and another 25% in the provinces of Santa Fe, Cordoba, Corrientes and Mendoza. The actual supply of trucking services has increased faster than the vehicle numbers would indicate because of a shift to larger size trucks. Truck transport is used for long ancl short hauls and for practically all commodities. Freight rates are low because of the generally flat terrain allowing the use of heavy truck trailers with a low power-to-weight ratio. Trucking rates are not regulated by the Government. The average age of the trucking fleet has been estimated by the Government at slightly over seven years. Both urban and inter-urban bus services, which are provided by private companies, are regulated. In general, these services are quite adequate.  -3- D. Ports 1.07 Argentina's ports can be classified into three geographic zones: (a) the Atlantic, whose main ports are Bahia Blanca, Comodoro Rivadavia and Quequen; (b) the Plata River, whose main ports are Buenos Aires and La Plata; and (c) the Parana River, whose main ports are San Nicolas, Campana, Rosario, San Lorenzo and Santa Fe. These ten ports handled about 76% of the total traffic in 1976 (78.6 million tons), with Buenos Aires accounting for the largest share (27%). Most of the river ports are affected by silting and require costly maintenance dredging. The main ports are somewhat specialized, handling general cargo (Buenos Aires), mineral and petroleum products (Comodoro Rivadavia, La Plata, San Nicolas, San Lorenzo and Santa Fe), and grain products (Bahia Blanca, Quequen, Rosario, Santa Fe). Roughly 60% of the total tonnage handled in ports is domestic waterborne bulk traffic--essentially petroleum products, gravel and sand. A serious problem is the cumbersome and inefficient way in which the ports are managed, basically resulting from too many organizations having control of the several port operations without proper coordination. For example, while port management is entrusted to the Administracion General de Puertos (AGP), an autonomous enterprise under the Secretaria de Estado de Intereses Maritimos (SEIM), all dredging and marine construction are the responsibility of another department under SEIM, the Direccion Nacional de Construcciones Portuarias y Vias Navegables (DNCPVN). The construction or expansion of buildings and warehouses is the responsibility of the Direccion de Arquitectura under the Secretaria de Obras Publicas y Transporte. In addition, in all major ports handling grains, there is an area reserved for the Junta Nacional de Granos (JNG), under the Secretaria de Estado de Agri- cultura. JNG owns and operates all grain silos, operates and unloads trains within its territory and controls the arrival and departure of-ships to the grain berths. Also, private stevedoring companies control and direct the loading and unloading gangs, and, in some ports, private shipping companies, by virtue of their long standing rental contracts, operate sheds and warehouses. The lack of coordination with respect to all these different organizations is probably the single most serious bottleneck in the port subsector today. A study of operations and management as well as physical facility requirements at Bahia Blanca, Rosario, San Nicolas, San Pedro, Buenos Aires and La Plata is presently under way with UNDP finance, with the Bank serving as executing agency. In addition, under the grain storage project (Loan 1521-AR), the Bank is financing a study to determine the feasibility of deepening the channel at Bahia Blanca. E. Inland Waterways 1.08 The Plata River and its tributaries--the Parana, Uruguay, Paraguay and Alto Parana Rivers--form a navigable system of more than 3,000 km. The tributaries, particularly the Parana River, constitute an important outlet  - 4 - for cereals and other exports and carry about 40% of the country's total grain exports. The depths of the rivers limit the draft of ships entering the system and, hence, exclude the larger bulk carriers or restrict their loading capacity. Insufficient and inadequate dredging equipment continues to be a problem. A recent Spanish bilateral credit for dredges should help to resolve this matter. 1.09 In the river trade, the largest Argentine carrier is the state-owned Flota Fluvial del Estado Argentino (FF), which provides freight and passenger services along the Parana, Paraguay and Uruguay Rivers, passenger services between Montevideo and Buenos Aires, and ferry services across all these rivers, including a special service between Colonia (Uruguay) and Buenos Aires. It also owns and operates tug boats in the main ports. FF showed a profit in 1976. F. Sea Transport 1.10 The Argenatine merchant marine fleet consists of 66 state-owned vessels with a total of 479,000 DWT and an average age of 15 years. Within the state fleet, the largest owners are the Empresa Lineas Maritimas Argentinas (ELMA), a state enterprise which owns and operates 34 ships, and Yacimientos Petroliferos Fiscales (YPF), which owns and operates 26 ships for the hauling of crude oil. The total participation of Argentine vessels in foreign trade was 31% in 1974, of which ELMA accounted for 19%. The Government's objective is to obtain 50% for Argentine vessels. G. Air Transport 1.11 Argentina's extensive area and the considerable distances separating a number of its population and commercial centers have made civil air transport an important element in the country's transport system. Airport infrastruc- ture is highly developed, with modern runways and terminals in all major urban centers. There are around 1,500 airports and airstrips of all standards, of which about 90 are open to commercial aviation. There is some overdesign of airport facilities., particularly along the Parana River where pairs of large, modern airports have been built at cities separated only by the river. Such is the case of Resistencia and Corrientes and Santa Fe and Parana. The air transport industry has enjoyed relatively steady growth for a number of years. The Government-owned, and financially profitable, Aerolineas Argentinas provides internal and international services. The privately owned Austral and Aero-Chaco provide national and regional services respectively. LADE, the development airline owned and operated by the Air Force, provides subsidized services to the southern part of the country. H. Pipelines 1.12 Pipelines account for the bulk of crude oil and practically the total of gas transport in the country. There are about 6,100 km of oil pipe- lines and about 10.900 km of gas pipelines in the trunk system. The oil pipe- lines connect the oil fields and refineries in the North, Central West and Southwest to the main urban centers. Pipelines also connect the refinery at La Plata with Buenos Aires. Oil from the fields in the South is transported  -5- by ship to the main refineries near Buenos Aires. The vast network of gas pipelines may be classified into four systems: (a) the Northern system, which brings gas from Bolivia and the Argentine fields near the Bolivian border to the urban centers along its route to Buenos Aires; (b) the Central Western system, used only for local distribution to Mendoza; and (c) the Southeastern and (d) the Southern systems, which are interconnected and bring the production from fields in Neuquen, Comodoro Rivadavia and Tierra del Fuego to Bahia Blanca and Buenos Aires. There are no plans to expand the network of pipelines for oil products at present. There are, however, plans to expand the network of pipelines for gas, mainly to interconnect the various sytems in the near future. YPF and Gas del Estado, two Government enterprises, own and operate the oil and gas pipelines respectively. I. Urban Transport in Buenos Aires 1.13 The Buenos Aires metropolitan region has several corridors of urban development that extend westward for approximately 60 km from the center of the city, with most of the urban development contained within a 25-km wide band (Map IBRD 13700). There are 25 suburban municipalities surrounding the Federal Capital. The population of the area is about 10 million, accounting for 38% of the total population. Population growth in the region, some 2.4% per year, is low compared to the growth rates of other Latin American cities, but is 50% higher than the national growth rate of 1.6% per annum. 1.14 An important characteristic of the transport situation in the Buenos Aires metropolitan region is the extensive use made of public transit services and the correspondingly small proportion of trips by private automobiles. Of an estimated 14 million daily passenger trips in vehicles in 1977 (in which changes in mode are counted as separate trips), 23% were accounted for by automobiles, 56% by buses, 8% by the suburban railway, 5% by the subway, and 8% by taxi. While the ratio of passenger trips in public vehicles to total passenger trips in vehicles has decreased in the last few years (from 83% in 1969 to about 77% in 1977), due in part to the lack of coordination of planning among the different modes (para 1.15 following), it is still quite high compared with many other countries. Preventing any further decline in this ratio is probably the most important challenge facing urban transport planners today. The extent to which this can be accomplished will essentially depend on how successful Buenos Aires is in coordinating the routes, schedules and fares for the various public modes of transport as well as the specific measures taken to discourage the use of private automobiles in the downtown area. Generally, in terms of physical facilities, Buenos Aires has a good public transportation system for today's needs. The suburban railway service, however, could be improved and more passengers carried (paras 2.38-2.40). The coverage of the bus system is quite good. The system is privately owned and operated with minimum Government regulation. The subway is Government-owned and receives large annual operating subsidies. 1.15 The institutional and organizational structures for transport planning and coordination in the metropolitan region have been seriously neglected to date; there is no agency responsible for the overall coordination of transport planning. A 1972/73 preliminary study of transport in the metropolitan region recommended the creation of such an organization as well as the separation of the suburban railway from Ferrocarriles Argentinos (FA) and the creation of a new company which would eventually merge with  -6- the subway. The possibility of separating the suburban railway from FA and creating a new company will be examined in a st:udy of the suburban rail service which is included in the project (Annex 1). J. Planning and Coordination 1.16 Planning and coordination have traditionally been among the weakest aspects of Argentina's transport sector. in the past, the considerable degree of independence of the largest Government agencies, such as Vialidad Nacional (roads) and FA (railways), and the loose Goverrment control in the water and air transport subsectors made it very difficult to have integrated and con- sistent transport plans and policies. Several attempts have been made to improve this situation, including the creation of a Sectoral Transport Planning Office (STPO) in 1968. However, its staff members could seldom have their points of view accepted by the numerous and sometimes more powerful transport agencies. 1.17 With the new Government-of March 1976, STPO has recruited new capable staff and strengthened its position vis-a-vis the agencies. Nevertheless, coordination in the sector is still hampered by the fact that the management of several of the modes is divided among a number of Secretariats within the Ministry of Economy (roads and railways come under the Secretariat of Public Works and Transport, ports and waterborne transport under the Secretariat of Maritime Affairs and pipelines under the Secretariat of Energy), and air transport is totally outside the Ministry, being managed by the Air Force. 1.18 In 1977, because of the need for better planning and coordination in the transport sector, the Bank, at the request of the Argentine Government, included financing for a National Transport Plan (NTP) under the Fourth High- way Project. The NTP could become the vehicle by which all transport agencies are brought together under one integrated structure. Work on the NTP started in early 1979, and the study part should be finished by the end of 1981. II. THE RAILWAY SUBSECTOR A. Background 2.01 During the half century preceding the first World War, the railways played a crucial role in the economic growth of the country by opening up new areas to development and providing the only transport link between primary production areas and the main ports. Shortly thereafter, however, their rela- tive importance ,declined steadily with the growth in road, coastal shipping, river and pipeline transport. In 1946, the Government purchased the 12 private railway companies and combined them with six owned by the Federal Government and one by the Province of Buenos Aires, creating one railway organization which was called Ferrocarriles Argentinos (FA). The railway network, consist- ing at that time of 44,000 km, was organized into six systems: four with broad gauge (BG), one with standard gauge (SG) and one with narrow gauge (NG). However, the Government failed to create a fully unified organization or to discontinue services which could no longer be p'rovided economically because of changed settlement patterns, the new distribution of economic activity and the  - 7 - growth of other transport modes. Railway traffic declined from 16.5 billion ton-km and 32.8 million tons in 1951 to 14.2 billion ton-km and 22.1 million tons in 1970. FA experienced severe financial deficits combined with low productivity and poor services. 2.02 In 1970, the Government and FA adopted a plan to redimension the railway and to concentrate on traffic which the railway could carry more economically than other modes. The Bank helped to finance this plan under Loan 733-AR. By February 1974, it was apparent that little or no improvement had been achieved in FA's physical and financial condition during 1972 and 1973 and that performance was well below the established targets. No line closures had occurred, workshop consolidation had not begun, staff strength was not reduced, locomotive availability had not improved and the railway was showing an operating ratio above 200. In April 1974, the Bank offered the Government and FA one of two alternatives: (a) to renegotiate the loan on the basis of new targets and specific actions to be taken by the Government and FA; or (b) to cancel the balance of the loan. The Government and FA chose the latter. The situation continued to deteriorate through early 1976. Over the period 1973-1976, FA employees increased from about 142,000 to about 158,000, and traffic continued to decline. While the initial decline in traffic was largely due to competition from other modes of transport (principally road), the lack of railway capacity, caused mainly by poor availability of locomotives and rolling stock, has been a significant contributing factor. B. Redimensioning 2.03 Redimensioning the railway to make its scale, operations and manage- ment better suited and more responsive to modern conditions has been discussed by numerous Government administrations for the last 20 years. However, only in the last two years has any significant and concerted action been taken. Since the new Government assumed power in March 1976, 5,656 km of track have been closed (66% of which is planned for removal as well), reducing total route-km from 39,779 to 34,123 (Map IBRD 13699); 374 stations on other lines have been closed; uneconomic intercity passenger train services have been cut, reducing intercity passenger train-km from 32.8 million to 18 million, a decrease of 45%; and staff has been reduced from 156,000 to 117,000, a decrease of 25%. 2.04 By any standards, these changes, compressed within such a short period of time, are impressive and represent the determination with which the present Government has sought to reform the railway. For this reason, more than any other, the Bank has considered new lending operations for the railway. However, FA started from a particularly bad position and, while significant steps in the right direction have been taken, much more needs to be done. Even with the reduction of 5,656 km of line, about 50% of the remaining system still carries only about 25% of the traffic; intercity passenger traffic densities on many lines, which are paralleled by good roads, are well below economic levels, leaving considerable room for further reduction of service; workshops need to be consolidated; and the staff strength of 117,000 is still excessively high (although there are some shortages in certain key operating areas). The railway remains divided into six separately administered lines, which adversely affects operations. FA's management and the Argentine Government are aware of these problems and are committed to their resolution through further action as discussed below.  - 8 - 2.05 The Government, under the direction of the Subsecretaria de Transporte (SST), has agreed to undertake a study of uneconomic lines and stations, the foreign exchange cost of which is to be financed under the proposed loan. The implementation schedule and cost of this study are shown in Annex 1. The Government agreed during negotiations to furnish to the Bank, by June 30, 1980, a schedule for carrying out the recommendations of the study, including a system of compensation for those uneconomic lines and stations which would continue in operation (para 3.15). The uneconomic lines study is intended to supplement work done by the railway, which, by the end of 1978, studied some 21,430 km of line,of which about 9,159 km have been recommended by the railway for closure. The railway's studies are based essentially on financial analysis (revenues and costs from the stand- point of the enterprise) and focus on the most conspicuous cases for aban- donment where traffic levels are extremely low and show little promise of growth. To date, this approach has been adequate and has yielded useful results. The purpose of the study to be directed by SST is to introduce economic analysis and to include some of the less obvious cases not yet covered by the railway's studies. The Government has agreed to the following minimum program for line closures which has been incorporated into the Plan of Action (para 3.14) pending the results of the study, at which time the Bank and the Government will have to agree on a. revision of the Plan of Action: Lines to be closed System route-km (end of year) (end of year) 1976 - 39,779 1977 5,000 34,779 1978 856 33,923 1979 3,644 30,279 1980 1,500 28,779 1981 500 28,279 1982 500 27,779 12,000 2.06 The Government, under the direction of SST, has also agreed to under- take a study of intercity passenger services, the foreign exchange cost of which is to be financed under the proposed loan. The implementation schedule and c:ost of this study are shown in Annex 1. The Government agreed during negotiations to furnish to the Bank by April 30, 1980 a schedule for carrying out the recommendations of the study, including a system of compensation for those uneconomic services which would continue to be provided (para 3.15). As a minimum commitment, the Government has agreed (see Plan of Action, para 3.14) to reduce intercity passenger train-km from 18 million in 1978 to 16 million in 1980 and to hold this level of service constant over the remainder of the plan period pending the results of the study, at which time a final  program will have to be drawn up. The important role to be played by SST in these studies will ensure adequate coordination, as appropriate, with the NTP (para 1.18). The possibilities for consolidating workshops will also be examined in a study to be financed under the proposed loan (Annex 1). FA agreed during negotiations to furnish to the Bank, by September 30, 1980, a workshop rationalization program that takes into account the long term needs of the railway (paras 2.25 and 3.15). 2.07 A study of future staff needs and salary levels will also be financed under the proposed loan. The implementation schedule and cost of this study are shown in Annex 1. Pending the results of this study, FA plans to reduce staff from about 117,000 to 105,000 at the end of 1982. FA agreed during negotiations to furnish to the Bank, by December 31, 1980, a final manpower plan based on the findings of the study (para 3.15). The manpower targets set out in the Plan of Action (para 3.14) would at that time be revised accordingly. 2.08 The foregoing redimensioning program should contribute significantly toward achieving the project's overall objective of putting FA firmly on the path of becoming a financially viable enterprise. It should be recognized, however, that, given the present situation, it would be unrealistic and perhaps even counter-productive, by setting unattainable goals, to expect FA to achieve full financial viability by the end of the railway's current plan period (1979-1983). The proposed project (Chapter III) and redimensioning program have been designed so that full financial viability could be achieved with reasonable likelihood within the succeeding plan period. It is in this longer term perspective that the Bank's proposed participation in the project should be seen. C. FA Organization 2.09 FA is a state enterprise under the supervision of SST. It is responsible for the operation of the railway and has authority to approve its internal organization and regulate its affairs. As prescribed by its charter, FA is expected to operate along commercial lines. However, the Government exercises a considerable degree of control over FA in its review of its invest- ment plans, tariff levels, annual operating and capital budgets, and financial statements. Government policy toward FA has been a key factor in determining tariff levels, staff numbers and salaries, investment levels (and the costs of items procured from local industry), funds available for maintenance and the rate at which uneconomic lines and services have been eliminated. The present Government has exercised this responsibility with generally beneficial effects in the areas of staff reductions, line closures, phasing out of uneconomic services and tariff increases. On the other hand, it has failed to approve adequate budget allocations for permanent way and rolling stock maintenance, and it is currently requiring FA to borrow to finance a share of its operating deficits, which is detrimental to FA's longer term financial prospects. These matters were discussed during loan negotiations, and a coordinated plan was prepared, not only for the redimensioning process but also for maintenance (para 2.60). FA also agreed not to incur any debt to finance its operating expenses (para 5.21). Once the basic redimensioning process is completed, rehabilitation is well advanced and an appropriate subsidy policy is introduced (para 5.23), the Government should permit FA to have greater autonomy. This  - 10 - is a matter, however, which will have to be pursued by the Bank in possible future lending operations. Assuming that satisfactory progress is made in the proposed loan, a second operation to finance projects beginning in the years 1981/82 of FA's investment plan would be appropriate to continue the BanK's participation in the long-term rehabilitation process. 2.10 The organization of FA is shown in Charts 1 and 2. Day-to-day operations are the responsibility of the General Managers of the six railways which constitute FA. 1/ Overall planning, operating norms, inter-railway coordination and policy matters are handled in the headquarters office in Buenos Aires. The proposed loan includes provision for technical assistance to help strengthen the planning capacity of FA's Planning Department which, although competent in engineering fields, is weak: in project evaluation and financial analysis (Annex 1). 2.11 In the early 1970s, FA attempted to reorganize by reducing the number of separate railway administrations from six to four (two broad gauge subsystems, one standard gauge subsystem, and one narrow gauge subsystem), by centralizing accounting and financial management, and by reorganizing the commercial department. However, because of opposition from the railway unions and the individual lines as well as an apparent lack of resolve by the Government at that time, this process was largely halted and, in some areas (e.g., accounting), even reversed. The process has now been renewed in traffic management, shop centralization, the commercial department and in accounting and financial management (paras 2.60 to 2.65). D. Management, Staff and Training 2.12 The management of FA is the responsibility of the President, a Board of Directors and an Executive Vice President, all of whom are appointed by the Government. Military personnel continue to occupy a number of the senior administrative positions, while senior technical posts are held by civilians. The management is generally competent in technical fields, but its experience in business and commercial areas is weak, owing largely to the neglect of these matters in the past. Because of low salaries in comparison to other enterprises, there is a shortage of middle management and technical staff. However, FA has recently increased salaries for management personnel by con- centrating wage increases among those in the higher positions, and it plans to continue this practice. 2.13 The number of staff has varied widely over the years - 219,000 in 1956, 171,000 in 1966, 138,000 in 1973 - increasinrg again to 157,000 in early 1976 and being reduced to some 117,000 in 1978. About half the reductions since 1976 have been made possible by laws requiring early retirement in some categories and the dismissal of so-called troublesome personnel and those with physical and mental disabilities. The other half of the reductions 1/ The six lines are the Roca, San Martin, Mitre and Sarmiento (broad gauge), the Urquiza (standard gauge) and the Belgrano (narrow gauge).  - 11 - occurred for reasons of death, normal retirement and voluntary separation to seek higher pay in other jobs outside the railway. It is proposed to reduce the staff further, gradually, to achieve the target of 105,000 by the end of 1982 through normal attrition. This goal should be possible by further rationalization of train operations, stations, yards, and shops and the closure of uneconomic lines. 2.14 The rapid reduction in numbers has caused shortages in some areas, especially in permanent way gangs on the Roca and Sarmiento lines (there is a surplus on the Belgrano) and in certain key areas such as skilled shop mechanics, engineers and computer specialists. FA is authorized to recruit certain key staff, but emphasis is first being placed on the transfer of staff from areas of geographical surplus to those where there are shortages. This transfer is difficult to achieve because of the lack of housing and the competition from other higher paying jobs in areas where deficiencies exist. 2.15 FA proposes to start recruiting key staff in 1979 and to embark on a program of recruiting apprentices to improve the age structure of its personnel. FA's personnel and training organizations were reviewed during project preparation and found to be well manned and equipped to handle recruitment, training of new staff and retraining of staff redeployed because of rationalization programs. 2.16 FA clearly needs time to solve the problems created by the large staff reductions of the last two years and to define its future manpower requirements. A study (Annex 1) to be financed by the proposed loan will address this problem and help to define an appropriate salary policy and standards for manning low density lines. Until this study is completed and its conclusions are reviewed, the Government proposes that FA's total wage and benefits bill be kept constant in real terms by proportionate reductions in staff. Staff salaries decreased by about 38% in real terms between 1975 and 1977. They were increased by about 25% in 1978 over 1977, and further planned increases will help to restore an additional 10% by 1982. These increases should help to improve the situation until FA adopts an appropriate manpower and salary policy as a result of the planned study. E. Railway Facilities (i) Track 2.17 Route-km total 34,123, distributed among three gauges as follows: 20,656 km of broad gauge (1.676 m), 10,694 km of narrow gauge (1.000 m) and 2,773 km of standard gauge (1.435 m). More detailed route and track data are given in Table 2.1. The suburban system in Buenos Aires accounts for 570 km, of which two broad gauge lines (Sarmiento and Mitre) and the one standard gauge line are electrified. Except in the Buenos Aires suburban system where there is double and - in some cases - quadruple track, most of the lines are single track, with favorable alignment characteristics. Nearly 90% of the track is straight with low gradients. The mountainous sections are compara- tively small and of minor importance from the point of view of traffic. Since  - 12 - the FA system grew out of 19 different railways, the rails are of many varying types in terms of profile and weight, ranging from 29 to 50 kg/m. Welded rail (30-36 m) exists on about 20% of FA's track length. Ties are predominantly timber (quebracho) of very high quality. 2.18 Because of insufficient renewals over many years, some 40% of the track on the main lines is over 40 years old. Many of the bridges are in poor condition, and several of them cannot support diesel locomotives without serious speed restrictions. The ballast situation is generally very poor, and, on most lines, the track is laid over a compacted earth bed or over a mixture of gravel and earth, leading to poor drainage and weight distribution. Only about 8,000 km of main line track and about 2,000 km of the complementary network are provided with broken stone ballast, often of limited thickness and poor quality. Rail fractures and derailments due to rail and foundation defects are frequenit. 2.19 The project includes the complete renewal of 1,142 km of track plus partial renewal of 6545 km with the replacement of only some track components. In addition, several bridges will be strengthened, mainly on the trunk lines which are to be rehabilitated. The project also includes some light machinery for track maintenance. (ii) Motive Power and Rolling Stock 2.20 FA's motive power and rolling stock fleet is shown in Table 2.2. The fleet, as of January 1978, consisted of 1,171 diesel locomotives of 22 different types, 681 steam locomotives, 57,351 wagons of various types in- cluding cabooses, 474 diesel rail cars, 653 electric coaches and 3,652 passenger coaches. 2.21 Steam locomotives are used mainly as shunters in the yards and on some trains in sections which cannot support the heavier diesel locomotives. FA plans to scrap the steam locomotives by eliminating them from train oper- ation by 1980 and from the yards by 1982 (Table 2.3). 2.22 The average availability of diesel locomotives is about 63%. Such poor performance is due in large part to a chronic shortage of spare parts and to the multiplicity of types of locomotives, which makes maintenance and procurement of spares difficult. The problem of importing spare parts has been largely alleviated by a recent Government decree which allows FA to import up to US$100 million worth of spare parts in three years despite the "Compre Argentino" law. 1/ The locomotive scrapping and purchase programs have been designed ito gradually reduce the number of types of locomotives from the present figure of 22 to 14 in 1982. FA's diesel locomotive require- ments are shown in Table 2.4. 1/ The Compre Argentino" law provides that no import license will be issued if the item to be imported is, or can be, manufactured in Argentina.  - 13 - 2.23 FA has a high percentage of over-aged wagons; roughly 68% are over 40 years old (Table 2.5). FA plans to scrap almost 6,000 wagons by the end of 1981 (Table 2.6). To complement this program, FA plans to purchase new wagons and to rehabilitate others, largely through the replacement of bogies. 2.24 FA's scrapping, rehabilitation and purchase programs for locomotives and rolling stock through 1980 are reasonably well defined and have been derived with the assistance of consultants (ITALCONSULT, Italy) and the Bank. To define more precisely FA's requirements after 1980, technical assistance is included in the proposed loan (Annex 1). This program will be integrated with the program for rationalizing the maintenance workshops (para 2.25). (iii) Workshops 2.25 FA has 22 workshops for the maintenance and general repair of motive power and rolling stock, 12 of which are on the broad gauge, four on the standard gauge and six on the narrow gauge. These workshops developed with the individual railways, and each had several production lines for steam and diesel locomotives, railcars, passenger cars and freight cars. A program to rationalize the workshops was started under the first Bank loan, but no significant results were achieved. Under the present Government administration, FA has begun to reorganize its workshops in order to achieve greater specialization and thereby to increase efficiency and improve quality control. Instructions have already been given for the closure of three workshops (Strobel, Cruz del Eje and Santa Fe). The Villa Luro workshop is to be merged with Liniers, and there is a proposal to sell the Mendoza workshop to private industry. The staff strength of FA workshops, which stood at 20,005 in 1976, was reduced to 15,300 by the end of 1978. A small team of experts from SOFRERAIL, France, is presently studying the workshops and line maintenance sheds and is expected to present its recom- mendations within about one year, to be followed by a period of implementa- tion. The SOFRERAIL study will be made available to the Bank, and this work will be coordinated with the study of motive power and rolling stock require- ments, to be financed under the proposed loan (Annex 1). The proposed Bank-financed study is aimed at developing a workshop rationalization program that takes into account the long-term needs of FA. (iv) Signaling and Telecommunications 2r26 FA's signaling installations are generally very old (more than 30-40 years), somewhat obsolete and of different types. Electric controls and inter- locking between signals and crossings are limited, and, in stations, they are mechanical. Many of the level crossings in urban areas are unprotected by signals. The telecommunications system consists of telephone installations for train operation, for which transmission is by overhead lines. The wires are old and unreliable, the equipment is heterogeneous, and the level of communications over various parts of the railway is poor. FA will soon install automatic telephone exchanges in the zonal headquarters of Buenos Aires, Tucuman and Cordoba and a long distance carrier system over much of the network.  - 14 - 2.27 There is a need for an integrated signaling and telecommunications system to enable FA to change over to modern met:hods of train control and to provide management with the necessary information systems. The project includes some signaling works in the suburban Buenos Aires area, ths reh I41i tation of telephone transmission lines with the necessary ancillary equipment, and a study to be financed by the proposed loan for the development of an integrated signaling and telecommunications network (para 3.06). (v) Other Property 2.28 In general, the buildings, stations and plant of the railway are old but reasonably well maintained. The project includes some locally financed minor buildings for housing for workers, stores, cabins, etc., to complement the line works. F. Traffic (i) Freight Traffic 2.29 Freight traffic statistics by commodily and gauge for the period 1973-1977 and the forecasts, including provisional 1978 figures for tonnages only, for the period 1978-1983 are given in Tab:Les 2.7 and 2.8 respectively. Freight densities for 1977, and as forecast by the end of the plan period (1983), are shown on Map IBRD 13699. 2.30 Freight traffic reached its peak in 1928/29, declined during the Depression years of the early 1930s, recovered during the period of the Second World War and then declined from 35.4 mi:Llion tons in 1946 to 23.4 million tons in 1965, a decrease of 34%. Ton-km over the same period declined less sharply from 17.3 to 14.2 billion, a decrease of only 18%, as shorter haul traffic was lost to highway competition and the average haul increased from 490 to 607 km. While the shift to road transport during this period was experienced by many countries in the world, it probably would have been much less in the case of Argentina (given the limited extent of the paved highway network that existed for most of this period) had the railways been able to handle the business that was offered. The cont:inued neglect of the railways and the consequent progressive physical deterioration of the motive power, rolling stock and track prevented this from happening. During the rest of the 1960s and early 1970s, with increased competition and the continued neglect of the railways, traffic showed a very gradual but persistent decline. In 1975, freight traffic had fallen to 16.3 mill-ion tons and 10.7 billion ton-km (less than one-third the level of traffic that the railways once carried). 2.31 Freight traffic began to increase in 1.976; tonnage increased by 3% and ton-km by 3.3%. In 1977, freight traffic inicreased again, reaching 19.8 million tons and 11.5 billion ton-km, representing increases of 15% and 5.4% respectively. The very exceptional increase in tonnage and the modest but significant :increase in ton-km in 1977 are raainly explained by a large increase in grain traffic (33%) which has an average length of haul (about 270 km) considerably below the average for all traffic, which decreased from 610 km in 1976 to 579 km in 1977. 2.32 The main commodities carried by the railway in 1977, in order of importance in terms of ton-km, were: sugar (11,'), fuel oil (11%), wine (7%), wheat (7%), petroleum (6%), cement (5%), sorghum (5%), mineral products (5%), corn (5%), forestry products (4%), and limestone (4%). Some of the most important traffic flows in the system include: sugar (over one million tons  - 15 - per year) from Tucuman to Buenos Aires (over 1,000 km); wine (over 600,000 tons per year) from Mendoza/San Juan to Buenos Aires (about 1,000 km); grains (about 7.5 million tons per year) from the vast fertile plains surrounding and including the province of Buenos Aires to consumption centers and ports on the lower Parana River and Atlantic coast (an average distance of about 330 km); cement (about 600,000 tons per year) from the provinces of Cordoba, Neuquen and Santiago Estero to Buenos Aires (an average distance of about 650 km); heavy fuel oil (almost 900,000 tons per year) from Mendoza to San Lorenzo (900 km); limestone (about 212,000 tons per year) from Mendoza to Buenos Aires (over 1,000 km) and salt (about 270,000 tons per year) from Neuquen to Buenos Aires (about 900 km). These main traffic flows alone account for about 50% of FA's total freight traffic. Densities in 1977 (Map IBRD 13699) range from a high of over two million tons between Mendoza and Ruffino and over one million tons between Buenos Aires and Bahia Blanca, Rico and Bahia Blanca and Rosario and Santa Fe (all on the broad gauge subsystem), to less than 100,000 tons on some parts of the standard and narrow gauge subsystems. Freight transferred between gauges is relatively small, amounting to 60,000 tons in 1977, or about 3% of the total freight traffic. 2.33 Over the forecast period (1978-1983), tonnage is expected to increase by 4.5% per annum to about 26 million, and ton-km by 3.7% per annum to about 14.2 billion. The average length of haul for total traffic is expected to decrease to 547 km as grain traffic, with its shorter haul, becomes relatively more important. These freight traffic forecasts are attainable provided, of course, that FA accomplishes the Plan of Action described in paragraph 3.14, particularly with respect to the availability of locomotives and the produc- tivity of wagons. Also important in this regard are the purchases of new, locomotives and rolling stock and the rehabilitation of the track included in the project. The forecasts, representing the combined work of consultants and Bank staff, are largely based on regression analysis, with modifications. Regression equations for each commodity, relating total national supply (Table 2.9, derived from detailed market and production possibility studies by regions) to railway traffic, were used. The results were modified to account for those markets where, on the basis of more detailed information, it was believed that the railway would have a greater or smaller role to play than *the regression analysis would indicate. 1/ (See paragraphs 2.41-2.49 for a discussion of 1/ Some of the most important adjustments which were made to the regression analysis include those for: petroleum, where railway traffic is expected to decrease because of the decreased yield of the Carmancito oil field (at the same time, market expansion is not envisaged because of competi- tion from pipelines, para 2.42); fruits and flour where competition from road transport is expected to hold railway traffic to present levels; livestock (cattle), where increased competition from trucks is expected to progressively diminish this traffic; firewood, where railway traffic is expected to decrease as consumers substitute other fuels; petroleum coke (included in the category combustible minerals), where railway traffic is expected to increase as the result of a recently negotiated contract with the shipper; and grains, where the railway is expected to participate in an increasingly larger share of the market during the latter part of the plan period as the railway is rehabilitated and the grain storage project is completed. The locations of the planned grain storage silos are shown on Map IBRD 13699.  - 16 - FA's competitive position with respect to other modes of transport.) Ton-km were then forecast by commodity by applying estimates of average lengths of haul, which, for only a few commodities, are expected to be significantly different from present averages. To obtain line densities, the tonnages by commodity were then distributed among the lines irI the same proportions as exist at present with the exception of grain traffic, which was adjusted to account for the grain storage project planned to be in full operation in 1983; this project, at least over the forecast period, is the only factor expected to alter significantly the relative importance of the railway's main origin and destination pairs for principal commodities. L/ (ii) Intercity Passenger Traffic 2.34 Intercity passenger traffic statistics by gauge for the period 1970-1977, together with the forecasts for 1978-1983, are given in Table 2.10. Intercity passenger traffic densities at present (1978) are shown on Map IBRD 13699. 2.35 In contrast to freight, intercity passenger traffic continued to grow in the period following the Second World War, due partly to the growth of population and urbanization and probably also to the low level of fares maintained during this period. However, intercity passenger traffic reached its peak in 1965 with 53.7 million passengers and 6.4 billion pass-km. Since then, it has been steadily decreasing as the counitry's road system and road vehicle fleet have increased. In 1977, the railway carried 15 million intercity passengers for an average journey of 293 km per passenger, or 4.4 billion pass-km. 2.36 The present Government has been following a policy of reducing uneconomic passenger services on those low density lines where public road transport is available at lower cost to the economy. Intercity passenger train-km were reduced from an annual level of 32.8 million at the end of 1975 to an estimated 18 million for 1978 (based on present train schedules), a decrease of 45% in a period of three years. While this progress is excep- tional judging from the experience of many other countries, there is still scope for further reductions. Densities (Map IBRD 13699) on several parts of the narrow and standard gauge subsystems are below 200,000 passengers per annum. Preliminary comparative cost studies indicate that the breakeven density (above which rail is less costly than bus transport) is likely to be considerably higher. Of course, there are a few lines where traffic is already quite high (above one million passengers per annum) and, if the service can be improved, the prospects for further growth appear good. These lines are principally between Buenos Aires and Mar del Plata, Rosario and Santa Fe. 1/ Railway traffic forecasts derived from a full network analysis based on commodity origin and destination matrices would, of course, have been ideal. The results from such an approach should be available in 1980 under the National Transport Plan. In the meantime, the approach adopted is considered sufficiently reliable for the purposes at hand, which are, basically, to identify immediate investment priorities and to forecast operating and financial results for the next few years.  - 17 - 2.37 With the need to reduce some intercity passenger services further ancl to develop others, the Government has agreed to have SST undertake a study of the railways' intercity passenger services. The study, which would examine specific lines, would be included in the proposed project. The implementation schedule and cost of this study are shown in Annex 1. Pending the results of this study, the Government has agreed to a target of 16 million train-km by 1980 (2 million less than in 1978) to be held constant over the plan period (P:Lan of Action, para 3.14). Based on this level of service, the tentative intercity passenger forecast, to be revised and agreed with the Bank when the results from the study are available, shows a marginal decrease in both passengers and pass-km, from 15 million and 4.4 billion, respectively, in 1977 to 14.9 million and 4.3 billion, respectively, in 1983. (iii) Suburban Passenger Traffic 2.38 Suburban railway passenger traffic statistics for the period 1970-1977, together with the forecasts for 1978-1983, are given in Table 2.11. Traffic densities are shown on Map IBRD 13700. 2.39 The suburban rail service in the Buenos Aires area extends for about 60 km from the city. It accounts for about one million daily passenger trips at present, or about 8% of the total passenger trips in the metropolitan region. The suburban rail service is actually of greater importance than these figures would indicate since it serves the people who make the longest trips. The average journey distance for the suburban passenger is about 20 km. The volume of passenger traffic on the suburban railway remained more or less constant during the 1960s, declined during the early 1970s, and then rose again to 411 million passengers in 1976. However, in 1977, it decreased signifi- cantly to 387 million passengers, partly because of the deteriorating level and quality of service, particularly on the southern (Roca) and narrow gauge lines and partly because of deliberate reductions in service in order to release locomotives for the increased transport of grain as the railway was caught short of the necessary motive power. This tradeoff was clearly benefi- cial to FA from the financial point of view. 2.40 The growth of suburban railway traffic in the future will depend on the demand but, also critically, and, perhaps most importantly for the next few years, on the extent and rate at which improvements are made in the level and quality of service. Thus, it is impossible to separate the traffic forecasts for this service from the formulation of a master plan for the suburban railway. The determination of traffic forecasts, therefore, is included as one of the tasks to be accomplished under an overall suburban railway master plan study to be financed by the proposed loan. The implemen- tation schedule and cost of this study are shown in Annex 1. For planning purposes, pending the results of this study, the Government has agreed to hold suburban passenger train-km constant at the estimated 1978 level of 27.2 million (Plan of Action, para 3.14). Upon the assumption of constant train-km, the tentative suburban passenger forecast, to be revised and agreed with the Bank when the master plan study is available, shows an increase from 387 million passengers in 1977 to 428 million passengers in 1983. In addition, FA and the Government agreed during negotiations to discontinue, by the end of 1979, the small suburban rail services that are provided in a few cities outside of Buenos Aires where the densities are extremely low and bus services are more economical.  - 18 - G. Intermodal Freight Competition 2.41 In analyzing FA's competitive position with respect to freight traffic, the latter may be divided into two basic categories--grains and other traffic. Most of FA's non-grain traffic, the composition of which is fairly diverse and comprised mostly of bulk commodities, has average hauls above 800 km and, for several commodities, above 1,000 km. The following average hauls for commodities, which constitute about 52% of total railway freight traffic (grains account for another 18%), are representative: sugar, 1,115 km; wine, 1,071 km; combustible minerals, 938 km; other minerals such as sulphur, borax, iron, zinc and lead, 800 ki; heavy fuel oil, 792 km; cement, 547 km; salt, 827 km; limestone, 830 km and forestry products including logs and sawn lumaber, 1,178 km. For these principally bulk, long haul traffic flows, trucking in Argentina is not competitive on groun,ls of cost. Even for cement, with an average haul of 547 km, trucking is considerably more costly than rail; at: an average haul of around 500 km, the railway tariffs and direct costs for transporting cement are about 50% and 43%, respectively, of the truck tariffs and costs. It is quite apparent, therefore, that the inroads that trucking has made into the railway's market Eor these commodities in the past, aside from the elimination of purely short-haul traffic, have been due not to market factors but essentially to the railway's inability, through its own inefficiency and generally deficient physical condition, to carry what it was offered (para 2.30). 2.42 For petroleum and the lighter petroleum products, however, which constitute about 8%' of total railway freight trafiic, FA does compete directly with pipelines, which provide a cheaper mode of transport for these commodities and which now interconnect most receiving ports, oil fields, refineries and storage areas (para 1.12). No reversal in the railway's present downward trend for these commodities is expected. The railway is still competitive, however, in the transport of heavy fuel oil, which cannot be transported by the pipelines now existing in Argentina. 2.43 The market for grain traffic deserves special attention since the average hauls are relatively short. The railway's average haul for this traffic is about 270 km, a distance at which trucks are normally competitive. An analysis of tariffs in the province of Buenos Aires in November 1977 indicates that, for the distance equal to the average length of haul by rail, the rail tariffs for wheat, corn, sorghum, vegetable oil seeds and other grains are about 79%, 80%, 73%, 56% and 84% respectively of the truck tariffs. The rail tariff for grain tends to be about 25% lower than the truck tariff at distances above 100 km, specifically about 78% of the road tariff at 275 km, 73% at 400 km and 74% at 600 km. In order to determine whether the rail tariff for grain (USg1.75 per ton-km based on the average length of haul) covers costs and is, in fact, an accurate reflectiDn of FA's real competitive position or, if not, whether FA would be able to raise tariffs to remunerative levels and still sell its services in a competitive market, both railway and trucking costs must be considered. For this purpose, a comparative cost analysis was made based on current average trucking and railway operations for grains. Average avoidable costs for both modes (excluding administrative and fixed right-of-way costs) were used. The results are summarized as follows:  - 19 - Road and Rail Grain Transport Costs (USe ton-km) Rail: BG = 1.70; NG = 2.0; SG = 2.40 Truck: 2.0 2.44 First, it may be noted that the rail tariff for grain is about equal to the directly associated costs on the broad gauge subsystem, about 88% of the costs on the narrow gauge subsystem and only about 73% of the directly associated costs on the standard gauge subsystem. Thus, the comparison of road and rail tariffs for grain is a reasonably accurate reflection of FA's competitive position only on the broad gauge subsystem, which, at present, accounts for 88% of the railway's total grain traffic. Since the rail tariff for grain is significantly less than the directly associated costs on both the standard and narrow gauge subsystems, tariffs at present cannot be used to measure the railway's competitive position on either of these two subsystems. 2.45 The comparative road and rail cost analysis indicates that, for the transport of grains, the directly associated rail costs are below truck costs only on the more important broad gauge subsystem. Rail costs for the trans- port of grain on the narrow gauge subsystem, which accounts for about 10% of the railway's total grain traffic, are equal to truck costs and are signifi- cantly more than truck costs on the standard gauge subsystem, which accounts for about only 2% of the railway's total grain traffic. The relatively high cost on the standard gauge subsystem is partly explained by an average haul for grain (about 203 km) which is about 25% below the average for the whole railway. Thus, if the railway were to try to charge a remunerative tariff for grain today, based on present costs, on either the narrow or standard gauge subsystems, it would definitely lose grain traffic to trucking. The scope for raising grain tariffs in real terms on the broad gauge subsystem (where tariffs are already about equal to the directly associated costs), in order to cover some of the railway's administrative overhead and fixed right-of-way costs, is rather limited because the margin by which truck costs exceed rail costs on this subsystem is only about 18%. One would normally expect this margin to be at least above 20% in order to neutralize such factors as door- to-door service and greater scheduling flexibility, which generally characterize truck transport and which have not been taken into account in the direct cost comparisons. 2.46 By introducing improvements in operating efficiency as indicated by the targets under the project, railway costs for the transport of grain can be reduced by about 9%, 7% and 12%, on the broad, narrow and standard gauge subsystems respectively. This should enable FA to experiment with raising grain tariffs above the directly associated costs on the broad gauge subsystem. However, the envisaged cost reductions would not be sufficient to permit grain tariffs to be raised to remunerative levels on either the narrow or standard gauge subsystems without substantial loss of traffic. It should be enough to make the transport of grains on the narrow gauge subsystem an economical  - 20 - proposition which is important in its own right by lowering rail costs below trucking costs. However, further cost reductions would be required on the standard and narrow gauge subsystems before the former could be expected to provide an economic service and both subsystems could charge a remunerative tariff for grain without losing traffic. It was agreed during negotiations that FA would prepare and furnish to the Bank, for its review, by December 31, 1979, a program for the improvement of its total grain transport operations. 2.47 Thus, while the average hauls for grain are relatively short, it appears that the railway can compete effectively for this traffic (with the possible exception of the standard gauge subsystem which, in any case, is relatively unimportant for such traffic) using modern, unitized methods of handling and transport. Better terminal facilities for grains on railway sidings in both production and port areas and conversion of general wagons into specialized hopper wagons, as provided under the Bank's grain storage project, more new specially designed hopper wagons, as provided under the proposed project, and the usea of more block trains are all means toward achieving this end. 1/ The alternative of not providing the railway with this capacity would mean that, in the short run at least, the country's grain export targets probably could not be achieved and, eventually, as trucks met the demand, that the cost of transport would be substantially higher than otherwise necessary. 2.48 The foregoing generally optimistic assessment of FA's present and prospective competitive position with respect to freight traffic should be interpreted with a c:ertain degree of caution. The analysis is based on an evaluation of market: conditions (cost and demand characteristics). However, as the past record indicates (para 2.30), the inefficiency of the railway, as reflected in FA's inability to carry all the traffic it was offered, has often prevented the railway from assuming its real competitive position. One of the main objectives of the proposed Bank projecl: is to reduce this ineffi- ciency and allow FA to carry more freight. This aspect would have to be care- fully monitored by the Bank during the supervision process. 2.49 A somewhat special problem pertains to the standard gauge subsystem. This subsystem is involved in the transport of fore!stry products as well as tea from the Misiones region in the northeastern corner of Argentina (the main production area for this railway subsystem) to the Buenos Aires area. In the future, this subsystem could face severe competition from river transport once the rapids on the upper Parana River are eliminated. by the Yacyreta hydro- electric dam now planned for completion by the mid or late 1980's. In fact, once the Parana River, which parallels the entire trunk line of the standard gauge subsystem, becomes navigable throughout, and, if the river fleet is expanded (at present it is too small to consider), the economic and finan- cial viability of the entire standard gauge subsystem could become an issue. 1/ About 70% of all railway grain traffic at present is carried in block trains. However, use of many non-specialized wagons and inadequate terminal facilities have prevented this method of operation from achiev- ing the full economies. Both the Bank's grain storage project and the proposed project: are directed at removing these constraints.  - 21 - However, these developments are not likely to occur before the end of the next decade. In order to minimize risk, present investments in this subsystem should be confined to meeting only immediate and near-term future requirements. The NTP, which has the perspective of a 20-year planning horizon, should be able to provide further clarification of this issue. H. Operations 2.50 Table 2.12 gives a summary of operating statistics for the years 1968 to 1977. Statistics by gauge are given for 1977 (Table 2.13). There is room for considerable improvement in train loads and speeds, wagon utiliza- tion and locomotive and wagon availability. For suburban passenger trains, average occupancy is good (75%), and, for intercity passenger trains, the average occupancy is improving because of the recent reduction in the most uneconomic services, which is not yet reflected in the available data. Serious accidents are not uncommon, and derailments due to track and vehicle defects are numerous. 2.51 FA is continuing to implement a plan, started with SOFRERAIL's technical assistance in 1970, to rationalize train operations. Implementation was completed only on the standard gauge subsystem, and, although started also on other lines, the work was never completed because of a lack of locomotives. The plan involves dividing FA's system into operating zones within which train programing and wagon management and control are carried out. FA also plans to improve wagon control by reducing the delivery time of empties. A pilot project is being carried out on one of the broad gauge lines. Full implementation of these improvements will depend upon the rate of improvement of FA's communications (presently under way) and the recruitment of qualified personnel in FA's computer center. FA is also carrying out a program (again with SOFRERAIL's assistance) to reduce the number of yards, concentrating on some 24 major yards and rationalizing their operations. 2.52 Other programs to increase the number of block and unit trains 1/ and to generally increase the size of trains are being implemented as locomo- tive availability increases. FA's program of shop rationalization is described in paragraph 2.25 preceding. I. Commercial Department 2.53 In 1971, FA, with the assistance of SOFRERAIL, established the so-called first commercial zone office in Tucuman as a pilot project. Because of opposition from the unions, this project was stalled, and only now a second commercial zone in Cuyo is being established (apart from Cuyo, commercial zones are to be established in Villa Mercedes, Rosario and Cordoba in the coming year). In all, 16 commercial zones will be established to replace the commercial departments on the individual lines. The zones I/ A block train is composed of freight cars having the same origin and destination, whereas a unit train is a block train carrying only one commodity. Neither needs intermediate shunting of wagons.  - 22 - overlap the geographical dividing lines between the individual railways of the FA system, which is consistent with the general policy of ignoring such historically determined divisions in reorganizing the administration and operations of FA. The new commercial zones will *be responsible directly to headquarters in Buenos Aires. They are expected to give greater flexibility in resolving problems (wagon shortages, for exampLe) and to reduce competi- tion between the lines, promote the efficiency, quality and sale of railway services and improve relations with users. Formerly these functions were carried out by the local traffic departments when they had time, with the result that the job was done poorly. The new commercial zones are to be established by personnel trained at the existing Tucuman office. J. Tariff and Costs 2.54 One of the reasons for FA's poor financiial results has been its failure in the past to adjust tariffs frequently enough to offset the effects of high rates of inflation on its operating costs. The new Government (March 1976) permitted significant real increases in passenger fares. Freight rates in real terms declined slightly and then were increased by a large percentage in late 1977 and again in early 1978. The Government's policy has been to approve tariff increases frequently enough to offset the effects of high rates of inflation on FA's costs. In order to facilitate the implementa- tion of this policy, approval of tariff increases is now required only from the Subsecretary of Transport and no longer from higher levels in the Ministry of Economy, as was required formerly. The Government is now prepared to go even further in granting commercial autonomy to FA. It was agreed during negotiations that the Government would not object to FA's changing freight tariffs, except in those cases where it felt that FA was exercising mono- polistic power. Passenger tariffs would still be subject to Government regulation; however, the Government is willing to adopt a rational tariff and subsidy policy for these services (para 5.23). With these changes in policy, the Government is clearly moving in the right direction. 2.55 With respect to costs, FA has made traffic costing studies and has determined the variable and fixed costs associated with the various railway services. There are many weaknesses, however, in these estimates, essentially because inadequate material costs are used in establishing maintenance costs for rolling stock and permanent way, inadequate depreciation allowances are included and there are general distortions which are inevitable in a highly inflationary environment. With these caveats in mind, an analysis of 1976 costs has been made. The results are reviewed in detail in Chapter V of this report, but some general findings are worth noting at this point. 2.56 Freight rates on the broad gauge subsystem did cover long-run marginal costs, although by a very small amount in 1976. RLte increases projected in real terms over the coming years will widen this margin and enable FA to reduce the losses from freight services on the standard arLd narrow gauge subsystems. 2.57 FA failed to recover the long-run marginal costs of the Buenos Aires suburban passenger services in 1976. With a projected increase of such rates from the equivalent of USVO.6 per pass-km in 1976 (USV12 per average trip) to  - 23 - USV1.35 (or US