Transcript of meeting of the Executive Directors of the IBRD and IDA, held on March 27, 1979 : Argentina - Second Railway Project

STRICTLY CONFIDENTIAL 1 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION March 27, 1979 Washington, D. c. The meeting of the Executive Directors was convened at 10:00 a.m. in the Board Room, 1818 H Street, N. w., I Washington, D. c., Mr. Roberts. McNamara, Chairman, presidin~. STRICTLY CONFIDENTIAL 2 1 Proposed Loan - Argentina (Second Railway Project) 3 STRICTLY CONFIDENTIAL 3 MR. McNAMARA: The first item on our agenda is a proposed loan to the Argentine in the amount of $96 million equivalent for a railway project and I'll ask Mr. Martinez to present it to us. MR. MARTINEZ: Mr. Chairman, Members of the Board: The Argentine Railways reflect, probably to a greater extent than any other Argentine institution, the damages that decades of political turbulence and economic disorder have l I brought to the country. Argentina, with economic characteris/ tics and a terrain highly suited to railway transport, was I  I I STRICTLY CONFIDENTIAL 11 4 I' I faced until two years ago with the progressive disintegration of its sizable railway infrastructure. Governments and labor unions had for many years arbitrarily interfered with the management of the railways and, because of short-term political considerations, tariffs were inadequate, uneconomic services were kept and the staff was expanded. The resulting railway operating deficits were covered by Government subsidies, averaging $360 u. s. dollars a year -- million u. s. dollars a year. Those subsidies, however, were not sufficient to finance adequate maintenance of the railway~s track and equipment, which has steadily deteriorated. Concurrently, service worsened and shippers 1 turned increasingly to road transport. Railway traffic and revenues declined. The vicious circle of low tariffs, high costs, low maintenance, poor service, diversion to road and re- duction in traffic could only be broken by decisive actions over a long period of time. The high political cost of such actions prevented previous Governments from carrying them out and as a result the railways were unable to fully play their role in the Argentine economy. Failure of the Government to take adequate action led to the cancellation of part of a Bank loan made in 1971 for the rehabilitation of the rail- ways.  5 STRICTLY CONFIDENTIAL The present Government has decided to attack this intractable problem at its roots and to initiate a program to restore the railways to the status of an efficient pur- veyor of a vital public service, using the economic and financial criteria that any enterprise, public or private, needs to apply if it is to be viable. To this end, it has already taken far reaching measures. It has increased railway tariffs substantially in real terms, reduced the staff by 25 percent, eliminated nearly 6,000 kilometers of uneconomic lines and many uneconomic passenger services and agreed to an investment program for railway rehabilitation, part of which the proposed loan would finance. These actions, which were far trom easy, and the initial very positive response to them, give grounds for confidence that the vicious circle that engulfed the railways have been broken and that the necessarily long recovery process is beginning. The Bank has played a delicate and important role in the efforts to rehabilitate the railways. The Government and the railways respect the technical competence and neutrality of the Bank and have relied frequently on Bank · advice. The role of the Bank has been primarily to propose  .I I' STRICTLY CONFIDENTIAL 6 technical parameters along which further tariff adjustments, line closures, staff reduction and investment should take place so that future actions along these lines could be taken in accordance with technical and economic considerations, instead of the largely political considerations of the past. There is full agreement that the railways should operate as a commercial enterprise in free competition with other transport modes. After the President's report was distributed, we were informed that the Government required a special contri- bution to the budget of 1979 from all public entities, including the railways. This contribution will not impair the railways' ability to carry out its investment program and we have received assurances from the Government that such program would be carried out as negotiated. Bank participation in this project is within a rigorously defined investment program and with a clear agreement on the Plan of Action to be followed to reach specific operational and financial targets. The Bank project covers subprojects which would begin during the first two years of the investment plan. Provided that improvements in the railways continue and the railways show that they are able to carry out  7 STRICTLY CONFIDENTIAL effectively the investments contemplated in the project, the Bank can hardly make a greater contribution to Argentina's development than to continue to be associated within a longer term framework in the rehabilitation of the railways. In the expectation that this will be the case, we ask you for your approval of this loan. MR. McNAMARA: Thank you, sir. May I have your questions and comments? Mr. Drake? MR. DRAKE: Mr. Chairman, I support this project. I would like, however, to make one general comment and to ask two related questions. As the OED has made clear, the Bank's past involvement in the railway sector has had more than its share of problems. And I am usually concerned every time we are faced with a proposal for a loan to the railway sector.I I This loan to Argentina will form, as you have said, part of a sizable financial plan for the railway sector, reaching a level of 1.2 billion by 1982. Judging by the Bank's limited participation in the project, there certainly seems to be a high level of commitment by the Argentine government to the railway sector, and I welcome this. However, I have some degree of concern about the I capacity of the Argentine railways to implement this ambitiour STRICTLY CONFIDENTIAL 8 plan. The Bank's description as the borrower on pages 14 and 15 of the President's report leaves in my mind a reasonable degree of doubt as to the capacity of the institu- 1 tion to implement the financing plan. 1982 is only three years away. As I said, I don't doubt the willingness of the Argentine authorities to improve the efficiency of their railway operations, but I find it rather difficult to believe that these efficient levels of operation will be achieved by 1982, especially if we consider that in 1977 government subsidies reached the level of 72 percent of the total cash flow for that particular year. No one could claim that the Argentine railways were efficient in 1977. I'm quite aware of the recent changes undertaken by the present government to improve the operations in the railway sector. I -- although I don't agree with all the actions implemented in 1 76, I believe that as a whole this move is a step in the right direction. I certainly hope that the outcome of this second loan will result in a different experience than the one we have on record with the first Bank loan to the Argentine railways. The President's report mentions that the Argentine railways• working ratio is expected to improve from 192 in 1977 to 141 in 1980. Are these reasonable targets? The STRICTLY CONFIDENTIAL 9 working ratio in 1976 was 196; in March 1976 a number of changes occurred, such as closing some tracks and stations, reducing long-distance passenger train services, reducing , the total staff by 40,000. After all of this drastic redimensioning, the working ratio was only four points less than in 1976. What assumptions have been taken into account to propose a working ratio of 141 in 1980 in the light of this history? And what are valid international comparisons? We were unable to find any in this report. The working ratios are talked about, but ' what's a valid -- what are some valid international comparisons in Latin America or elsewhere in the world? The second point is the question of staff shortages. I do not want to discuss the rather unusual arguments employed in the appraisal report to justify the dismissal of 40,000 staff, which have taken place since 1976 and which have resulted in shortages in some key areas of operations. I am, however, puzzled at the Government's proposal that until a study redefining future manpower requirements is prepared and its conclusions reviewed, the railways• total wage and benefits will be kept constant in real terms by proportionate reductions in staff. How long will it take for this study to be prepared and reviewed? And if we don't  10 STRICTLY CONFIDENTIAL have this study yet, what is the basis used for the proposal to reduce the staff by another 12,000 by the end of 1982? Thank you. MR. McNAMARA: Thank you. Mr. Martinez, would you start on these and call on any of your associates you wish. First, are the targets reasonable, specifically~ the working ratio of 141 in '80 and how will it be achieved? What assumptions have been used? What are international comparisons? MR. MARTINEZ: Obviously, when you are faced with an institution such as the railways that for so many years has been neglected, it has received no Government support of any kind, little investment for many, many years, you are always faced with a lot of difficulties in trying to define how much can they do and how fast. It's easier when you start, like in the case of the Argentine railways, from a very low base. It's hard to think that the railway can have lower ratios than these ratios So, to expect improvements in these ratios at this stage is going to mean more than anything else improvements in the basic infrastructure of the railways. Right now track, for instance, as a good example I, hasn't been touched for many years. The speeds in many areas I 11 ii  11 STRICTLY CONFIDENTIAL is so low that in some bridges they have to go at 15, 10 miles per hour. So it is not so much that the railways lack the technical people, lack the financial people, lack the capabilities of implementing an investment program. It 1 s a fact that for so many years there has been no investment: for so many years there has been a complete neglect on the railways. Many of those people are very much discouraged. We are confident that they can meet these ratios. We don't think these ratios are targets by no means. We think they are reasonable ratios they can meet, provided that they continue to receive the funds on time and that they perform as we know based on our contacts with them, the opinion of the consultants as they perform as we know they should be able to perform. However, the fact that the loan covers only a two- year investment plan, it's a direct reflection that in a very short time, in two years from now, we would like to be in a position to reassess to what extent the railways are able to carry out these activities. As to their capacity to do these things, we are substantially reassured with what they have done to date. They have done very difficult things which had proved to be -  " 12 STRICTLY CONFIDENTIAL and not only to dismiss the staff. They have carried out operational improvements within the railways, which are technically detailed to explain, but which show as great confidence that they will be able to implement these changes. So in conclusion, we don't believe these ratios are targets. We believe they are feasible. We are confident on the basis of what they've done in the past and our evalua- tion of the people there, the technical assistance they are going to receive, that this ratio should be attainable, and we expect to review them frequently with them during the course of the supervision of the project. MR. McNAMARA: What are international comparisons? MR. MARTINEZ: It is very hard to talk about international comparisons in railway ratios. That will vary from railway to railway. However, if you compare the Argentin, i railways with other railways in Latin America, with similar large countries, the Argentine railways are well below -- well, well below. And it is not that they have less capable people: I it is not that they have the most suited market for railway service. On the contrary, in many cases they have very I capable people and a very suited terrain for railway operation~. I 1 So it is mostly the fact that investments have not been taking  13 STRICTLY CONFIDENTIAL place in railways for many months, for many years, and that they cannot perform without equipment. MR. McNAMARA: Secondly, with respect to staff shortages, when will the study become available and what basis is there for the planned reduction of an additional 12,000 people? MR. MARTINEZ: The railways reached almost 200,000 people sometime during its career. It has been going up and down, up and down. It is a very difficult problem to try to define how many people an institution of that size needs. To determine precisely how many people you need, you would have to go through a very detailed analysis which takes years. We have used to a very large extent the judgment of the railways. It's an area in which we are concerned because we see so many people leaving and we wonder whether this enormous reductions will affect the railways' capability to operate. Up to now, that hasn't been the case. They certainly have some shortages of some specialized personnel in certain areas, but it happens to any institution of that size anywhere. So we are not too concerned about that. We are concerned about the level and that's why we expect that the figures we have here will be carried out,  14 STRICTLY CONFIDENTIAL will be refined when this study is available. I understand the study will be ready -- MR. STAAB: On page 32 of the appraisal report, there's a statement as to when the study will be available and that is September 1980 and the railway is required to furnish to the Bank their program based on this study by the end of the year, December 1980. MR. MARTINEZ: We expect that this study will give the railway personnel and the railway management a better basis to make these very difficult judgments as to how many people they need and how any further adjustments in personnel should be made. MR. McNAMARA: Are there other comments or questions? Yes, Mr. Dixon and then Mr. Johnston? MR. DIXON: Mr. Chairman, I wish to abstain on this project and to be so recorded in the minutes of today's meeting. MR. McNAMARA: Thank you, Mr. Dixon. Mr. Johnston? MR. JdH)ISTON: Mr. Chairman, I just wanted to say that I hoped that this project would be a success. It seems that most of the geographic and other conditions are very much in its favor. I had the same problems that Mr. I, Drake had about the feasibility of -- well, I suppose the I STRICTLY CONFIDENTIAL 15 dedication of the government to the project, but I believe myself that the risks are worth taking and I, therefore, strongly support it. Thank you. MR. McNAMARA: Thank you, Mr. Johnston.