Turkey - Railway Project

Dowument of The World Bank FOR OFFICIAL USE ONLY Report No. 5768 PROJECT PERFORMANCE AUDIT REPORT TURKEY: FIRST RAILWAY PROJECT (LOAN 893-TU) June 30, 1985 Operations Evaluation Department This deumt hIs a resricted distribUtlemnd my be ued by recipients only in the performance of their efdal duties. Its cotaless may net otherwhe be dislosed without World Bank authorizetion. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT TURKEY: FIRST RAILWAY PROJECT (LOAN 893-TU) TABLE OF CONTENTS Page No. Preface .............. ............ .... ........ I Basic Data Sheet ................*....e. .e.... .......... . 11 Highlights .................... ................. ...... iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. INTRODUCTION ............................................ 1 II. BACKGROUND .............. ........................ I III. PROJECT OBJECTIVES ...................................... I IV. PROJECT DESCRIPTION .......................... 3 V. PROJECT IMPLEMENTATION ... **.......... ......... 4 ,I. PROJECT EVALUATION .................. ..... 7 Attachment - Coments Received from the Turkish State Railways .... 13 PROJECT COMPLETION REPORT I. Introduction ........... ........................... 33 II. Project Preparation and Appraisal ....................... 34 III. Project Implementation ............................. 36 IV. Traffic and Operations ................. ...... 38 V. Financial Performance ................................ 50 VI. Institutional Performance and Development ............... 59 VII. Economic Reevaluation ................................... 61 VIII. Bank Performance ........................................ 63 IX. Conclusions ...................................... 65 Tables 1. Project Implementation 1973-80 .......................... 66 2. Actual and Appraisal Estimates of Project Costs ......... 67 3. Revenue Earning Freight Traffic ......................... 68 4. Passenger Traffic ................................... 69 5. Selected Operating Statistics ........................... 70 6. Actual and Forecast Income Accounts 1972-1980 ........... 71 7. Government Subsidies to TCDD and Railway User Charges ... 72 8. Actual and Forecast Balance Sheets 1972-1980 ............ 73 9. Actual and Forecast Cash Flow 1973-1980 ................. 74 Annex - Plan of Action for Railway Development .................. 75 This dommant bas reatrictd distribution and may Wb used by reipimaw only in the pesiae of their officimI duies. Itsnteals m May Wot otlerwi be dscloid without Work Bank audiiad. PROJECT PERFORMANCE AUDIT REPORT TURKEY: FIRST RAILWAY PROJECT (LOAN 893-TU) PREFACE This report represents a performance audit of the Turkey First Railway Project, for which Loan 893-TU for US$47 million equivalent was approved on April 24, 1973. The report consists of a Project Completion Report (PCR) prepared by the Projects Department of the Europe, Middle East and North Africa Region and a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED). The borrower contributed to the PCR by supply- ing project data. OED has reviewed the PCR against the Appraisal and President's Reports and the transcript of the Executive Directors' meeting which considered the project. Project files and documents have also been reviewed and discussions have been held with Bank staff. Further, an OED mission had discussions with officials of the Turkish State Railways (TCDD) and government departments in September 1984. In the audit's view, the PCR gives, on the whole, a fair account of the experience under the project. The PPAM has expanded on a number of issues, summarized the discussion of others and added new ones. The draft Project Performance Audit Report was sent to the Govern- ment/borrower for comments. The borrower has made extensive comments which are reproduced as Attachment to the PPAM. - ii - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET TURKEY: FIRST RAILWAY PROJECT (LOAN 893-TU) KEY PROJECT DATA Appraisal Actual or Estimate Current Estimate Total Project Cost (US$ million) 223 441 - Overrun (Z) 0 98 Loan Amount (US$ million) 47 47 - Disbursed 47 46.51 /a Date Physical Components Completed 09/75 06/81 Proportion of Physical Components Completed by Original Completion Date (Z) 100 45 Time Overrun (%) 0 222 Economic Rate of Return (%) 26 n.a. /b Cumulative Estimated and Actual Disbursements (US$ million) Bank FYs: 73/74 74/75 75/76 76/77 77/78 78/79 79/80 80/81 81/82 (i) Appraisal 27.4 47.0 47.0 47.0 47.0 47.0 47.0 47.0 47.0 (ii) Actual 9.6 21.1 30.2 32.3 34.5 39.2 44.9 45.9 46.5 (iii) Actual as Z of Appraisal 35 45 64 67 73 83 96 98 99 OTHER PROJECT DATA Original Actual Date Date First Mention in Files n.a. n.a. Government's Application n.a. 1969 Negotiations (completed) n.a. 03/ /73 Board Approval n.a. 04/24/73 Loan Agreement n.a. 05/25/73 Effectiveness 06/30/73 08/23/73 Closing 09/30/76 06/30/81 Borrower and Executing Agency Turkish State Railways (TCDD) Guarantor The Republic of Turkey Fiscal Year of Borrower January 1 - December 31 Follow-up Project None /a US$0.49 million were cancelled. T7- No quantitative analysis performed by PCR. MISSION DATA Month/ No. of Staff- Date of Mission Year Persons Weeks Report Preparation 11/71 3 40 02/28/72 Appraisal 03-04/72 4 n.a. 04/06/73 Prenegotiations 09/72 & 05/73 1 2 05/30/73 Supervision 1 07-08/73 3 6 08/28/73 Supervision 2 07/74 5 18 07/31/74 Supervision 3 12/74 2 4 02/04/75 Supervision 4 08/75 2 4 09/11/75 Supervision 5 01-02/76 2 3 03/03/76 Supervision 6 11/76 3 6 01/31/77 Supervision 7 08/77 2 3 08/10/77 Supervision 8 04-05/78 2 4 05/26/78 Supervision 9 10/78 1 1 11/07/78 Supervision 10 02/79 2 3 03/19/79 Supervision 11 05-06/80 2 2 06/13/80 Supervision 12 05-06/81 3 5 06/26/81 Supervision 13 12/81 2 1 01/12/82 102 /a CURRENCY EXCHANGE RATES Name of Currency (abbreviation): Turkish Lira (TL) 1972 US$1 - TL 14.15 1973 US$1 = TL 14.15 1974 US$1 = TL 13.93 1975 US$1 = TL 14.44 1976 USS1 - TL 16.05 1977 US$1 = TL 18.00 1978 USS1 - TL 24.28 1979 US$1 = TL 32.08 1980 US$1 - TL 76.04 1981 US$1 = TL 111.22 la Without staff input for appraisal. - iv - PROJECT PERFORMANCE AUDIT REPORT TURKEY: FIRST RAILWAY PROJECT (LOAN 893-TU) HIGHLIGHTS The project was to be the Bank's first major contribution toward the reform of the Turkish transport sector along the lines of two Government-Bank Memoranda of Understanding of 1971, one dealing with the Turkish State Railways (TCDD) and the other with the entire transport sector (PPAM, para. 2). The project was to radically transform TCDD into an efficient and commercially viable enterprise, and it established specific targets and actions to be achieved or taken by TCDD. The project also committed the Government to detailed actions for improving transport sector management (PPAM, paras. 3-5). The project description comprised the first phase (1972-74) of TCDD's 1972-77 Investment Plan and an updated version of the 1971 Memorandum of Understanding about the Plan of Action for the Turkish Railways System. Among the investments, way and works and traction and rolling stock were the most important items, representing about 80% of total cost. The Bank Loan, US$47 million, included financing of US$10 million equivalent of local currency expenditures (PPAM, paras. 8-10). The project investments were implemented with a cost overrun of about 100% and a time overrun of about 220%. The cost overrun was, to a large extent, explained by higher than expected inflation, and the time overrun, by the borrower's unfamiliarity with Bank procurement guidelines and slow progress in lining up technical assistance. Procurement problems and violations of the Loan Agreement and Bank procurement guidelines were numerous (PPAM, para. 11). TCDD's freight traffic fell short of appraisal projections by some 50%. Among the causes responsible for the shortfall was lack of carrying capacity, which itself was brought about by TCDD's unsatisfactory operational performance, particularly related to locomotives. Actual passenger traffic was about in line, if not slightly above, projections (PPAM, paras. 12-13). TCDD's financial restoration was not achieved, partly because of operational shortcomings, partly because of lack of adequate tariff action, and partly for other reasons. Coverage of railway cost by users' revenues deteriorated from about 77% in 1972 to about 48% in 1981. The working ratio also slipped under the project, and losses exceeded appraisal projections by far (PPAM, paras. 14-15). - V - Improvements in TCDD's organization and management were limited. A great number of Loan Covenants were honored only partly or not at all. The Plan of Action for Transport Coordination, which was part of the Guarantee Agreement, was only implemented in part (PPAM, paras. 16-18). While it may be argued that the project was in the interest of the borrower and TCDD, it was largely a failure, as railway and transport sector reforms, the core of the project, were attained only partly or not at all. The reforms were apparently too ambitious, given the scope of the task and the limited timetable. The reform was also caught up in major dislocations which occurred in the Turkish economy in the aid and later 1970s after the successive oil price rises. The project quickly became a thorny issue in Government-Bank relations (PPAM, paras. 20-22). Procurement problems sidetracked TCDD, the Government and the Bank from the real project objectives of sector reforms. A special Bank effort might have been advisable to deal with procurement (PPAM, para. 25). The SAR's economic analysis was very general, based on the notion that the project investments were an integral part of a long-term railway investment program. There were no separate analyses of major project components, and this prevented an effective economic judgment of the merits of the project (PPAM, para. 26). Bank railway projects have tended to be trouble prone, and railway problems have been difficult to diagnose and cure. Several recent PCRs and audit reports have analyzed Bank railway projects (e.g., Indonesia First Railway Project, Pakistan Tenth Railway Project), made in the early/mid seventies, which had far-reaching and comprehensive objectives but fell short of expectations. The experience suggests that the overly ambitious designs were partly responsible as in this ease for the ultimately disappointing results. Both Bank staff and Turkish officials expect that any further Bank lending for the Turkish railways would very likely be confined to a few more limited objectives, such as improving TCDD's operations, rather than addressing all major problems and thus be a counterpoint to the overambitious First Railway Project (PPAM, para. 24). A new railway policy has been formulated for Bank lending as a result of some of the unfavorable results of previous Bank activity in this sector. Operational policy staff believe that the criteria which must be satisfied for this lending under the policy will help improve performance. The audit is unable to comment on this, except to note that nonconcurrence by the Bank and the Borrower on project objectives, whether by misunderstanding or otherwise, were a major factor in the limited achievements of the present project (PPAM, para. 25). - 1.- PROJECT PERFORMANCE AUDIT MEMORANDUM TURFEY: FIRST RAILWAY PROJECT (LOAN 893-TU) I. INTRODUCTION 1. Since 1950, the Bank has assisted the Turkish transport sector through five lending operations. Two projects were made in the port sector (Loan 28-1-TU of 1950 and Supplemental Loan 28-2-TU of 1953, and Loan 1741-TU of 1979); another two in the highway sector (Loans 2137-TU of 1982 and 2439-TU of 1984); and one project, the object of this audit, in the railway sector. At present, new projects in all three of these sectors are at various stages of preparation. The railway project is the first transport project submitted to a review by the Operations Evaluation Department. II. BACKGROUND 2. The Railway Project was the culmination of a Government-Bank dialogue over some four years, assisted by UNDP-financed studies, about the management, organization and development of the Turkish transport sector. Important milestones in th... pre-project dialogue were the Memoranda of Understanding on Plans oi Action for Transport Coordination and for the Turkish Railway System signed between the Government and the Bank in April 1971. Progress in implementing the memoranda in the two years before approval of the Railway Project was "disappointing overall",1/ both in the areas of transport coordination and reforms of the Turkish State Railways (TCDD) . The Bank, therefore, requested in mid-1972 from the Government "satisfactory evidence of progress" under the agreed memoranda before start of the negotiations,2/ which according to the project documents was given in time. III. PROJECT OBJECTIVES 3. The Railway Project was perceived as the Bank's first major contri- bution toward the long-term reform of the Turkish transport sector along the lines spelled out in the 1971 Memoranda of Understanding. It was focused on the transformation over time of TCDD into an -efficient and commercially viable enterprise",3/ and it contained provisions for implementing selected 1/ Staff Appraisal Report (SAR), dated April 6, 1973, para. 1.03. 2/ SAR, para. 1.03. 3/ SAR, para. i. - 2 - parts of the Plan of Action for Transport Coordination. TCDD was recognized as having made poor and inadequate investments over decades, suffering from weak management, conducting antiquated commercial policies and being ill- equipped to face growing road competition.4/ TCDD incurred continuously growing deficits, and at about the time the project was appraised, operating revenues covered only about one-half of working expenses. 4. The project objectives specific to the organizational, operational and financial improvements of the railway were described in the (amended) Plan of Action for Railways Development, which was given great visibility and legal force through its inclusion, in full text, in the Loan Agreement with TCDD.5/ Anong other points, the Plan of Action established quantitative targets for working ratios and operations. It committed the borrower to undertaking railway investments only after their technical, financial and economic feasibility had been demonstrated. It required TCDD to establish a traffic costing system and a revised (freight and passenger) tariff struc- ture, and to make tariff adjustments in real terms. Further, it obligated TCDD to various measures of improving the organization, management and the staffing situation and to retain consultants for a variety of studies and other services. 5. The provisions under the project pertaining to the Plan of Action for Transport Coordination were also given enhanced legal status through their inclusion in the Guarantee Agreement. Under this agreement, the Government, in recognition of the need for coordinated transport policies, was to maintain the Transport Coordinating Agency (TCA), which it had created in 1972. TCA, assisted by consultants, was to undertake studies of user charges in all transport modes, of the adequacy of the management information system in the transport sector and of the import restrictions on transport equipment and their effects on the sector. Further, TCA was to formulate a draft transport policy statement, with references to existing laws, policies, regulations and practices; to work on the reconciliation of conflicting policy provisions; and to reinforce sound principles of cost effectiveness in situations of intermodal choices- 6. The Bank's project documentation was comprehensive and detailed, with the SAR comprising over 100 pages of text and tables. Perhaps in anti- cipation of things to come or to leave little room for unwarranted interpre- tations, the Bank took great pains to explain in the project documents the rationale, the objectives and the substance of the project. In the compre- hensiveness and scope of the reforms it attempted, the project could have served as model case for the Bank's 1982 policy paper entitled "The Railway Problem", which sought to provide a remedy for the Bank's, on the whole, disappointing experience with railway lending. 4/ SAR, para. ii. 5/ The original Plan was agreed to under the 1971 Memorandum of Understand- ing. The amended Plan was again modified in August 1975 to reflect the latest railway developments. - 3 - IV. PROJECT DESCRIPTION 7. The main thrust of this project and the appraisal were the major reforms of the railway sector and indeed of the entire transport sector. In this context, the details of the investment program and what the Bank loan would finance assumed secondary importance. While Bank staff note that the Bank's lending was for high priority items, the Bank's analysis was directed at the program as a whole which was made more realistic, but as indicated below (PPAM, para. 27), major individual items were not analyzed separately. The financing function of the project thus primarily served to facilitate borrower/guarantor-lender agreement on the wider issues. 8. The project was based on the first phase, covering the 1972-74 period, of TCDD's 1972-77 Investment Plan, which had the objectives of replacing obsolete assets and providing capacity for future traffic. The Investment Plan agreed to under the project was a modified version of a more ambitious but, to some extent, unrealistic earlier plan. Conceptually, the project was defined in a manner that was quite novel in the Bank's practice at that time for lending to railways. The project consisted not only of the physical components of the 1972-77 Investment Plan, but also of the Plan of Action for the Turkish Railways System, which did not necessarily entail financial outlays.6/ The project also included several studies which were expected to be funded by UNDP. 9. The investments under the project covered the following items: way and works, traction and rolling stock, signalling and telecommunication, workshops and depot facilities, and miscellaneous items. The first two items were the most important in terms of cost, making up almost 80% of total appraisal cost. 10. Total project costs were projected at about US$216 million, of which the Government was to finance about US$152 million (about 70%); the Bank Loan, US$47 million (about 22%); and other sources (European multi- and bilateral), about US$11 million (about 8%). Most of the proceeds of the Bank Loan were to be used for way and works (about 65%) and traction and rolling stock (about 23%). For reasons not entirely made clear in the appraisal documents or the PCR, US$10 million out of the Bank's Loan of US$47 million was earmarked for financing of local currency expenditures. This was done notwithstanding the fact that the Government's total financing contribution (in local currency), about US$152 million equivalent, slightly exceeded the project's total local cost, about US$149 million. 6/ In the Loan Agreement, the Plan of Action was not included in the Description of the Project", but reproduced under one of the Schedules. V. PROJECT IMPLEMENTATION 11. The project investments were implemented with a cost overrun of almost 100% and, some six years behind schedule, with a time overrun of about 220%. The cost increase was largely explained by unexpectedly high infla- tion. Implementation delays, according to the PCR, were related to the bor- rower's unfamiliarity with the Bank's procurement guidelines and affected, in particular, the smaller items. Technical assistance was also very slow. At the original completion date, only about 45% of the investments were imple- mented, although they were largely completed in 1976, with a delay of about two years. Procurement problems under the loan were numerous, requiring considerable staff involvement, and the borrower violated the Loan Agreement and Bank procurement guidelines. 12. Actual development of TCDD's freight traffic in the period from 1973 (year of loan approval) to 1981 (most recent year with available compar- ative statistics) was highly disappointing. For 1981, for example, the appraisal had projected about 12.2 billion ton-km with the project and about 5.5 billion ton-km without the project. Actual 1981 traffic was about 6.1 billion ton-km, which is 50% lower than the forecast and some 10% less than traffic in 1973, when the project was approved. Lack of carrying capacity, linked in part to insufficient investments, and not erosion of demand, was cited by TCDD and Bank staff as the cause of the underperformance. Passenger traffic in the period from 1973 to 19777/ performed better. The actual number of passengers carried was roughly equal to the number projected, and since the average journey length in this period went slightly up (by some 10% in 1977), the actual passenger-km achieved also slightly exceeded the fore- casts. It is, however, important to note that TCDD's tariffs were below cost.8/ 13. TCDD's operational performance was unsatisfactory. Problems, which in the view of Bank staff were unforeseeable, were in particular associated with locomotives. Problems with locomotive performance have been encountered in several other Bank railway projects (Senegal, Brazil and others) and while such locomotives are often financed by non-Bank (bilateral) sources, the Bank would presumably be reviewing locomotive acquisitions in the course of appraising the railways' overall performance. The actual availability of the diesel units, the most important locomotives in the fleet, was below targets, severely cutting into TCDD's transport capacity. Low locomotive performance and lack of spare parts were major reasons for the shortfall in availability, but other factors, such as poorly organized maintenance, came also into 7/ The appraisal projections were made only up to 1977. 8/ Revenues from passenger traffic may not have covered more than 20% of marginal cost. - 5 - play. Steam locomotives were possibly phased out too juickly. Availability of freight wagons was also a major operational problem. / 14. TCDD's financial restoration was not achieved under the project, as neither the required operational efficiency nor tariffs and revenues were increased adequately. Not only did traction and train movements remain inef- ficient, but uneconomic lines, services and stations, another cause of the railways' financial problems, were also not abandoned or discontinued as agreed.10/ Further, staff was reduced at a pace slower than envisaged. Partly to control inflation and partly because of road competition, only some of the agreed tariff increases were implemented, thus compounding the revenue problem created by the shortfall in freight traffic. The relatively high volumes of passenger traffic did little to alleviate the profit situation and probably were harmful, as passenger traffic makes up less than one-fifth of total railway revenues but represented a much higher share in total cost. How little TCDD moved forward on the issue of (real) tariff increases is highlighted by the fact that in 1972, before the project started, users' revenues covered some 77% of total revenues including subsidies. In 1980, the coverage was 41%, and in 1981, it was 48%.11/ A revised costing system for TCDD was implemented and a revised freight and passenger tariff structure was partially -implemented", but their ultimate purpose, the setting of cost-based tariffs in a commmerical environment, was not attained. 15. The lack of real progress in TCDD's financial restoration is indi- cated in TCDD's working ratio,12/ whose improvement in 1971-78 the Presi- dent's Report called the -centra feature of the Plan" of Action for Railways Development.13/ The ratio was expected to be improved from 2:1 in 1971 and 1.9:1 in 1972 to 1:1 in 1978, which would have been a break-even perfor- mance. After mixed achievements in 1973 (1.7:1) through 1976 (1.6:1), the actual performance was about 2.5:1 in 1978; it improved somewhat in 1981 to 9/ A large part of TCDD's comments on the draft PPAM deal with questions of locomotives and rail transport capacity (Attachment to PPAM, paras. 4.1-5.5). 10/ TCDD notes that it obtains compensation from the Government for the operation of uneconomic lines (Attachment to PPAM, para. 0.3). 11/ According to TCDD, progress is now being made in improving the autonomy and financial performance of the railways (Attachment to PPAM, paras. 1.1-1.5). 12/ Defined as all current cost (exclusive of depreciation and interest) as a percentage of gross operating revenue exclusive of subsidies. 13/ President's Report, para. 40. - 6 - 2.2:1.14/ The income accounts showed a comparably dismal picture. For example, the projected loss for 1977, the last year for which appraisal projections were made, was TL805 million, and the actual loss was TL3,550 million. The increase is substantial even if allowance is made for higher than expected inflation. 16. The improvements in TCDD's organization and management envisaged under the project were of a diverse nature. Some improvements were to come from the (UNDP-funded) consultants' study of these issues. Others would derive from the establishment of a TCDD coordinating committee (with the Director-General as chairman) which was to ensure the effective implementa- tion of the project. The President's Report expected the committee's experi- ence to have "a significant long-term effect on the quality of TCDD's manage- ment" and concluded that it "may be one of the greatest benefits of the project".15/ The consultants' study was undertaken but not given to the Bank for review prior to implementation, and in any case, implemented in only a strongly modified form and with many shorthcomings in attainment of objec- tives. Major study recommendations could not be implemented because of the low availability of locomotives and lack of spare parts, which Bank staff think were unforeseeable. The project coordinating committee was estab- lished, though it concerned itself only with the project's physical prog- ress. The conclusion seems safe that its establishment did not turn out to be "one of the greatest project benefits", even if it is recognized that other project objectives/targets were also not or only partly attained either. 17. A great number of important covenants in the Loan and Guarantee Agreements were only partly honored or not at all, almost crowding out the few covenants which were honored. This overall picture is significant in understanding how far apart the borrower and guarantor were in implementing the spirit and letter of a cooperative agreement. Among the covenants not honored wern those on asset revaluation, new railway line construction and audit of TCDD accounts. Asset depreciation of TCDD was at the time of appraisal based on historic values, as is the case with many other re'I-ays, thus seriously understating railway costs and operating losses and distorting modal policies. The project attempted to change this practice, but failed. However, according to TCDD, progress has since been made on the issue with the 1983 passage of legislation under which state enterprises (including TCDD) would be required to revalue assets, starting in 1984. One covenant required the Guarantor not to proceed with new rail line construction without providing justification satisfactory to the Bank. In the PCR's view, it was most likely that the Bank was aware, at appraisal, of serious consideration by the Government of a new high cost and (economically doubtful) high speed rail link between Istanbul and Ankara. Despite earlier Government denials that the construction was not imminent, works actually started in 1976 14/ In 1978, the definition of the working ratio was amended (PCR, para. 5.07). On the basis of the revised definition, the ratio would have been 2.2:1 in 1978 and 2.0:1 in 1981. 15/ President's Report, para. 29. - 7 - without the review process envisaged under the project agreements.16/ Another covenant required TCDD accounts to be audited in accordance with appropriate auditing principles. The Government and the Bank could, over almost ten years, never agree on how these principles were to be defined. The issue is still unsettled.17/ 18. The Plan of Action for Transport Coordination was partially imple- mented under the project. The Transport Coordinating Agency (TCA) completed by 1978 the studies assigned to it. The studies were used for the prepara- tion of the Fourth Five-Year-Plan (1979-83) and tariff proposals in public sector transport. Whether the studies were adequate and had a significant bearing on transport polinies is unclear. TCA was, in 1981, "technically disbanded" and apparently not "maintained", as required under the Guarantee Agreement.18/ While TCA was operational, it worked effectively according to TCDD. Certain functions TCA had performed were transferred to a new depart- ment in the same Ministry (of Communications), and the State Planning Organi- zation (SPO), a planning body attached to the Prime Minister's Office, is now in charge of major transport coordination and planning. SPO prepared a mas- ter plan for the transport sector in 1981 (which Bank staff advise was to be implemented over three years) and thus effectively carried on work previously entrusted to TCA. 19. The foregoing recital of experience under the project is largely based on the PCR which establishes, in considerable detail, the course of events under the project. The PCR does not, however, provide a full analysis of the reasons for the project's outcomes. Some thoughts on this topic are given in the next section. VI. PROJECT EVALUATION Borrower Agreement on Objectives 20. A review of the fundamental project objectives and the railway sector accomplishments over the last 10 years leads to the inescapable con- clusion that the project was largely a failure. The far-reaching railway and transport sector reforms were either not accomplished at all or fulfilled only in minor parts, and the railways' transformation into a modern enter- prise functioning in a commercial environment, outside the traditional con- finements of entrenched Government bureaucracies, has not come about. The audit notes that the economic environment had turned unfavorable for such a 16/ Major progress on line construction never materialized, presumably because of lack of funds and not because of the Bank's power of convincing its client. The entire episode is presented in full in the PCR, paras. 8.01-8.05. 17/ The impas-c oUL auditing is described in the PCR, paras. 5.18-5.20. 18/ PCR, para. 6.04. - 8 - challenging task shortly after the loan was made (inflation, budgetary con- straints, world wide recession). Bank staff believe that these economic dif- ficulties, as well as the unsatisfactory working of the locomotives, largely explain the shortcomings in project performance. In the view of the audit, the project failed primarily because neither the railway nor the Government could give it adequate support. The railways' management which was, through- out the project period, the target of strong political, economic and social demands and pressures, could, under favorable or unfavorable conditions, not effectively support the far-reaching changes embodied in the project; and it may indeed never have fully understood or endorsed them either. Similarly, Government ability to support the project was questionable. 21. Project preparation and appraisal documents, as well as the Board presentation speech, were unanimous in their assessment, that the project would be difficult, but nevertheless would succeed. This hopeful assessment seems not to have taken account of the complexities of the railways' problems or of the attitude of the railways and other Turkish authorities which pre- saged limited ability to institute the difficult changes which were envi- sioned. For Turkey, the task of railway reform was enormous, the attempted pace was fast, and by comparison with other Bank railway projects, the scope of the intended railway and sector changes was formidable. During the audit mission to Turkey, there was little evidence that the project's intended railway sector reforms were fully appreciated in railway or Government cir- cles when the loan was made, and if they had been understood at one time, little trace of the appreciation seems to have been left. The failure of Bank staff to observe and act upon the apparent lack of consensus on the part of the Turkish authorities has various explanations. A senior Bank manager had serious reservations about the chances for project success before Board approval, and other Bank staff familiar with the project believe that the Bank lending target for Turkey was a deciding factor in the Bank's decision to go ahead, despite signs that the right time had not yet come. Also, in Bank-internal deliberations during project implementation, some staff seemed to have lost track of the project's real objectives-the sector reforms. Bank staff, nevertheless, believe that the project's influence on making the railways' investments more realistic,19/ its financing of items deemed to be high priority, and its contribution to the establishment of a coordinating mechanism for transport have fully justified making the loan to TCDD. 22. Once the project ran into serious trouble, which happened quickly, it severely tested the Government's and the Bank's good will in maintaining an adequate working relationship even with respect to matters outside the transport sector. Within the Bank, the project was a contentious issue between the Region's Programs and Projects Divisions for a long time, absorb- ing large amounts of energy and time and complicating work toward common country assistance goals. Over the some ten years of dealing with the Bank, some TCDD officials became disillusioned with the Bank, and the aftereffects are still being felt. 19/ TCDD apparently has some misgivings about the Bank's influence under the project on railway investments (Attachment to PPAM, para. 8.2). - 9 - 23. Apart from some progress mentioned on topics related to railway and sector reforms, the PCR puts great emphasis on the TCDD/Government-Bank "dialogue" as a special project feature and category of lending benefits. Emphasis on "dialogue" is consistent with the Bank's current attention given to non-financial instruments of assistance to its clients. In Bank parlance, the word "dialogue" covers many activities ranging from casual discussions on aspects of a project to imposition of strict conditions to the granting of credit. In view of this somewhat flexible usage, an evaluation of a "dialogue" would require review and analysis of such issues as: at what level the "dialogue" should be conducted, what topics it should cover and what it should produce in concrete economic terms and at what time. How- ever, any "dialogue" would normally involve an understanding by both parties of each other's point of view. Whether there was a good or meaningful "dialogue" or any "dialogue" at all under the project is in doubt, given the broad-based disagreements and misunderstandings between borrower/guarantor and lender, although Bank staff consider that progress has been and continues to be made with both TCDD and the Government through discussions. 24. The lesson of tailoring a project to the willingness and capacity of the borrower, which emerges so clearly from this audit, is being applied by the Turkish authorities and Bank staff. When the audit mission visited Turkey, the railways' management was not concerned, as noted above, with major reforms as envisaged more than ten years earlier, but instead was pri- marily interested in operational improvements. Both Bank staff and Turkish officials expect that any further Bank lending for the Turkish railways would very likely be confined to a few more limited objectives, such as improving TCDD's operations, rather than addressing all major problems and thus be a counterpoint to the overambitious First Railway Project. 25. A new railway policy has been formulated for Bank lending as a result of some of the unfavorable results of previous Bank activity in this sector. Operational policy staff believe that the criteria which must be satisfied for this lending under the policy will help improve performance. The audit is unable to comment on this, except to note that nonconcurrence by the Bank and the borrower on project objectives, whether by misunderstanding or otherwise, was a major factor in the limited a.hievements of the present project. Procurement 26. The PCR makes an important point about the unusual incidence of procurement problems, linked to TCDD's unfamiliarity with Bank guidelines and possibly to its disinclination to completely abandon traditional procurement practices.20/ The PCR suggests, in the view of the audit with ample justi- fication, that focus on procurement diverted attention from the more impor- tant issues, such as the broadly-based transformation of TCDD into a modern enterprise. On the Bank's side, it would therefore have been advisable to 20/ TCDD notes that it may have been justified in some instances in deviat- ing from Bank-prescribed procedures (Attachment to PPAM, paras. 9.2-9.6). - 10 - make, at an early time in the project cycle, special organizational arrange- ments for dealing with procurement, thus freeing the regular operational staff for the other project assignments. Such arrangements have been and are being made for other projects and countries early during project implementa- tion, and while they may appear to initially overtax supervision budgets, they may be more efficient in the long run. The Project Division responsible for the project added a procurement engineer to its staff which would assist in resolving the procurement problems of the project under review, but this occurred only in 1976, some three years after Board approval of the project under audit. The PCR records a total of about 60 man-weeks of mission time spent on project supervision over a period of almost 10 years, which amounts to a yearly average of about 6 man-weeks.21/ Given the project's complex- ity, its classification in the Bank in due time as -problem project-, the stakes involved (smooth functioning of the whole relationship between the Government and the Bank) and TCDD's unfamiliarity with the Bank, the actual supervision input looks fairly modest. Economic Analysis of Project 27. The SAR's economic analysis of project investments was unimagina- tive and obscured the real economics of the project. In the SAR's view, ben- efits from the project's individual investments/programs could not be quanti- fied, and not even be identified, because of the absence of detailed TCDD costing data, and because the components were interrelated. Moreover, bene- fit calculation was considered impractical because (maximum) project benefits would only be realized if the entire 1972-82 TCDD investment plan, and not only the project investment of 1972-74, or the investments of the 1972-77 plan, were undertaken. Following this line of reasoning, the SAR estimated the project's economic rate of return (ERR) to be the same as the ERR for the entire 1972-82 investment plan-26%. In the audit's view, burying the analy- sis of discrete investments in the analysis of a broadly defined investment program does not provide an effective means of establishing Pn optimal in- vestment program or deciding on the individual items in such a program. While there could be reasons for establishing the economics of a large pro- gram stretching over a period exceeding a project's boundaries, there should always be separate analyses of major project items or categories: the fact, that a long-term investment program is or is not economically viable, does not permit reliable conclusions about the viability of individual program components. Further, after several years of preparation of the First Railway Project in Turkey, there should have been sufficient data available to allow separate quantitative economic analyses of the major project investments, notwithstanding the fact that there was no formal costing organization in the railway and the project included financing of a railway costing study. The PCR makes no attempt at improving on the SAR's calculation of the ERR and 21/ The statistics include travel and weekend/holiday time while the mis- sions were in the field. They exclude, however, consistent with Bank instructions for time recording, staff input by Departments other than Projects. - 11 - observes that the ex-post analysis of the ERR is only of "academic inter- est"22/, and Bank staff consider such an evaluation of doubtful value, espe- cially when the need for the investments is "evident". Nevertheless, the PCR in the end concludes that the SAR's ERR of 26% "almost certainly" understates the actual project achievements in terms of what would otherwise have hap- pened in the "without" project case.23! The audit is unable to accept this ERR because it is not based on a comparison of quantified costs and benefits as they actually occurred. Future Projects 28. The First Railway Project had a sobering effect on the Bank's enthusiasm for reforming the Turkish railway sector and on the Government's, TCDD's and the Bank's expectations about the chances for successful coopera- tion on railway issues. It cooled for many years all parties' desire for a follow-on project. The Bank apparently hoped to persuade the Government and TCDD into a better performance under the first project by stalling on the preparation of the second. It is not quite clear whether this tactic worked or was possibly counterproductive and whether TCDD's long-term improvement was thus enhanced or set back. What transpires from this project and other Bank railway projects is that many railway problems appear close to intrac- table, challenging to the utmost the borrowers' and lender's ingenuity and determination in solving them, and that among essential ingredients for such projects are a willingness to proceed in small incremental steps, to accept that improvement will be a long time in coming and to expect set-backs along the way. Both Bank staff and Turkish officials expect that any further Bank lending for TCDD would be along these lines, and thus would build on the lesson of an over-ambitious First Railway Project.24/ 22/ PCR, para. 7.03. 23/ PCR, para. 7.05. 24/ TCDD officials, sharing the optimistic note about the chances for a follow-on railway project, point out that the ports project (Loan 174i-TU) was successfully implemented by TCDD (Attachment to PPAM, para. 8.6). -/2..- - 13 - TCDD TURKISK STATE RAILWATS c~1 -pme t b= ur. Yukinorl Watanmbe Divector OperatIona Evaluation Departmet 1818 B Street 3.1 IASEGTON-DC.20433 USA Det Your letter datod maroh 19, 1985 Your letter and report hag been exained by TDD Our.evaluation about your report s annemd. Begardg Sinceoely General Dirmectorate o Turkih State ilyas of M.4~ etc -~Ž U s- :f Directo DIcC - - - and Cen, ral D~ n .. De-. pae qute oc name lm dlat and rmek~. .a atnu a a - 14 - EVALUATION OF TCDD ABOUT "PROJECT PIFOMIANCE AUDIT PEPORT ON TURKEY FIRST RAILWAY PROJECT" (IDAN 893-TU) - 15 - CONTENTS 0- OBEDIEKCE TO THE FINANCIAL AGREMITS 1- COLMRC 2- PROJECT APPLICATION 3- TE AIMS OF THE PROJECT 4- TRAFFIC AND MANAGEI-ENT 5- NAGENTS 6- RESuLTS 7- FINANCIAL PEOIRMANCE AP-rASIAL 0- TE PROJECT 9- IMP MENTATION OF TE PRIOJECT - 16 - COMIMENTS BY OBEDIENCE T THE FINANCIAL AGMENTS REGION & OED 0.1- It was stated by Thridsh State rail authority that the require- cunts of the credit agreement hadn't partly or fully been fUlfilled by some clerical offices and these matters were detailed. 0.2- These matters are mentioned in the answers given above. For emuple, the increase In the last years. The appraise of constant Lesson for sources is also answered. Although, it is true that; the wanted aims future project referred to have not been reached with the given work ratios, this first credit in para. 28 given by the World Bank has been a gaidence to the second railway of PPAM. project. 0.3- About the uneconomic routes to be cancelled; The uneconomic routes have not been cancelled but govenment support is obtained for their upkeep and restoration. -Alot of these routes have gained importance after the petroleum crises. Therefore it is possible to make theseroutes economic. Turkish State Rail Authority, until 1979, Refer to para. kept to the given plan about the personnel reducement. In our country 14 and new reduemen Infootnote 9 of the personnel wages are very low, and the "TKm for each personnel PPAM. is being tried to be increased,that is, the personnel productivity is being tried to be increased. TCDD has not increased personnel for meny years. The Government has begun to follow a new personnel policy and, from now it will be possible to work more rationally. - 17 - COMMENTS BY 1. COMMR REGION & OED 1.1- It can be said that, the price lilt which was prepared according to the circuntances and the competition with the roads; necesseary changes made to make it an elastic price list and for the years mentioned in the Para. 14 of ?PAM report onid4 not be applied. This is because the state applied cheap cost amended. to those products which is produced by the factors of the state production and it's not possible to make a competition according to the law of our institutions. 1.2- In spite of this, our institutions has been rearranged according to the law that brought free enterprice in the State . State Economy Interprice and this law is now in progress. These decisions will make a forward progress. 1.3- The decision which is applied as a law that mentioned above, determined our authority and our "main status" rearranged acoording to this. 1.4- The changes in the regulations and the changes in States Economic New foot- Politics, made us increase in service of production and competition with note 11 added to roads and necesseazy price list change in shorter period of time instead of prAM. receiving financial source from the treasury. 1.5- For this reason, there has been taken important steps in the instruction sheet and the last instruction sheet has been shown below. DATE PASSENGER GOOD HARBOUR VARIOUS GOODS 1.2.1982 % 20 25 18 20 1.1.1983 % 20 20 x 20 10-29.4.1984 % 40 25 I 40 20.1.1985 % 40 40 40 30 (1) Prom the date 1.1.1983, the price list prepared according to dollar and because of the currency adjustments, there is an increase depending on dollar. - 18 - COMMENTS NY 2. PROJECT APPLICAUON REGION & OED 2.1 It's a reality that the project iAvestments have finished in 1973-1981 instead of 1972-1974. But, the adaptation period has been quite long for the TCDD's unifamil- % 45 of the project investments to be made in the predicted time for the iarity Turkish State Rail Authority for the first time to make buys according to with Bank pro- the procedure of the World Bank. In spite of these defectiveness, at the end cedures of 1976, except education, in the rest of the catagories approximately % 90 noted in success was made. Prom the end of 1976 to the end of 19810 the remaining prPPAM. approximately % 10 of the project has been tried to be succeded. 2.2 Between 1973-1981 the inability of increasing traffic results from Capacity the inability of increasing vehicles both for pulling and pulled. The number limita- tions of of steam power locomotives and diesel locomotives in this period has been traction mentioned in the 53rd page of the report. 840 steam power locomotives in noted in para. 13 1971 was decreased to 530 in 1981. But the number of active steam power of PPAM. locomotives were approximately 180. In spite of this, the number of diesel locomotives was increased from 125 to 470. (78 of these were 360 horse-powe- red maneouvering machines) TCDD (Turkish State Rail Authority) in this Issues addressed period, that is between 1973 and 1981, has only been able to do only in paras. modernization and when % 15 of the traffic was being done by diesel locomo- 4.11-4.15 of PCR. tives, approximately % 80 of it begun being done by diesel engines. 2.3 This has provided for TCDD an important degree of energy economy. The number of load railways care were increased from 16423 in 1971 to 19955 in 1981. This is also an important increase. Thus fewnees of the pulling and pulled vehicles in the traffic continued remarkably. 2.4 In this period, the diesel electrical mainroute locomotives were not active as wanted. The reasons of these areg Issues dis- cussed 1. The straits of providing foreign exchange for spair parts* in paras. 4.11-4.15 2. The straits-of changing from steam to diesel (workshop qualified of PCR. personnel etc.,) - 19 - C4HMENTS BY REGION & OED 3. lhe locomotive chosen being 1500 c/min, the waring-down of parts and other engine problems (later the diesel engine was dropped from 2400 HP to 2100 RP and better working results were obtained) 4. To make large revisions of the locomotives, Behigbey large revision workshop was only finished after 1981. 5. The difficulties had in the local locomotive production. The management outputs great increase also depends on the modernization of the route by telecomunication, signalisation and electrification. TCDD has to proceed with the modernization program with importance. The prices are being increased at enough rates every year. In 1983, 1984 and 1985 important increase was made in load and passenger prices. 2.5 At present in TCDD in 1984 income and expences rations have been 10 %. In the past years, it can't be said that to increass iLcome the prices have been increased healtHly;. But in the years, many inportant steps have been taken in this matter. To follow and controll the progress of the project a coordination commites was formed with the lead of general principal and this commitee followed the progress of the project by holding meetings at regular intervals. Thus, between 1975 and 1976 approximately % 90 of the project was finished. 3. THE AIMS OP THE PROJECT 3.1 TCDD's weak and insufficient investment prevented the development in the rail transport. Till 1975, because of cheap petrol price, there has been Refer to modified given more importance to the roads and naturally there has been important para. 12 investment to roads. The economic crise between 1977 to 1982, effected the of PPAM. For a investments made on to railtays and after 1982, it was possible to give more more importance to railways. The leak institution, insufficiency of pulling and detailed discussion pulled vehicles, effected the income of TCDD. of these points, refer to paras. 4.02- 4.07 of PCR. - 20 - COHMMENTS BY REGION & OED 3.2 According to the money lending aggreement 893-U, it's agreed that the ;easibaity which is not approved by the World Bank, will not given any place for the investment by TCDD and this matter caused a long correspondence for the oxygen production equipment which was financed by own-sources of TCDD. 3.3 The aims of the operation included all the difficult matters. At the same time the German adviser was very useful which worked for Route Department. 3.4 The Transportation Coordination Board which was established for the Para. 18 of PPAM purpose of the project made suitabl4 work. But there has been a difficulty enlarged. to find people who worked long years in railway and knows the problems of Refer also to paras. the railways and because of this it was not possible to make more suitable 2.01 and work. 4.02 of PCR. 3.5 The aim of the project in our opinion, when regarded money lending period that is formed the firstslice whichis given 47 million dollars is very Refer to para. 18 inclusive and pretentious, should be excepted that it is a project which is of PPAM. very hard to materalize New foot- 4. TRAFFIC AMD MANAGEMENT note 9 added to PPAM. 4.1 As could be seen on the bank reports" table number three there is in increase on transportation between 1972 and 1976 as in ton-kma, but after 1976 it is witnessed that there is a decrease in these numbers. 4.2 The decrease after 1976 is the conjecture in Turkey which is effected Refer to negatively. This to do with not assuring spare parts and as a result an paraP 12 increase in locomotives which are out of use and there is a a gap in carry- power. 4.3 The Economic ci-Ise has been started in Turkey after 1977 and this crise has been continued till 1982. Deficiency in spare parts effected carrying power in negative way. Together with this, the numbers in ton-kma of 1982,1983,and Refer to 1984 is shown below and it could be witnessed that there is a progression paras. 12 and 13 of comparing with the past years. First three months of 1985 is much better PPAM. than 1984's first three. - 21 - COMMENTS BY REGION & OED 4.4 The falls In 1980 related with the great colds and this situation caused the locomotives has been frosen and suffering in management. YES -KW Footnote added to 1982 19.262.052.570 para. 4.03 1983 19.665.252.250 of PCR. 1984 23.415.633.646 4.5 It is obvious that the transit trains is very profitable for TCDD. The transport which mainly done to Iran and Iraq was partly shifted to roads because Syria has been closed it's borders from the date 8th April 1982. 4.6 It's mentioned above that year 1984 was a good year for traffic. 1972-1976-1980 and 1984 values in ton-kms shown below. YEARS NET TON-KMS (GOODS) 1972 6.739.374.700 1976 7.289.224.000 1984 7.532.151.100 4.7 At the moment most of the traffic done by diesel electrical locomotives and for 1984 this number is % 82. 4.8 The number given in page 13 and article 4.11 is belongs to the period that there was a great need of spare parts. After 1977, in addition to the French types of locomotives, the breakdown In carry-motor of General Electric locomotives and there was a great faal in working percentage. These numbers for diesel locomotives are 65 % in 1983, 70 % in 1984 and at the moment )5 % in 1985. 4.9 The reasons in increase in inactiveneas easipeciall4 after 1976 is Refer also explaind above. In order to increase the activeness of locomotives, TCDD to paras. 4.12-4.15 shose the diesel motors and from Hedemora Company in Sweden, get complete of PCR. 45 motors. At the same time, it is decided to renew of Prench type locomotives partly and 2400 HP, diesel Fower has been decreased down to 2100 HP to make it safe and long-lived. - 22 - COMMENTS BY REGION & OED 4.10- In 1982 Behigbey, Ankara locomotive revision workshop has been introduced to service and it is planed that every year 70 great revision to be done. To produce more strong locomotives there has been made some arragkments at ELMS. 4.11- If TCDD assures to obtain spare parts regularly, it is sure that the number of locomotive will be increase which is on service. TCDD also repairs the spale parts those are breakdown. Por instance French and American types of diesel electrical locomotives, cranks by the VAN DER HORST Company in Holland covered hard chromaj and re-usedL Turbocompresor turbines' turbines has been repairing by a turbine company in England. 4.12- When we come to the SOPRERAIL report; the report which has been prepared mainly the idea of application at French railways to transfer to TCDD. Because there was not any technical person present at the Transport Control Office and it was not possible to take technical people from the Administration of Rail Stock, this report could not applied fully. But some of 'them applied. For instance, at the managements which is formed from the Personel of Transport Control and the Administ- ration of rolling stock, as poste de Commande; the finance could not be received for the second phase application after the first study of sofrerail. 4.13- The- fewness of the diesel electrieal locomotives not only inabled the protective upkeep to be made but caused the normal upkeep not to be well fulfilled. The fewness or absence in spare parts delaid the repairs Problem of spare parts at machenes at workshops. Alhough it was necesseary to give to every noted in workshop enough diesel motors, alternator, carry motors ass complete para. 13 of bogy and wheels, parts and groups but it couldn't. For these reason P it could not be applied service and repairing. In the second railway project; the project of increase in active locomotives put forwart also because of the idea of fulfilling those and make them better. 4.14- The reason for the steam power locomotives not taken from the service is that there was not enough credit and own sources so no locomotives could not build and this is also because the plan could not be applied. - 23 - COMMENTS BY REGION & OED 4.15- Second important factor Is that the steam locomotives Uhich are used for maneuver and secondary routes services are still on service because the agreement has been delayed for 1100HP diesel electrical lcomotives. This agreement has been done with the German MAUSS- tkffei Company at the end of 1983 and it June 1985 it will start to Refer to be received and steam power locomotives will be out of service* paras. 4.16 and 4.18 of There was no distreese in mechanical and electrical parts of PCR. locomotives because they were local production. In other words this equipment is hopefull. In diesel motors there has been some distress in local production and management at the beginning. Generally these stresses arej too much oil is used, freezing in very cold weather, boiling in very hot weather etc., are more than problems of local production, because of motor desing is not very suitable for Turkeys circumstances. There has been some procautions taken. Our local locomotive production has been improved and it is much more successfull than comparing with the first years. 4.16- It's possible to keep on service the steam power- locomatives in Zimbabwe there are cheap and lots of coal present. Goods quality coal reservations in Turkey is not really enough for the steel Industry. Good quality Idnyit coal is just enough for the necesseary heatings at homes. If good quality coal imported to Turkey then it coats about X 70. It's quite open that, it is not posiible to continue on with the steam locomotives in these circumstancea. 4.17- If TCDD do not turned into diesel and continue using steam power locomotives, because there was not enough coal; it would not be possible and it was mentioned above that it would be cost alot because in 1984 the price of coal was average 20,251 TL per - ton and fuel was average 113,255 TL per-ton. It cost 303,5 TL per-ton-kas. In diesel it costs 91,75 TL per/ton-kms. With steam power, it costs 3.3079 times more expensive. 4.18- If TCDD kept all the steam power and diesel locomotives as it was in 1972, at 1984; it would be necesseay more fuel to use them. Between 1972 to 1985 the absence of locomotives and wagons the traffic could not be increased to the desired capacity but TCDD locomotive modernization has been completed and fuel used very economical. - 24 - COMMENTS BY REGION & OED 4.19- Although those reasons mentioned above, TCDD's fast ohange into diesaliton, created some management and service problems but it is hitting the right mark. 4.20- ElectrifIcation traffic is planned for those routes Vhich are continiou and intensive. These are the routes where the transit transport made for iron and other mines* Also these routes are the reagan where there Is sufficiant electrical energy and at nights it will be possible to get cheap electrical energy. Por Turkish Electrical Company It is possible for them to give energy at mights between 23.00,07.00. 4.21- It is a rral unluckyneso to take the numbers of 1980 concerned with management of goods-wagons. As it mentioned above, at that year there were great colds and diesel electrical locomotives has been More on these questions frozen and could not find better possibiality for good management* under paras. The long winter effected the statistics. To make a better repairing 4.26-4.27 - of PCR. and service for the goods-wagons there is a workshop at Malatya is building. By this way, the wagons which are waiting for repair could be decreased and much more healthier revision will be done. 4.22- The values given for wagon rotation in 1980 should not be compared to the numbers in other years. TCDD is making direct trains and number of those trains increasing each year. 4.23- By the way, talking about the insufficiency of wagons, between the years 1972 to 1982 to the Eastern regions also carried straw. These trasport made by the government's decision and the cost was very limited. In these reg±ons sometimes very important traffic jam has been occured. The situation which is lived some years, effected the traffic in negative directions. 4.24- The great increase in transit traffic in 1974-1976 is also sourced from the low cost of price list of TCDD. According to PCR, para. 4.09, 4.25- The passenger increase mostly seen in the suburban trains. Also at issue was pre- ierene giv pe- the main routes, noticable increase has been occured. TCDD essipecially ference given to passenger put forward fast passenger trains between Ankara-1stanbul, Ankara-Izmr, trains. Ankara-Sivas; which are important cities. - 25 - COHEHTS BY REGION & OED. 5o KAGERM New footnote 9 added to PPAM. 5.1 TCDD's first diesel mainline locomotive has been bought from American G.J. Company in 1958 ad it was five. Addition to this, 40 more locomotives bought from same company in 1964. In 1968, there has been a Licance agreements signed by the Prench Industrial group to make local locomotives at TCDD's Bskiehir Locomotive and Motor Industrial Institutions and below shown that the locomotives produced there. Number of Mainline Number of Goods-Wagons Locomotives a which are produced a 1971 5 717 1972 22 573 1973 20 610 1974 12 407 1975 45 985 1976 50 908 .1977 53 530 1978 52 536 1979 35 311 1980 40 604 1981 25 853 1982 - 870 1983 - 1096 1984 50 1016 1985 64 (x) 1300 5.2 In 1984 a new locomotive contract has been done with the Am2rican General-Motors Company. With this contract 2200PP 39 locomotives has been bought. Also five of PED locomotive- is included in the contract to setting up and put into service this year. (x) 39 loco will be corcpletely canufactured in USA (in the G4 plant) 5 loco will be f.tted in Turkey (in the Eskiehir plant) after original parts came from USA 20 loco will be producted in Eski*ehir under french license. Seperatelly, mterial is beeing obtained for 7 locomotives. - 26 - COMMENTS BY REGION & OED 5.3 Much more trustable and much more better 44 G-M diesel locowmtives planned to put into service In 1985 and the transportation of most of the jewel will be done with these locomotives. This way will make a direct Jewel train from DivrigL to KarabUk and this would decrease the wagon rotation. The same type good train management will be expanding. 5.4 To make easy side maneuvers and increase making direct trains, two of (Marshalling yard) triaj gar has been projected. It has been studied on these two triaj gar. 5.5 Also TCDD is believes in necessiaty of modernization of signali- sation of lines and electrification to make decreave rotation. 6. RESULTS 6.1 In our opinion the application of the project is an hard project and for the new project suitable results has been obtained. 6.2 The machines for the clearing away snows, in the g&eat winter of 1980; took two days to open the ways between Karagil-getinkaya and Sivas-Karagdl. Of these machines were not there, it could take 15 days to open it with the steam machines. The first dreyman cranes which is bought, in acedints fast way openings became possible. The equipments of Good-wagon which has been through World Bank, -985 of them in 1975 end 908 of them in 1976, the recor numbers for those years. Even the project did not reached to it's aims, it had lots of adventages to TCDD. 6.3 The apperance of petrol crise in 1974 and problems for TCDD in finding Foreigu exchange after 1977, are the great effecte-that it Refer to could not be reached to the goaly of project. The types of locoastives para. 20 of PPAM. which are selected is also effected the result of management. The price list readjusted at the most suitable way last year. 6.4 To work much more trustable on main-route locomotives, the ones bought which are American type General-Motor and shipted to local pro- duction. -27- COMMENTS BY REGION & OED 6.5 There has been taken some steps, easiness in buying. It has been realised by TCDD, buying methods according to the Hand-book of World Bank and for the future projects, a trained worker possibly found. 6,6 As a result, in the first railway project with the reasons mentioned above it would not be possible to reach to the goal. Bat Refer to para. 28 of this project was very useful for TCDD. TCDD has been experienced for PPAM and the future projects, representation of projects, buying procedure and paras. 3.01- 3.02 of PCR. other points so in the future it will be more succesaull. It kas been realized how to overtake difficulties of similar projects. 7. PINANCIAL PERPORMANCE 7.1 In this section, at the "Application of Project" which has been mentioned on page 10-15, 173 firstly touched on this point and then answered questions on Financial Performance. (Page t 10-11 Article : 17) : 1.Re-valuatioa of fixed values : Although according to the article T.Ach placed in the agreement New footnote that the revaluation of fixed values, becatse it did not decided by the added to para. 5.11 government which would include State Economy Enterprice, it could not be of PCR. possible for us to make a revaluation seperately by our institution for the perion between 1972-1981. According to the law number 2791 and dated 21.1.1983 and regarding the date 31.12.1982, economic value goods which belong to the amortization revaluated. And also according to the law 3094 and dated 4.12.1983 and Para. 17 of PPAM regarding the date 31.12.1984, the fixed values re-valuated. Prom now on modified. each year revaluation will be repeated at the end of the year and there will be no problem in the following years. - 28 - CGOMENTS BY 2. INSPECTION REPORT REGION & OED Ispectors of Mnistry of Treasuary and Tariff or Counters which are recognised as a private inspectors andl althought the counter Issue referred to appointed as inspectors, because of the late appointments-of counteral in para. 17 the preraretion of oontroller report could not be possible to send to of PPAM. World Bank after from the end of financial year in 6 months time with tanslation. 1-C-PINANCIAL AIMS (Page : 30-31) In April 1972, it's agreed together with World Bank experts that it would be 199,8 in 1972 according co 1972-1977 estimations and it's planned that it would be decreased into 160,2 in 1977. Aftet that World Bank experts proposed after they worked on this matter and advised a decrease in expences andincrease in income so the rate would be 99.3 in 1978. In incomes, during 1972-1977 an addition of % 75 to passenger price Macro- list and % 53 to the transportation of goods has been proposed. Te economic conditions traffic was much less than it was expected and the price list was affecting project insufficient because of the great increase in Enflation and and suvven- noted in tion included in the income; could not reached to the goal. para. 20 of PPAM. In the second railway project, it would be more suitable shown subwentions in income and calculate the management rates. 2. Re-valuation of the Fixed Values As !it mentioned above, periods between 1972-1981 revaluation of fixed values has not been done. Para. 17 of PPAM Prom the date 1984, the revaluation procedure will be done modified. according to the coefficient that is issued by Ministry of Treasury and Tariff. 3B-BALANCE SHEET - 29 - COHEMMS BY REGION & OED The harbours of Turkish State Hail Authority which were not in the status of institution periods of 1972-1981,'not represanted any offical balance sheet and financial tables, but a balance sheet and financial table has been prepared privately and given to the World . ank, Since 1.1.1985 there is no problem concerning the preparetion of balance sheets and financial tables for the harbour which is under ]-the statu of institution. 4-G-B-AMINATION (Inspection) We have mentioned our opinions on inspection reports and this is the matter to be solved betweeA the representatives of World Bank and Ministry of Treasury and Tariff. 5-H-0BEDIENCE TO THE PINANCIAL AGREEMENTS The matters concerned with these section answered a it's section. 8. APRASIAL OF THE PROJECT 8.1 The difficulty of reaching the aims shown in the project is t accepted by your bank. TCDD has moved in good intension in reaching the wanted aims. e can't agree with your sight that the project has Refer to paras. 20 been inevitably unsuccessful. It is a truth that there are many and 21 of obstacles formed in reaching the given aims. In 1974-1976 petrol crisee PPA14 have incre3sed this fact has speated the inflation, caused the fuel price and the spare parts' prices to increase, parallel to this, hand labor has increased. In the period of changing the railray from steam to diesel, in addition, the difficulties had in producing the local locomotives, the personnel education giving rcsults in a long peziod of time and the fewness of investment allowance given to the TCDD for many years, the weakness and unmodernization of the route, the inauffticiency of the locomotives and loadcars, and the problems may be caused by the increasing of the amount of these with speed should be thoght of and project should be made which will result in short time and have reasonable aims. -30 - COMMENTS BY REGION & OED 8.2 It's necesseary to think of a good management and for it to be suitable for present conditions. The matter of adjusting pricelist and upraising the own sources again will be mentioned later. In our opimib, the promises given in the agreement are, in general, have been accomplished, also, as mentioned above, approvement of the bank is seeked to buy the 5 Million TL costing 6xygen producing machine. The bank has also conditioned, in an article of the aggreement TCDD to seek it's approvement in receiving credit from other sources and New footnote this also is obeyed. (The credits received from the Europian 19 (referring Investment Bank and French sources for diesel locomotives.) It's also to railway investments) necesseary to mention that the bank bringing such conditions has added to PPAK. effected the other investments negatively. 8.3 After having an English Company do the contraction feasibility of the new railway between Istanbul and Ankara, the construction of For more details, this new railway has been started by Ministry of Publc works and refer to Dwelling. This project making Turkey the head of a bridge between paras. 8.01- Europe and the Middle East couftries and for the importance of the 8.03 of PCR. transit transport the realization of it carries great importance for TCDD. 8.4 The matter of transport co-ordination committee has been mentioned Refer to para. 18 above. This committee has lost it's activity by losing nembers in the of PPA . last years and it has been dismissed. 8.5 The result received from the first railway project is strongly believed that it will help in the second railway project. New foot- note 24 8.6 The 75 Million Dollars project about the sea-ports carried out addei to in 1982, 1983 and 1984, is a project carried out by TCDD. It is better PPAM accomplished than first railway project. Although the aims chosen in this project, it was completed in a more reasonable period. This is also accomplished by TCDD. 8.7 The reason for delay in purchasing in the first railway project Refer to para. is that the personnel working on this had began woking on thB tork for 26 and new the first time as explained above and the time wasted in leaving the footnote 24 of PPAM and purchasing procedures of the World Bank. TCDD has larned the purcha- paras. 3.02- sing procedure of the World Bank well and has shown it's application 3.04 of PCR. on sea-port project. - 31 - COMMENTS BY REGION & OED 9. IMPLMENTATION OP THE PROJECT 9.1 It is a reality that the retail price index in Turkey between 1974 and 1975 has risen % 132. The hing cost of the Project resulted from the inflation being higher than predicted. As a matter of fact, in the report it Is mentioned that the other years' price increase Is added to the 1971 predictions. But these price increases have been under the inflation and thus the project has been costly. 9.2 The matter of breaking the rules of the bank mentioned in the report was resulted from reasons out of TCDD's help. There are also examples which show that TCDD i' right in the matter of cancelling the purchasings and the rearrangament of the contracts for repurcha- sings. 9.3 Par example, in the first adjudication of the snot clearing mac- hines, the conditions were confirmed by the bark. It should rejected that the companies which are given an offering for acceptance, which are not suitable to the contract but cheap; TCDD has decided t6 cancel the putting up to tender and companies which are not suited, became suited and then putting up to tender redone. New 9.4 These matters were done by persuading the bank nembers and footnote 20 getting the agreement of the bank. added to PPAM. 9.5 In this section of the report on page 6, sections 3.02 end 3.03; 9.6 It says : "it has proceeded slower than expected to puchase an important parts of the units financed by the bank". At the end of this, three important matters which caused the delay by breaking the rules of the credit agreement and the bank and as a result causing the 5 Million Dollars part of the credit to be cancelled. - 32 - cuwsn 32 COMMENS BY REGION & OED 2hese are I a) The matter of wooden sleepers categories numbered 1 and 4 of the credit agreement, although it was proposed to have local partici- pets for wooden sleepers TCDD has, with insist given order to the General Direotorate at Porest Management, which doesn't fit the international adjudication conditions. TCDD has, an this matter, has *gone to international reducement but there was no company which gave an offer. Thus the aeney couldn't be spent and it was wished to transfer to categories other than banks. We had mentioned our view in the delay at the purchasings. But the project, period of which was between 1972 and 1974, had begun in 1973. The cuncorned purchasing units. at TCDD could only begin preparing More on this in the purchasing procedure of the bank to suit TCDD after this date. para. 3.02 5 illion Dollars part at .the credit wasn't cancelled but it was of PCR. transfered to other categories, b) It is discussed that; after agreement with PTT who did not even give the least thought application; 0.3.11ions Dollars has been taken;out of the credit amount which was resulted telephone equipments and specifications. c) There has been great attention to the spending of three years after the first application for the snow clearing machianes. In the first reducement, American Snowldlase company's application has been found cheap but against to the contract and these applications has been cancelled under the tnformation of bank and alnew contract represented and put on to reducement again. This in cause of delaying. - 33 - PROJECT COMPLETION REPORT TURKEY FIRST RAILWAY PROJECT - LOAN 893-TU I INTRODUCTION 1.01 The Bank's relations with Turkish State Railways (TCDD) began in 1969 at the Government's request. From the beginning, it was recognized that rehabilitation of TCDD would present a formidable task, demanding major insti- tutional reforms as well as sizeable investments. The railway's physical condition was poor, with serious arrears in maintenance of track, much of which traverses mountainous terrain, a motive power fleet that consisted for the most part of aging steam locomotives, a substantial proportion of obsolete rolling stock, and a signalling system which was described in the appraisal report as for the most part "primitive." 1.02 TCDD was obliged to operate under constraints familiar to railways worldwide. Its role was regarded esnentially as that of a public service and as such it was ill-equipped to meet the challenge of highly compe- titive and commercially-minded road transport. Between 1960 and 1970 the railway's share of total freight traffic decreased from 55Z to 25Z, while the proportion for road transport rose from 43% to 74%, Accepting that a general trend in favor of road transport was both inevitable and beneficial to the country's economy, the economy would have benefited even more from a better planned transition from rail to road. 1.03 In December 1970, an agreement was signed by the Government, TCDD and the Bank on a Plan of Action for the railway of which the objectives were to: (a) improve TCDD's organization and corporate planning; (b) introduce a cost-related competitive pricing policy based on establishment of a traffic costing system; (c) reduce staff by attrition; (d) revise TCDD's financial rilationship with Government and establish a specific accountability for the compensation of losses resulting from imposed non-economic services; (e) study uneconomic lines, stations and services; and (f) develop an investment program based on sound technical, financial and economic criteria." Two years before Board presentation, the details of the Plan of Action were recorded in a Memorandum of Understanding dated April 1971. It was thus accepted at an early date that financing under the Bank project was no more than a catalyst, albeit an essential one. The subsequent Plan of Action was incorpo- rated into the Loan Agreement as Schedule 5. The version as further amended by letter of August 5, 1975 is shown in Annex 1 to this report. - 34 - II. PROJECT PREPARATION ANi) APPRAISAL 2.01 In addition to the dialogue which led to the agreed Plan of Action for TCDD, the BanK was also involved, as executing agency, in a UNDPfinanced "Transport Coordination and Railway Study" by ITALCONSULT, which led to a Memorandum of Understanding on a Plan of Action for Transport Coordination in Turkey", formally agreed with the rovernment in August 1970. This led to establishment of a unit which, by 1973, was eventually titled as the Transport Coordination Agency (TCA), located in the Ministry of Communica- tions. High hopes were expressed for TCA's future role, but under extremely difficult and complex circumstances it did indeed have a meaningful impact on the conceptual approach to the country's transport problems. Appraisal of the railway project was thus preceded by an intensive dialogue which considered TCDD within the context of the whole transport sector. Appraisal eventually took place in March/April 1972, and was supplemented by a further mission in September 1972. 2.02 The project was conceived as a first three-year phase of a 1972-1977 Investment Plan for TCDD. More than one-half of the original Loan amount of US$47.0 million was allocated to track improvements, though in terms both of total project costs and of foreign exchange requirements the most important category was motive power and rolling stock. Cost Estimate and Financing Plan Cost Estimate Financing European French World Invest. Bilateral Local Foreign Total Govt. Bank Bank Credit ---------(US$ million equivalent)--- Way and works 39.7 18.5 58.2 32.1 26.1 - - Motive power & rolling stock 57.1 26.1 83.2 60.9 9.1 12.0 1.2 Signalling and telecommunications 9.4 2.6 12.0 10.7 1.3 - - Maintenance facilities for traction & rolling stock 8.8 8.1 16.9 10.2 2.6 4.1 - Training 0.4 0.2 0.6 0.4 0.2 - - Consultants 0.1 0.4 0.5 0.2 0.3 - - Other investments 8.7 1.6 10.3 9.9 0.4 - - Contingencies 24.4 9.5 33.9 26.9 7.0 -- GRAND TOTAL 148.6 67.0 2L5.6 151.5 47.0 16.1 1.2 - 35 - 2.03 The Bank Loan included US$10.0 million equivalent to finance local currency expenditure on track ballast and labor engaged in track renewal, which were items unsuitable for international contracts, and on wooden sleepers expected to be procured locally after international competitive bidding. Financing both from the European Investment Bank and the French bilateral credit was to meet the foreign exchange requirements fo-: manufac- ture of 140 diesel locomotives by TCDD, which had entered this field in 1968 and by the end of 1971 had produced 19 main line and 5 diesel shunting locomotives under licence from German and French firms, with results which were considered at the time to be satisfactory. 2.04 All imported goods to be financed under the Bank loan were to be procured through international competitive bidding in accordance with the Bank's guidelines, with "preferred" domestic bids .(for goods manufactured or processed in Turkey, and having a domestic value added of at least 20%) receiving preference during evaluation, again in accordance with Bank guidelines. - 36 - III. PROJECT IMPLEMENTATION 3.01 Loan effectiveness, expected by the appraisal report to be in June 1973, was achieved by August of that year. 3.02 Physical progress on the project as a whole (TCDD's 1972-74 Investment Plan) can be judged as fairly satisfactory, the physical components being largely completed by 1976, one to two years behind schedule. Costs were double the appraisal estimate, but this was largely because of inflation. Most costs were based on 1971 prices, with price contingencies added which reduced from 10% in 1972 to 6% in 1976. In fact the retail price index in Turkey rose by 132% between 1971 and 1976 and at a much higher rate thereafter. Procurement of the majority of Bank-financed items proceeded slower than expected. It is significant that as late as May 1978 a Bank mission found it necessary to provide an aide memoire spelling out the Bank's requirements. Three items gave rise to particular diffi- culties, with violations of the Loan Agreement and Bank guidelines causing delays and eventual cancellation of US$0.5 million of the Loan. 3.03 Of these three, wooden sleepers involved the largest item in the Loan (US$4.5 million). A supervision mission in November 1976 summarized the position very well: "Although Schedules 1 and 4 to the Loan Agreement expressly provided for domestic participation in ICB for wooden sleepers, TCDD since April 1974 has placed all orders direct with the General Directorate of Forests without previously notifying the Bank. Foreign and other domestic suppliers, but not the Directorate, responded to ICB at the end of 1974 but no orders were placed as a result. TCDD's request for $4.5 million reimbursement for domestic sleeper purchases has been refused, and TCDD has now asked the mission for permission to reallocate the US$4.5 million to the purchase of rails and track maintenance equipment." The ex-post ICB, which was the result of the Bank's insistence, thus proved to be no more than a charade. The other items which gave particular difficulty were telephone equipment, where, after award of contract to the Turkish PTT Directorate which was not the lowest bidder, US$0.3 million was cancelled from the loan, and snow ploughs where three years were spent after bids were first invited before agreement on specifications was finally reached. 3.04 These three instances represent only selected exampler of procurement problems under the Loan. Other voluminous correspondence was concerned, inter alia, with the following, of which the first item is perhaps the favorite: - 37 - combined screwing, unscrewing and fishbolt fastener machine; PABX telephone equipment; one high performance wheel profile lathe; one oxy-acetylene shaped iron place cutting machine; rail cutting machines; one ballast cleaning machine; track recording cars; roller bearing axle boxes; a rail defect detecting car; a levelling, lining and tamping machine, etc. The total list is much longer, all of which items were expected to be procured under Bank guidelines, and in accordance with the Loan Agreement. Procurement of these items required much time from staff who, at the same time address themselves to innumerable quescions relating to every aspect of TCDD's activities; to its role within a transport policy coordinating all transport modes; to the Bank's relations with the Government of Turkey; to our obliga- tions to potential supply member countries; and to our overall role as an international agency. Equal demands were made up the Government and its agencies. The conclusions are sumarized in a subsequent section of this report. - 38 - IV. TRAFFIC AND OPERATIONS A. Freight Traffic 4.01 The appraisal report noted that revenue-earning freight traffic by rail increased by 31% in terms of ton-km in the period prior to appraisal, 1964-71; but this is perhaps misleading because there was a substantial upsurge in 1965, but thereafter the total increase by 1971 was only 8%, representing an average annual growth rate of little more than 1%. 4.02 Over the subsequent years to 1980, appraisal forecasts suggested an annual average annual growth rate of 7.9% (in ton-km) if the project were implemented; but virtual stagnation of traffic levels if it were not, with early initial gains to 1973 being offset by steady erosion thereafter. 4.03 Actual results showed that ton-km reached a peak in 1976, with a gain of 30% over 1971, but the figure was still 12% lower than the "with project" forecast for that year. After 1976 traffic fell in every year to 1980, when ton-km were 14% lower than in 1971, 44% lower than the "with project" forecast, and even 10% lower than the "without project" estimate for that year (Table 3). Provisional figures for 1981, however, :how a considerable improvement over 1980, due essentially to the introduction of unit train working for iron ore, lignite and international transit traffic (para. 4.27).Y. 4.04 The disappointing achievements compared with expectations were reflected in the figures for all major commodities, but two categories of traffic need special mention. In terms of ton-kkm, iron ore remained as the railway's most important single commodity in 1980. The appraisal forecast, however, expected ton-km From this source to increase more than fourfold by 1980 compared with 1971, but there was no such increase; the figure achieved in 1980 being actually somewhat lower. The appraisal report noted a number of uncertainties in the Government's plans for developing steel production and its iron ore resources (based primarily on a Bank appraisal of the Erdemir Steel Plant Expansion Project appraisal report (February 1972), but with hindsight, it is apparent that more realism would have been appropriate in compiling the forecast of railway traffic resulting. And this emphasizes the need for careful integrated traffic forecasts. However, after 1976, the railways carrying capacity declined mainly due to a reduction in traction power for lack of maintenance and a shortage of spare parts, as explained in para. 4.07. 4.05 Sezondly, with hindsight, it is now clear that more attention to international railway transit traffic would have been justified. This traffic received no mention in the appraisal report, presumably because past carryings had been relatively small. Nevertheless, this traffic rose rapidly in 1972 and in the peak year of 1976 accounted for 24% of total freight ton-km. Its contribution to TCDD's net freight revenues was undoubtedly much higher than these figures suggest. A subsequent super- vision report (May 26, 1978) did give recognition to the "..... lucrative international transit traffic, mainly to Iran and Iraq." 1/ Freight Traffic: TCDD has pointed out that this upturn in tkm continued and reached 23,415 million in 1984 (with a net tkm of 7.532 million). - 39 - It seems that deliberations on rail transportation in Turkey should keep in mind an essential fact of geography: that Turkey represents a strategic gateway between Europe and Asia. Any attempts to forecast the level of international traffic can be little more than guesses, in view especially of the continuing volatile situation in the Middle East. Closure of the Suez Canal in 1967, the more recent and ongoing war between Iran and Iraq, and difficult relations between Iraq and Syria serve to illustrate major factors influencing transit traffic overland through Turkey. (TCDD has one direct rail route to northern Iran, and one to Iraq involving an 80-km link through Syria). 4.06 After appraisal, international transit traffic continued to increase until late 1977, when the border between Syria and Iraq was closed, and 1976 has remained the peak year for these flows. Subsequent fluctua- tions in this traffic are largely responsible for changes in the overall average length of haul for all freight: Average length Weighted by Traffic of haul (km) (m tons) (%) Year 1976 (Peak year) International 1,895 0.97 6.6 All other 413 1/ 13.72 93.4 Total 511 14.69 100.0 Year 1980 International 833 0.87 7.7 All otner 405 1/ 10.49 92.3 Total 438 11.36 100.0 Year 1981 (Provisional) International 1,146 1.20 9.4 All other 407 1/ 11.59 90.6 Total 476 12.79 100.0 In spite of the fluctuations, the average length of haul for the transit traffic remains much higher than for all other traffic. Combine this, inter alia, with the fact that it requires a minimum of expensive terminal facilities and marshalling, is a natural candidate for the opera- tion of unit train loads, and there is good reason to expect this to be a lucrative business for TCDD. Accepting that international traffic will remain susceptible to political vagaries, there seems little doubt that both the Government and the Bank now recognize its importance to the commercial and economic welfare of TCDD and as a foreign exchange earner. 1/ Derived from other figures shown - 40 - 4.07 For freight traffic generally, the more recent supervision reports have given clear indication that traffic losses have been a "supply-side" problem rather than representing an erosion of "demand" for rail services due to road competition: "The principal limiting factor in domestic freight traffic was a lack of available locomotives but wagon shortages also played a restricting role; It was estimated by TCDD that freight traffic would have been very substantially higher but for these restraints and a large potential for freight traffic growth undoubtedly exists" (Supervision Report, March 19, 1979, page 3)". "1980 was a bad year operationally for TCDD in which both freight and passenger traffic showed further decline..... The main cause was a lack of serviceable locomotives which resulted in an inability to haul all the offered freight traffic." (Supervision Report, June 26, 1981, Annex 8, page 1)". "About 10,000 tons per day of freight offered cannot be accepted mainly because of lack of freight wagons and the above mentioned traction problems." (Supervision Report, January 12, 1982, Annex 8, page 2). An additional 10,000 tons per day would have brought freight traffic up to the highest levels recorded in earlier years. In passing, it should be noted that the crucial problem was with the shortage of motive power. Even an unlimited availability of wagons would have been translated as a "wagon shortage" if there were insufficient locomotives to move them, because a wagon that cannot be moved becomes at best a warehouse, and is , longer a transport vehicle. But availability of motive power was not the only factor, and the situation is discussed in more detail in subsequent paragraphs. B. Passenger traffic 4.08 In terms of "traffic units" (one passenger-km - one freight ton-km), passenger traffic is as important to TCDD as its freight operations. The passenger traffic, however, contributes only about one-fifth as mch as freight to the railway's gross revenues, though it undoubtedly accounts for a much higher proportion of operating expenses. One reason is that 80% of passengers are carried on the suburban commuter services, which are typically costly to provide owing to the peak nature of demand and the short distances involved; but the Appraisal Report also noted (para. 3.29) that even for main line traffic: "analysis suggests that railway fares do not cover even the marginal cost of passenger transport. In order to stay competi- tive, TCDD did not increase its fares despite enormous cost increases for passenger traffic....." After very substantial increases in passenger fares in March 1978, February 1980 and October 1981 a supervision mission still reported in January 1982 that passenger revenues were estimated to cover no more than 20% of "attributable" costs, compared to 75% for freight. - 41 - 4.09 The crucial constraint of lack of effective motive power was none- theless allowed to fall much more heavily uF.n freight than on passenger traffic. In terms of billion gross ton-km hauled the contrast is significant: Passenger Freight Year trains trains 1971 6.3 14.2 1980 6.4 10.7 Some motive power (such as multiple-unit passenger trains), is not in any case available for freight, but it remains clear, as Bank missions have noted, that the Government's preference in a general situation of motive power shortage was to give first priority to passenger traffic. 4.10 On the most important main line passenger route (Istanbul-Ankara), and on the Longest passenger route (Istanbul-Kars, near the eastern border with Russia), TCDD introduced much faster express train services in early 1977: "The mission learned chat the train service in general is highly appreciated by many new passengers." (Supervision Report, June 1980, Annex 8). It has to be recognized that a national railway such as TCDD means more to its government than can be determined by objective connercial or economic evaluation, and that attitudes cannot be -7ianged within the context of one Loan Agreement. C. Operations 4.11 Railway operating statistics, by their volume alone, can serve to confuse rather than to inform. In attempting to find an appropriate focal point it is relevant, first, that motive power has continued to be TCDD's most worrying operational problem, and the focus can be further sharpened by the fact that, in 1980, some 80% of all gross ton-km were moved by diesel locomotives. The overwhelming workload was born by the following diesel- electric units: Locomotive No. Locomotives % available as No. Locomotives type owned Dec. 4, 1981 available Alsthom 344 68% 233 General Electric 44 27% 12 1/ 388 (weighted av.) 63% 245 1/ The very low availability shown for General Electric locomotives is misleading. During the early months of 1980 at least part of the fleet was transferred as an emergency measure to eastern sectors of the system, to replace Alsthom units which had failed under severe winter conditions. Local staff apparently had no previous experience in servicing these loco- motives, which were in any case kept in traffic without proper maintenance so long as they were still operational. - 42 - Schedule 5 of the Loan Agreement postulated that the availability of diesel locomotives should increase from an actual average of 78% in 1971 to a target figure of 80% by 1974. A revision to Schedule 5 in August 1975 extended the targets to 83% in 1975 and 85% in 1976. 4.12 A simple sum can illustrate the importance of these statistics. If an availability of 80% had been achieved, this would have meant that 310 locomotives would have been ready for service, or 65 more than were actually available in December 1981. Taking the cost of a locomotive as of the order of US$1 million, the meaningful capital value of the diesel fleet would have been increased by US$65 million, which is considerably more than the total of the World Bank Loan. The incremental value in terms of TCDD's traffic achievements (and to Turkey's GDP) would undoubtedly have been much higher. 4.13 During supervision of the project, successive Bank missions emphasized that a basic reason for the railway's motive power difficulties was the shortage of spare parts. A further reason was the comparative sophistication of design of the main locomotive in service with TCDD, which was insufficiently robust for operating coneitions on the TCDD network, but the main difficulty was the lack of spare parts. The appraisal report did not at that tia recognize this as a problem for diesel traction, beyond noting that "the variety of (locomotive) types causes difficulty in securing spare parts" (Annex 6, page 5). The Loan itself included nothing for loco- motive spare parts, and it appears that no subsequent reallocation of funds was made for this purpose until the Loan was approaching its final Closing Date. Following the supervision mission in May/June 1981, a letter to TCDD records that "Arrangements were concluded with the mission for the utiliza- tion of an additional US$407,000 of loan funds for spare parts for General Electric diesel locomotives" (July 20, 1981). 4.14 The locomotive spares situation is a common experience with the Bank's borrowers: the benefits from very large investments in new units are seriously diluted by the absence of relatively small outlays on spare parts, and/or by their ineffective application. The railway usually first points to the absence of foreign exchange as the essential cause of their problems. In the past, at least, the Bank showed reluctance to finance such items, which are "recurrent" rather than "capital" (although vitally important in protecting investments), and which are difficult or impossible to procure under ICB. In 1979, however, more than half of a US$75 million Bank Loan to Turkey for a Ports Rehabilitation Project was devoted to spare parts alone. In the Railway Project emphasis was instead upon the con- version from steam to diesel traction and procurement of new rolling stock and other items of capital expenditure, plus wide-ranging institutional reforms. 4.15 The country's very difficult foreign exchange position was undoubtedly a serious problem, but was not the only constraint, for foreign exchange clearly cannot by itself provide the answer, and this was recognized by successive Bank missions within the context of "institutional reforms". The list of spares required is numerous and complex, so good stores procedures to ensure that the right parts are ordered at the right time are just as crucial as sufficient financing, and often in practice at least as inadequate, together with the availability of technical staff to 43 - ensure that they are put to good use. This may seem too obvious to deserve emphasis, but a shorthand explanation of "shortage of foreign exchange" runs the risk of implying Inat injections of additional funds alone would provide the solution. A "shortage of spare parts" may also be misleading for similar reasons. 4.16 A study by consultants (Sofrerail) financed under the Loan was concerned with two aspects of TCDD's operations: "Establishing a Transport service", and "Organization for Maintenance of Diesel Electric Locomotives". Their findings were summarized in a report by an individual consultac- to the Bank (Mr. H. Van Helden, October 1980). 4.17 Mr. Van Helden's report makes it clear that the Bank Loan was regarded from the beginning as a catalyst for a dialogue with the Turkish Government and TCDD, and not as a panacea for the railway's problems; but the difficulties of entering into a meaningful dialogue are emphasized by the fact that the final draft of the Sofrerail report was received in August 1980 "after the Bank asked for it" (Van Helden report, para. 1.01), and more than seven years after the Loan Agreement was signed. 4.18 Sofrerail listed: "....... a number of simple measures which could be introduced immediately, even without changing the present method of freight train operations, which would lead to immediate improvements, such as: (i) removal of "parasite" wagons from shunting sidings; (ii) reducing the number of small neighboring shunting sidings through concentrating them in fewer but better equipped stations; (iii) launching an extensive campaign against train delays through introduction of rigorous personnel discipline; (iv) elimination of slow stopping trains on too long routes; (v) providing shunting personnel with simple tools such as tackles, uncoupling bars, braking sleds to avoid shocks, etc.; (vi) obligation to label wagons; and (vii) improved organization of repair shops for wagons would not only shorten the abnormally long waiting time in shops of TCDD's wagons (half of which loaded) but also reduce TCDD's payments in foreign currency for the use of wagons of foreign railways. - 44 - "Obviously, all measures listed above, which would lead to greatly increased quality of services, line capacity, and utilization of equipment, do not require investments to speak of." (Van Helden report paras. 3.02 and 3.03). However, it is generally easier to implement investments than to change traditional attitudes. 4.19 On maintenance of diesel electric locomotives it was noted that: "There is no scheduled preventative maintenance. Repairs and occasional non-scheduled maintenance are spread over a large number of shops, many of which are poorly organized, equipped and staffed. Training of personnel is very inadequate, and provision of spares unorganized." (Van Helden report, para. 6.01). 4.20 In June 1981 TCDD notified the Bank that it accepted the Sofrerail report in general, and the Bank replied urging TCDD to begin implementation of the recommended improvements, and to seek continued assistance from the consultants in doing so. On March 8, 1982, a telex was received from TCDD advising that an application to UNDP was being prepared to request $250,000 to finance consultants' services for this purpose. The Bank considered that this sum was probably much too low, but offered to act as executing agency if so requested. 4.21 At the time of appraisal it was planned that TCDD's fleet of 820 steam locomotives would be completely eliminated by 1982, being replaced by an additional 520 main line and 120 shunting diesels to be manufactured by TCDD at its plant at Eskiseher. (In December 1981, 530 steam locomotives were still owned, of which 230 were currently available). The arguments in favor of eliminating steam as quickly as possible must have seemed over- whelming. Much of the fleet was said to have exceeded its useful life: "Maintenance and repair become increasingly difficult and expen- sive, particularly for the newer locomotives as well, because spare parts for steam locomotives are no longer obtainable from outside sources, and TCDD has 40 different types of steam locomotives in the fleet". (Appraisal Report, Annex 6, page 5). An additional factor was that Turkey had already demonstrated its ability to manufacture its own diesel locomotives. In retrospect, however, and with hindsight, there might be some value in reviewing this major decision. 4.22 One country deciding to rehabilitate part of its steam fleet in recent years--Zimbabwe--was admittedly influenced by its landlocked (and previously unique political) position, which gave added uncertainty to reliability on imported fuel supplies. Zimbabwe has no domestic oil but abundant coal, available for use either for steam traction or electricity generation. The strategy, therefore, was to minimize any further capital expenditure on expensive diesels, to plan for future electrification, and in the meantime to bridge the gap with rehabilitated steam locomotives. - 45 - 4.23 There can be no doubt that Turkey was correct in planning for substitution of steam traction as quickly as reasonably possible. Accepting that the decision was made to convert to diesel traction, the issue is whether sufficient concern was shown for TCDD's ability not only to manufacture but to maintain its new diesel fleet within the planned time frame. The corollary is whether more thought should have been given to rehabilitation and maintenance of steam locomotives during the transitional period, in spite of a valid desire to minimize the difficult period of maintaining diesel and steam units side by side. The factor given most prominence in planning for elimination of steam by 1982 seems to have been the rate at which TCDD's Eskisehir works could expand its manufacture of diesels, and not so much the development of the logistics needed to maintain them. "We are aware of the problems associated with many of your steam locomotives because of their age, and we have already referred to the need for more rapid dieselization". (Letter to TCDD July 30, 1974). It seems significant that with the dieselization program still not completed, a supervision mission reported in January 1982 that: "TCDD intends to use the full capacity of the Eskisehir works to repair 60 diesel-electric locomo- tives in 1982". 4.24 It is also noted that in spite of the dieselization program, TCDD's proposals for a second Bank loan have included "extension to locomotive factory at Eskisehir for manufacturing electric locomotives"' and "electri- fication of Iskenderun area". The latter is now the subject of a detailed technical study under a contract signed with Sofrerail in May 1981. There are also plans for electrification "in the European part of TCDD's network". (Supervision Report, June 1981). At present 464 km of line are electrified. 4.25 For a number of reasons the Bank's acceptance of the virtually full-scale dieselization of TCDD, apparently without detailed discussion of the electric alternative, was fully understandable at the time of appraisal. The subsequent escalation of diesel fuel costs, and the added incentive to turn to secure indigenous energy sources, could not have been foreseen, while in addition rapid technical advances have since helped to increase the attractions of electrification. The major decision to manu- facture diesels locally had been taken in 1968, the year before the Bank's first involvement with TCDD, at which time the fleet already included 108 diesel and only 3 electric locomotives. Any insistence on a full-scale study of electrification would have meant lengthy delays. One view expressed is that TCDD was right, and will continue to be right, in opting for the diesel alternative, but that it chose to standardize on the wrong type of diesel-electric locomotive. With hindsight, two opinions would appear to deserve a general consensus; that TCDD would have been better served if more attention had been given to: (a) the potential problems of maintaining the diesel fleet; and (b) the case for a stronger effort to preserve the fleet of steam loco- motives over a longer period, if only as a matter of insurance. - 46 - 4.26 TCDD's apparent wagon shortage arose in spite of the fact that although freight ton-km were 142 lower in 1980 than in 1971, the number of wagons owned was LM% higher, and with bigger wagons their total capacity was 28% higher: 1976 (peak % Change, %Change, traffic 1980 cf. 1980 cf. 1971 ear) 980 1981 L 971 1976 Total operational fleet (wagons) 16,423 17,489 19,366 19,955 +18% +11% under repair 1,215 1,082 3,557 2,594 +193% +229% available 15,208 16,407 15,809 17,361 +4% -4% Total operational wagon capacity available (000 tons) 359 460 458 503 +28% same Average nominal wagon capacity (tons) 23.5 28.0 28.9 29.0 +23% +3% Wagon turnaround time (days) 6.4 8.3 13.2 12.2 +106% +59% Freight ton-km carried 5,748 7,499 4,971 5,903 -14% -34% 1980 was an exceptionally poor year in terms of wagons out of service, and is unlikely to be representative. As shown by the figures above the situation improved in 1981. It remains clear, however, that poor wagon availability was by no means so important a constraint on traffic levels as poor locomotive availability, but other factors were also important. 4.27 For any railway serving a variety of commodities and routes, a cause for concern is that wagons in general spend far more time at terminals (loading and unloading, shunting etc.), or in intermediate marshalling yards, than in actual movement. For railways which are concerned with analysing the make-up of wagon turnaround times (and all railways should, including TCDD), it is commonly found that less than 10% is spent in actual movement, even though "movement" may be expected to include long periods of time spent waiting for line clearance, particularly on an essentially single-track railway such as TCDD. In seeking improved wagon utilization, one key factor is to reduce marshalling and terminal shunting to the fullest extent consistent with retaining acceptable train loading, and wherever practicable to operate block (or "unit") train loads from origin to destina- tion. On TCDD there were some obvious candidates for block train - 47 - working. In response to Sofrerail's recommendatiors (para. 4.16) at the beginning of 1981, ten such trains per day were introduced for iron ore and five for lignite, with salutary effects on average wagon turnaround times for the railway as a whole, which were reduced from 13.2 days in 1980 to an estimated 9.9 days in 1981, principally as a resul: of the new block train operations. Later in 1981, two similar block trains were introduced for international transit traffic, and a third was planned. The benefits of operations of this kind extend beyond improving wagon turnaround times: they also reduce the costs of shunting and marshalling, they offer opportu- nities for better utilization of locomotives, avd in general they simplify the railway's logistical problems. "Utilization' and simplification" should be key words in any railway's vocabulary. The only question is why it should have taken so long to introduce such train working. D. Commercial Policy 4.28 The quality of para. 3.07 of the appraisal report justifies quotation in its entirety. "The railway's commercial policy is still based on the attitude that rail transport is a public service rather than a product that must be sold in a competitive environment. Quality of service is poor, manifesting itself inter alia in cumbersome dispatching procedures, the lack of a collection and delivery service, and lack of confidence by shippers that goods entrusted to the railway will reach the customer in a reasonable time. Moreover, the present freight tariff system is too rigid to allow the railway to compete successfully with road transport. Its structure is complicated and related neither to the costs of moving the different types of traffic nor to what the com etition will allow. In 1968, TCDD undertook a study through consultantsaI! concerning possibilities of modernizing the railway's commercial policy and the adoption of appropriate freight tariffs. The consultants' recommendations included (a) introduction of a new commercially-oriented, cost-related pricing system; (b) introduc- tion of a costing system for pricing; (c) proposals for the improvement of the quality of service; and (d) proposals for improvement of TCDD's marketing efforts. Due to the unfamiliarity of some of TCDD's executives with modern management methods and, consequently, a reluctance by management to implement the sweeping changes proposed by the consultants, the Board decided, pending further action on a reform of TCDD's traffic costing methods, to continue current commercial policies. In doing so, TCDD deprived itself not only of a valuable management tool, but also of a considerable additional traffic potential. The consultants estimated that application of a more commercially oriented tariff system in conjunction with improved quality of service could have led to the transfer to rail of up to four million tons of road-borne traffic in 1971, resulting in additio- nal revenues of about TL 250-300 million annually". 4.29 This wording is considered praiseworthy for the following reasons: (a) it avoided d common mistake of confusing cost accounting with railway traffic costing, the former representing an essential part 1/ Davies and Robson: "Implementation of Tariff Scheme", Ankara, February 1971. - 48 - of a railway's accounting system, while the latter demands ingredients from every railway department, including such factors as operational efficiency an. in particular the utilization of locomotives, rolling stock and other expensive equipment: traffic costing was thus recognized as involving the totality of the railway's economics, and as an essential management tool in making judgements in a commercial atmosphere; (b) it avoided the conventional but ambiguous term of "cost-based tariffs", referring instead to a "commercially-oriented, cost- related pricing system", which implied that although the best assessment of the cost of carrying traffic was fundamental, it was also necessary to respect the market price set by the competition, or in economists' terms, to acknowledge the dichotomy of supply and demand; and (c) by relating the need for a costing system to "proposals for the improvement of the quality of service" it conveyed a message that traffic costing is not simply an arithmetical ingredient in commercial tariff-setting, but is a basic means for helping mana- gement to understand the strengths and weaknesses of a railway's competitive position and for pointing the way to possible improve- ments. 4.30 An obvious point, which is nevertheless often misunderstood, is that in a competitive atmosphere a railway's tariff levels are set by the market, and that lessons to be learned from traffic costing are very frequently not so much on the "commercial" (demand) side as on the "operational" (supply) side. Accepting that competitive tariff levels (including transshipment and ancillary transport prices) are set by the market and not by the railway, can the railway successfully carry the traffic in question after reviewing the estimated costs of doing so? If the answer is negative the reasons need to be spelled out in operational terms, the costing exercise being accepted by management as the means for quantifying the results of any possible remedies. 4.31 For any railway, movement from an ingrained position as a "public service" monopoly to one of working in a competitive and commercial atmosphere is, at best, difficult, and predictably time-consuming, the time-frame being in terms of many years rather than months. For the government the situation is even more difficult because it is correctly concerned with political, social and other factors, and cannot be guided by economics alone. The files suggest that Bank staff should be commended for establishing a dialogue with the borrower, in which agreement on fundamental principles was established during the period of preparation and appraisal. On the question of timing, however, their predictions were over-optimistic especially as regards traffic forecasts. However, it was subsequently clear that misunderstandings developed and also that the borrower lacked adequate commitment to project objectives especially in the institutional sense. 4.32 The Loan Agreement, dated May 25, 1973 (in Schedule 5, I(D)) stipulated that: - 49 - "the borrower will take all action needed to establish in a manner satisfactory to the Bank, by May 31, 1974, or such other date as shall be agreed with the Bank, and thereafter maintain: (a) a traffic costing system; (b) a revised freight and passenger tariff system based thereon........; and (c) improvements in the quality of service." For a considerable time, however, nothing much happened. A supervision report dated January 31, 1977 records that: .........at present eight men from the newly-formed Costing Unit and Economic Research Group (of TCDD) are receiving training at the French National Railroads under a scholarship from the French Government. A later supervision report (August 10, 1977) noted that: "In November 1976 the General Manager of TCDD informed the mission that he would soon be submitting a request to the Ministry of Finance for permission to raise tariffs to reflect costs on a commodity-to-commodity basis. The formal request still has not been sent and TCDD is awaiting the establishment of the new government". A subsequent supervision report (May 26, 1978) noted that: "TCA has completed a zosting study designed to establish costs of individual trains and services and, together with the Commercial Department of TCDD, has revised the structure of both passenger fares and freight tariffs........ A mission in June 1981, recorded that TCDD had proposed new "basic freight rates per ton-km", which took account of such important features as length of haul, "loadability" characteristics of commodities and size of consign- ment offered. The Government rejected the proposals. 4.33 It is easy to find grounds for criticising the slow progress and limited effectiveness of efforts made in the field of traffic costing, and in seeking a better understanding ot the railway's economic and commercial situation in general. Many years passed before any significant results could be discerned. Apparently TCDD and TCA were pursuing separate paths in railway traffic costing, a Bank mission eventually reporting that "There appears to be no contact at all between TCDD and TCA which no longer plays any effective role as a coordinating authority in the transport sector." (Supervision Report, June 26, 1981, Annex 8). Traffic costing still appears to be regarded at best as a basis for tariff-setting, and even then the emphasis is upon published tariff scales rather than on "tailor-made" analyses of the economics of individual traffic flows. There is no indica- tion that traffic costing has yet been accepted as an indispensable tool in analysing the whole of the railway's economic and operational policy, or has found its way into the mainstream of management decision-making. Nevertheless a start has been made, and little more could reasonably have been expected in the circumstanzes. - 50 - V. FINANCIAL PERFORMANCE A. Financial Relationship between Government and TCDD 5.01 TCDD is a State Economic Enterprise (SEE) to w',ich a certain degree of operational and financial autonomy is granted by law. Its right to determine fretly rates and fares -- although specifically mentioned in the law gove*ning SEE's -- is actually restricted by overriding political and economical considerations. indeed, the law qualifies the above freedom in respect tr- basic goods and services (which include railways' services) which may, if necessary, be determined by Government. During the project period the Government has used its powers to approve smaller tariff increases than those requested by TCDD, and has chosen to subsidize from the general budget the losses incurred by not fully adjusting tariffs to railway users. The Government has also chosen to subsidize services on uneconomic lines rather than to discontinue or curtail them. This happened especially in the years after the 1973 cil price increases when the Government opted to protect the domestic economy from these outside induced inflationazy developments and saw the railways as an energy efficient substitute for road transport. However, it must be emphasized that railways are more energy efficient than road transport when carrying traditional railway traffic - large volumes of bulk commodities over considerable distances. Transfer of traffic from road to rail need not of itself reduce energy consumption. Much depends upon the commodities transported, utilisation of available transport capacities, origins and destinations, consignment sizes, needs for transshipment, and vehicles used. Lightly loaded rail services on marginal lines could well be less energy efficient than road services. The Government's approach however conformed to the public service concept, which had governed Government policy towards the railways until that time. However it failed to meet the need for TCDD to adapt itself to a competitive and dynamic environment within which it must sell its product and one of the main objectives of the project, which aimed at improving TCDD's financial position and reducing Government subsidies, was not achieved. Since 1980, the Government has granted substantial tariff increases, over and above inflation, to reduce TCDD reliance on subsidies. 5.02 In 1971, shortly before appraisal of the project, the Government modified substantially the capital structure of TCDD, and defined more precisoly than in the past its financial obligations vis-A-vis the railway. In particular: (a) Government equity in TCDD was increased substantially by incorpora- tion of past operating deficits, and existing treasury loans; (b) TCDD's future investments were to be met by Government as equity contribution; (c) the Government was to service TCDD's debt to the State Investment Bank; and (d) track renewal, maintenance, and repair were to be paid for by Government (in compensation for the alleged inequality of competi- tion between road and rail). It is worth mentioning that this law did not guarantee subsidization of future operating deficits, leaving the matter to be reviewed annually on an ad hoc basis. - 51 - B. Pricing Policies 5.03 The Plan of Action for Railways Development is detailed in Schedule 5 of the Loan Agreement and is shown at Annex L of this report. It requires inter alia TCDD to establish and maintain: (a) a traffic costing system; and (b) a revised freight and passenger tariff system, which would include, "for the purpose of reacting flexibly and effectively to changes in competitive circumstances," provision for varying tariffs as deemed advisable by TCDD. In addition, Side-Letter No. I on Tariffs and Personnel states that TCDD will establish tariffs "which will reflect the incremental cost of each type of transport service plus an equitable share of its infrastructure costs." 5.04 Implementation of these policies required from Government and TCDD a totally new attitude with regard to the economic role of the railway and its competitiveness in an aggressive intermodal transport environment. At the review of the yellow cover appraisal report the then Director of the Bank's Transportation Department questioned the readiness and the capability of TCDD's top management to initiate and implement such deep reforms. He also pointed out that the pricing requirements and financial objectives to be imposed by the Bank presented the Government with a dilemma as to where to apply subsidies, in the railway, or its major users, the Government controlled steel industry and iron mines. The interrelation of railway, steel and iron ore profitability is a major concern for Government and would certainly have weight in deciding the level of the periodic adjustments of railway tariffs required to comply with the loan covenants. He had doubt concerning the capability and intent of the Government to carry through such major tariff reforms as were suggested by the Bank. 5.05 The tariff issue overshadowed the processing of loan negotiations and has been a major issue during project implementation. During loan nego- tiations the Turkish authorities objected to incorporating in the loan documents any specific reference to the elimination of a given subsidy, such as that for track maintenance expenditure. The first set of tariff adjust- ments required by the Bank was delayed, which in turn delayed Board presen- tation. Tne tariff increases agreed upon at negotiations were written into Side-Letter No. 1; these increases were actually only partly implemented on April 30, 1973, between the date of Board approval (April 24, 1973) and that of Loan signing (May 25, 1973), and the Side-Letter had to be rewritten accordingly. During the course of project implementation tariff increases were implemented in 1975, 1978, 1980 and 1981. TCDDs proposals for the freight tariff increases which become effective in 1978 and later, were based on an analysis of costs made available by the costing system which resulted form the costing study carried out by consultants. They were calculated to recover the operating costs of carrying the traffic although they did not attempt to cover track maintenance costs which were covered by the special track maintenance subsidy. Substantial though these increases were (in May 1980 freight rates were increased by 150%, mainline passenger fares were doubled, and suburban fares quadrupled) they were not sufficient to keep up with inflation which rose steadily throughout the period from 17% in 1975 to 120% in 1980. In fact the railways lack of success in achieving - 52 - financial covenants should be looked at against the background of the economic ills which beset the Turkish economy during the implementation period and following the oil crisis of 1973-74. C. Financial Objectives 5.06 The objectives originally agreed upon are incorporated in Schedule 5 of the Loan Agreement. They concentrated upon a series of improving working ratios over the period 1973-78. The working ratio was defined as working expenses, excluding depreciation and debt service, expressed as a percentage of gross operating revenue, exclusive of Government subsidies and reimbursement by Government of track expenditure. 5.07 In 1975, because of rising working expenses and insufficient tariff increases, it became apparent that TCDD would not be able to achieve the original ratios. It was agreed to revise the targets upwards and to postpone the date for achievement of the target ratio of 100 from 1978 to 1980. In 1978, the Bank felt that the definition of the working ratio had to be amended. This was because the calculations made at appraisal and on which the ratios were based took into account the savings from abandonment or rationalization of uneconomic lines, stations and services; since the Government had taken no action on such abandonment or rationalization and had chosen to cover the losses incurred by subsidies, it was logical to deduct such subsidies from the working expenses, hence improving the working ratio. TCDD accepted this amendment. 5.08 A comparison of original and revised targets, and of actual working ratios, as defined in 1973 (original) and in 1978, eliminating all subsidies except that for uneconomic line, is as follows: Original Revised Actual Actual Target Target (1973 Basis)(1978 Basis) 1973 190 172 1974 165 212 1975 145 160 170 1976 120 145 156 1977 104 130 212 1978 100 115 218 1979 110 236 1980 100 241 1981 100 200 The table shows a substantial gap between targets and actual achieve- ment, a result principally of the Government's unwillingness to adjust tariffs and, to a lesser extent, of TCDD's inability to control expenses in a period of rapid inflation. From 1978 onwards, the Government introduced payment of the new subsidy to compensate for its refusal to increase freight rates to the extent requested by TCDD. Had the requests for tariff increase been accepted in full the working ratios above would have improved as follows: 1978 1979 1980 1981 200 221 156 139 - 53 - D. Income Accounts 5.09 A comparison of TCDD / actual and forecast income accounts over the period 1972-77 is given in Table 6; actual results for 1978-81 are also shown. Actual figures vary widely from appraisal forecasts. A sumary of selective data follows (TL million): 1973 1977 1M80 1981 (First Project Year) (Last Project Year) Actual Appraisal Actual Appraisal Actual Actual Operating revenue 1,508 1,354 3,691 2,134 22,529 32,759 Operating expenses 2,833 2,650 8,285 2,994 40,008 51,144 Less reduction for losses on uneco nomic lines 10 941 130 3,690 4,132 Net operating revenue (1,325) (1,286) (3,653) (730) (13,789) (14,253) The major reasons for these variations are as follows: (i) traffic has been lower than anticipated; (ii) tariff adjustments have been inadequate (a Government responsibility); (iii) constant 1972 wage and price levels have been used for appraisal forecasts throughout the project period, while inflation has actually been high; 6orecasts were based on the exchange rate of TL 14 to the dollar, while the rate actually deteriorated steadily to reach about 90 by the end of 1980 and 111 in 1981; (iv) anticipated staff savings were not achieved on time. 1/ Excluding ports - 54 - 5.10 The appraisal report mentioned overstaffing and the need to reduce the payroll. Schedule 5 of the Loan Agreement makes provision for TCDD to adopt a plan of reorganization and management improvement, including a phased reduction of staff; Side-Letter No. 1 quantified the Bank's expectations as being 650 personnel per year in 1973, 1974 and 1975. The target was ultimate- ly amended in 1975 and the revised Side-Letter No. 1 calls for containment of TCDD's operationall staff to 49,500 in 1975, and 50,500 in 1976 and 1977. The requirement to reduce staff as indicated above was dictated by the conviction that dieselization, CTC, and track improvement would result in a substantial reduction of manpower needs, mainly in the Permanent Way and Traction Departments. Although the 1975 to 1977 targets were not achieved during this period, operational staff had in fact been reduced to 50,114 by 1980 but staff costs rose from 60% of working expense in 1973 to 63% in 1980. 5.11 Section 5.04 of the Loan Agreement requires TCDD to revalue its fixed assets, which are based on historical costs, and to adjust the depreciation allowance accordingly. During project implementation it was learned that such revaluation had to be carried out by a Joint Committee comprising Ministry of Finance and TCDD representatives. In 1978, at a high level meeting with Turkish representatives in Washington, where the complexity of fixed assets revaluation was discussed, the Bank suggested the appointment of consultants to carry out the revaluation, and offered to consider financing of consulting services out of the loan. The proposal was conveyed to the Government but no action resulted. A reason advanced for the Government's reluctance to permit the asset revaluation was that the principle would also have had to be extended to the other SEE, and would have considerably reduced the amount of tax paid by them. So far TCDD has not revalued its fixed assets nor adjusted its annual depreciation allowance with the result that any comparison of operating ratios has little meaning2/. 5.12 In general TCDD has not shown great effectiveness in controlling its expenses as the pressure to achieve financial discipline weakened. Table 7 shows the different subsidies granted to TCDD and the revenue actually coming from users; in 1972, before the project started, users paid 77% of total revenue including subsidies; in 1980 their share had dropped to 41% before rising to 48% after tariff increases in 1981. E. Balance Sheet 5.13 TCDD's actual and forecast balance sheets as of December 31, 1972- 1977 are given in Table III; actual figures for 1978-1980 are also included. The balance sheets are consolidated in that they include the ports administered by TCDD. Section 5.02(b) of the Loan Agreement provides for TCDD to publish separate accounts and financial statements for the ports, but this clause has not been complied with. 1/ There seems to have been originally a confusion between TCDD's total staff (railways, ports, factories and temporary workers on investments) and TCDD's railway operational staff. 2/ Assets Valuation: TCDD has commented that until December 1983 the laws of Turkey did not permit a State Enterprise to revalue its assets. By the terms of Law 3094 (December 1983) assets were revalued as at December 1983 and will be revalued again a-. at December 1986. - 55 - 5.14 As already stated in paragraph 5.12 fixed assets are based on historical cost, which distorts fundamentally the financial presentation. Notwithstanding the substantial losses incurred, TCDD's cash position remained surprisingly good over the period 1972-76, with a current ratio1 varying between 1.2 and 2.6; the liquid ratio2 was less favorable at about 0.9, which was not particularly alarming. The situation deteriorated substantially since 1977 with a current ratio slightly below 1, and a liquid ratio oscillating between 0.4 and 0.6; a clear indication of a cash squeeze. 5.15 The 1971 law defining the financial relationship between Government and TCDD makes provision for Government to service TCDD's debt to the State Investment Bank. This has been done, and it explains why TCDD's long-term debt has hardly increased over the period considered. As a consequence the debt/equity ratio remained within safe limits. 5.16 As expected from the unsatisfactory results in the income accounts the actual financial position of TCDD is less favorable than envisaged at appraisal. It should be stated once more that the balance sheet does not reflect the true financial position because of the undervaluation of its main item, fixed assets. F. Cash Flow 5.17 It has not been possible to make a comparison of actual and forecast cash flow in full detail because of lack of information with regard to: (a) Debt repayment by TCDD; and (b) Funds made available by government for investment. An incomplete Table IV is attached. The missing information has been requested from TCDD. (letter of June 9, 1982) G. Audit 5.18 It was explained at loan negotiations that the High Control Board is responsible for the audit of all SEE's, including TCDD; The Board reports to Parliament. The Bank considered that the Board would not be in a position to conduct a satisfactory audit, and therefore insisted that the Ministry of Finance would be designated as auditor. The Turkish authorities resisted this proposal and the Bank -- at a point -- was ready to accept that audit be carried out by auditors of the High Control Board, subject to review by the Bank of its standard and procedures. This was not acceptable to Government, because it would put the High Control Board under the Bank's supervision. In another attempt to find a compromise, the Bank considered the withdrawal of the side-letter referred to below and the postponement of the definition of its audit requirements until after che first supervision mission. Eventually agreement was reached on a standard audit covenant making provision for audit by independent auditors, acceptable to the Bank, with audited accounts and financial statements to be received in the Bank by not later than six months after the end of each fiscal year (Section 5.02(a) of Loan Agreement) Side Letter No. 2 confirms that the Bank considers the Inspectors or Accounting Auditors of the Ministry of Finance to be independent auditors acceptable to the Bank, but reserves the right to review its decision. 1/ current assets over current liabilities 2/ current assets (less inventories) over current liabilities - 56 - 5.19 During the first supervision mission in August 1973 the arrangements for audit were discussed and an outline and scope of audit requirements was later on sent to TCDD. The mission expressed the view that the adequacy of audit arrangements in Turkey should be reviewed in general, after receipt of the first audit report on TCDD's accounts. The supervision mission of December 1976 was the first one after receipt by the Bank in May 1976, of the audit reports for fiscal years 1973 and 1974. These reports were found to be inadequate. The matter was discussed during the mission and the Ministry of Finance was later informed of the shortcomings and provided with a detailed outline of the Bank's requirements. 5.20 Since the supervision mission of December 1976 the Bank has repeatedly requested the Ministry of Finance to review its audit procedures for TCDD, but to no avail. Successive supervision missions have covered the subject out inadequate audit reports are still received. No attempt was made to review the agreement set forth in Side Letter No. 2. Audits have since been carried out annually by the auditors of the Ministry of Finance and reports have been received by the Bank. The reports are not yet as comprehen- sive as the Bank would desire but there is no doubt as to the competence of the auditors or to the thoroughness of their work. A Bank mission visited Ankara last year to discuss the status of auditing and accounting in the country and the Government has agreed to carry out a survey of the sector under terms of reference agreed with the Bank. H. Compliance with Financial Covenants 5.21 A review of compliance with financial covenants follows: Requirements Comments Loan Agreement Section 4.05 - Annual Review of Investment Plan investments and its financing with submitted to Government ank before submission to Government prior to Bank but after 1975 submitted simultaneously to Bank and Government. Section 5.02(a) - Audit Audit carried out and certificates received, but not yet of the scope and detail required by the Bank Section 5.02(b) - Separate accounts for Separation is made in ports administered by TCDD income accounts, not in balance sheets and cash flow. Section 5.04 - Revaluation of fixed assets Not done. and review of depreciation allowance - 57 - Section 5.05 - Achievement of given Not achieved working ratios Guarantee Agreement Section 3.02 (a) provide TCDD with funds to carry out Done investments (b) enable TCDD to achieve given working Not achieved. ratios without subsidies. (c) No construction of new lines without Construction of Ankara - prior study demonstrating technical, Istanbul high speed line economic and financial feasibility started in 1976 but now delayed. Plan of Action (Schedule 5 of Loan Agreement) 1. Working Ratios to be attained Not attained. 2. Savings from abandonment or No lines closed. rationalization of uneconomic lines and services 3. Traffic costing study and revised Costing system implemented flexible tariff system as a result of the study, but recommendations on flexible tariff system not fully implemented. Side-Letter No. 1 1. Staff reduction Met but in arrears 2. Tariff adjustments Insufficiently implemented 3. Further tariff adjustments Tariff increases were made related to inflation but were inadequate to counter increasing inflation. Side-Letter No. 2 Audit See above. Side Letter No. 5 If Government denies or delays discontinuance Done of uneconomic lines and services, or constructs new lines, savings not realized, or costs incurred, to be reimbursed to TCDD. - 58 - 5.22 Since the beginning of project implementation the Government and TCDD have been in default under some provisions of the Loan and Guarantee Agreements, and the project was at a early stage, put on the Problem Projects List. In 1975 the relationship between the Turkish authorities and the Bank with respect to the project had sharply deteriorated, at the April 1975 Annual Problem Projects Review it was decided that a letter should be sent to Govern- ment and TCDD giving them notice that the Bank would suspend the loan if action were not taken to correct problems besetting the Froject. Tariff increases applied shortly thereafter and other measures taken by Government prevented further deterioration of the project at that time and a constructive dialogue was resumed with the Turkish authorities, although tariff increases thereafter failed to keep up with inflation. - 59 - VI. INSTITUTIONAL PERFORMANCE AND DEVELOPMENT 6.01 In the Second Five-Year Development Plan 1968-72, the Government formulated a program for the transport sector calling for a comprehensive reform based on intermodal competition. The reform was not implemented, mainly because of lack of adequate administrative coordination. The latter stems ia part from the reluctance in some Government spheres cn give compre- hensive authority to coordinate the transport sector as a whole. To achieve some degree of coordination the Government established in 1970, a Transport Coordination Agency, (TCA) which, after some uncertainties, uas finally located in MTC. 6.02 Unclear lines of authority could also be found in TCDD; a highly centralized decision-making structure, but with lack of coordination between technical departments, and an inefficient research and economic department were among the major deficiencies acknowledged at project appraisal. 6.03 Against this background the following measures were agreed upon and written into the Loan and Guarantee Agreements: (a) a Plan of Action for Transport Coordination was drawn up; it provided for TCA to carry out studies leading to the formulation of a draft cransport policy statement to be based on cost effectiveness when intermodal choices are involved; (b) provision was made for TCDD to review annually, in consultation with the Bank, its investment plan; TCDD undertook not to seek amendments 3f more than 10% of any budgeted allocation; (c) a Project Coordinating Committee with executive powers, under the chairmanship of TCDD's Director General was created; and (d) a plan of reorganization and management improvement for TCDD was to be prepared, with the assistance of consultants. 6.04 TCA completed by 1978 the studies required by the Action Plan on transport planning, transport coordination, cost-based tariff formulation and other aspects of transport policy. These studies were used in preparing the Fourth Five Year Plan (1979-83) and in preparation of proposals for tariff increases in all public sector transport undertakings in 1978 and later. Although with some delay, they were a step in the right direction. TCA continued to function until 1981 but it has since been technically disbanded and certain functions transferred to a new department called "Tariff and Trade Dept" in the Ministry of Communications Though it played an important role in preparing and subsequently coordinating the implementation of a Bank-financed ports development project, TCA's coordination role in the transport sector as a whole has not been effective, and major transport coordination and planning is now undertaken by the State Planning Organisation which has recently prepared a 1983-93 National Transport Master Plan. - 60 - 6.05 The provision for the annual review of the investment plan limits such review to TCDD's plan, thus not covering the planning and construction of new Lines, which are the responsibility of MPW. During project implementation the relationship between the Bank and MPW remained difficult; MPW argued that its investments should not be discussed with the Bank as they were outside the scope of the project. However, in point of fact, the Bank was able to convirce Government to delay certain major investments until satisfactory feasibility studies were completed. 6.06 The Project Coordinating Committee was effective in bringing together heads (or deputies) of technical departments to consider progress on the project and necessary action, it concerned itself however with physical progress only. The TCDD's reorganization scheme implemented in 1976 differed substantially from the proposals made by the consultants; it was not given to the Bank for review prior to implementation. Major shortcomings were noted and, while some corrective action has been taken, the reorganization fell short of its objectives. 6.07 The ccvenants in the loan documents were, in general, adequately designed and well suited for their purpose. The principal reasons that performance fall short of the objectives are: that (i) the objectives set for a first loan were over-ambitious and were expected to be achieved in too short a time; (ii) Government commitment to modify TCDD's status from a public service organisation to a market oriented and financially viable enterprise dwindled after the oil price rises in 1973, and in the face of accelerating inflation and worsening economic conditions. - 61 - VII. ECONOMIC RE-EVALUATION 7.01 T.-e appraisal report suggested an economic return of 26% as the "best estimace", witn a range of between 16% and 41Z after a detailed sensitivity analysis. The economic evaluation of the appraisal report cannot be replicated since it would demand calculations based on earlier figures which, some ten years later cannot be the subject of meaningful revision. With hindsight and particularly in view of what would have happened to TCDD without Bank involvement (para 7.05) it can be concluded that the project was indeed economically justified. 7.02 The appraisal mission was over-optimistic in its freight traffic forecasts for the railway, so all estimates based on these forecasts were similarly inaccurate. Tne forecasts were based on a painstaking enquiry into the Government's plans for economic development, and on their effects upon railway traffic. They implied that the freight traffic growth rate would jump from an average of about 1% p.a. up to 1971 to nearly 8% p.a. during the ensuing decade. It did not happen. 7.03 The methodology used in calculating the economic return was conven- tional, but open to question. There was understandably no attempt to identify benefits from individual items in the project (the most important benefit was in fact the ensuing dialogue), but concentrated instead on expected benefits from the project as a whole, which were quantified in terms of additional costs to the country's economy if traffic which would travel by rail in the "with project" situation would otherwise have to travel by more expensive road transport in the "without" situation. Since the freight traffic forecasts were so far removed from what actually happened, and the situation and perfor- mance of the railways was so different in later years from what had been forecast. further ex post analysis could only be of academic interest. 7.04 More important was the fact that TCDD staff clearly welcomed an exchange of ideas with railway staff from outside the country. and that Bank staff were in a unique position to meet these needs objectively. It would have been helpful if the Bank had continued frcm the beginning by focussing on the internal economics of TCDD instead of the impact of the project upon the whole economy of the Republic of Turkey. In that case they would have been thinking and talking on the same lines as they would have wished TCDD staff to adopt. Innovations such as unit trains might have been introduced earlier as just one example of what is meant Dy "internal economics". 7.05 The meaningfuL comparison is not with the expectations of the appraisal mission, but with what would have happened to TCDD in the absence of Bank involvement. The Loan provided funds for the railway at a time when the country was desperately short of foreign exchange, and was for the most part allocated to improving the track and signalling system, which was in poor shape at the time of appraisal. The project was surely a success in suppor- ting a transport agency that remains an asset crucial to the economy of Turkey. Any transport business that has to refuse "about 10,000 tons per day of freight" as late as in 1982 (para. 4.07) is in a different situation from a firm facing bankruptcy due to a lack of customers. The efforts of the Govern- ment. TCDD and indeed the Bank, could have been more effective than they were, which is true of most similar projects. The conclusion remains that the - 62 - estimated economic return of 26% almost certainly understates the benefits of the project, in terms of what would otherwise have happened in the "without" case. Most important, to repeat, is that a meaningful relationship has been established over the years. A second project should be easier, more produc- tive, but probably no less difficult to quantify in terms of its economic return. - 63 - VIII BANK PERFORMANCE 8.01 Under Section 3.02(c) of the Guarantee Agreement, The Government as Guarantor, agreed: "not to initiate the appropriation of funds for, and not to under- take, or cause to be undertaken, any construction of new railway lines until the technical, financial and economic feasibility of such lines has been demonstrated to the satisfaction of the Guarantor, the Bank and the Borrower." 8.02 It seems most likely that at the time of appraisal the Bank was aware that, inter alia, the Government was considering construction of a new and very expensive high speed rail line between Istanbul and Ankara, though this received no mention in the appraisal report. In 1974 the Government gave a Bank mission a copy of a study of the New Line prepared by consultants (Davies and Robson; UK) in 1972. In November 1976 a Bank supervision mission reported thatz "Confirmation was received from the Director of Railways, Ports and Airports (DLH) of the Ministry of Public Works that construction of tunnels for the new Istanbul-Ankara high-speed rail line has indeed commenced and that the US$2 billion project is expected to be operational in 1981. This action is contrary to assurances given to Messrs. Pollan and Davar in March 1976 that no new line construction was undertaken in 1974 or 1975 or planned in 1976. "The Bank considered suspension but finally elected not to take any remedial actions when it learned that the Tecer-Kangal bypass, & 40 km, US$20 million line, was being constructed despite studies whi:h showed an inadequate economic return. The mission feels the Bank should take a stronger stand in the case of the Istanbul-Ankara line, which would cost about 100 times the cost of the Tece.-Kangal bypass, and would be one of the major construction projects in the world during the next few years." (Supervision report, January 31, 1977, pp 7 & 8). Attached to the report was a draft letter to the Ministry of Finance. (Annex 1.2) expressing the Bank's serious concern that construction of the New Line had begun "without discussing the technical, economic and financial aspects of it with the Bank, as required by Section 3.02 of the Guarantee Agreement. We would hope that the Ministry of Public Works would be willing to hold such discussions with our next supervision mission........ so as to preclude the Bank from having to consider the possibility of exercising any of the remedies under the Loan Agreement." 8.03 The inadequate wording of Section 3.02(c) of the Guarantee Agreement was in fact recognized by Bank staff at the time. In a side letter dated the same as the Guarantee Agreement (May 25, 1973), it was confirmed that if the Guarantor: "shall undertake the construction of new railway lines despite the provisions of Section 3.02(c), the Guarantor shall reimburse the Borrower for the net annual savings unrealized, or costs incurred by the Borrower by ....... operating the new railway lines." - 64 - 8.04 The Bank was thus anticipating a violation of Section 3.02(c) before the Guarantee Agreement was signed, and was trying to change the direction of its wording. Discussion of Section 3.02(c) is perhaps of little more than academic interest, because the Bank spelled out subsequently that its leverage was not in the Guarantee Agreement or side Letters, but in the prospect of a second railway project; "During our discussions in Washington with the delegation headed by Mr. Erder earlier this year, the Bank indicated LL would be willing to accept the Tecer-Kangal cut-off and the work under the two existing contracts for the high-speed line as exceptions to the undertaking in the Railway Project Guarantee Agreement, provided however, no further contracts be let for this line nor for any other new line of construction (except Tercer-Kangal) until their technical, financial and economic viability has been demonstrated as provided in the Agreement. We trust you will take appropriate action on this matter which of course was also one of the key issues leading to our postponing consideration of a second railway Loan." (Letter to the Director of the Treasury, Turkey, November 21, 1978). 8.05 In the two main issues of contention between the Bank on the one side and the Government and TCDD on the other side, the Bank was successful eventually with one issue and unsuccessful with the other. Construction of the Ankara-Istanbul high speed line has been delayed and a study for the development of the Ankara-Istanbul corridor by means of a series of possible investment alternatives is now to be carried out under Bank agreed terms of reference. On the other main issue, that of the financial viability of TCDD, tariff increases were insufficient to compensate for inflation as explained in para. 5.05. - 65 - IX. CONCLUSIONS 9.01 From the beginning it was predicted that the project would be difficult, but nevertheless worthwhile. Some ten years later, it can be confirmed that both predictions were correct. The question is not whether the Bank should have become involved in such a difficult project, but whether the difficulties could be mitigated for similar projects in the future, by learning from past experience. 9.02 One suggestion is that, for a first loan, the objectives to be pursued should be limited and realizable within the time-frame of the project, which should also be simple and focus on remedying Gne or two major deficiencies in railway operations. A more gradual approach to improving such a complex organization as the railways would, with hindsight, have provided a better basis for starting the dialogue with the railways. 9.03 Another suggestion is that the Bank should stop financing all the railways'equipment requirements which are subject to all the rules of the procurement guidelines. Most of the correspondence in the project files is concerned with such intimate details as "one oxygen production plant", or of the power of a "spindle drive motor". The result is to divert attention from what was intended to be the main thrust of the project, which was to transform TCDD from an inefficient public service organisation into an efficient, commercially-minded, competitive and financially viable organisa- tion. The Government of Turkey, the management of TCDD, and the Bank all reached a consensus on the essential objectives of the project, but somehow attention was diverted instead to the relative merits of snow ploughs, trolley cars and the like, which made only a marginal difference to the welfare of TCDD. (The choice of locomotives was of far greater importance, but decisions were reached before the Bank's involvement.) 9.04 Most of the financing from the Loan was in fact committed to items that were relatively easy to procure under Bank guidelines, the largest items being rails and rolling stock, neither of which usually involve complex difficulties in terms of specifications. The correspondence in Bank files demonstrates that it was the smaller items in the list of goods which gave the most trouble, and absorbed considerable staff time on such matters as the relative merits of four motor trolleys from the two competing firms of Plasser and Wickham. 9.04 A further suggestion is that with the bulk of physical investments completed by the end of 1976, the Bank should have taken steps to close the loan at a much earlier date than 1981. However, if the loan had been closed even one or two years earlier than it was, the very useful study by consultants on Freight Operations and Diesei Locomotive Maintenance would not have been completed. Since many cases arise where technical assistance of this kind is carried out only very late in the project period, it is suggested that more attention should be paid in project preparation and at negotiations to obtaining firm commitments and dates for the implementation of such technical assistance from both borrowers and governments. - 66 - Table 1 PROJECT COMPLETION REPORT TURKISH RAILWAY PROJECT (Loan 893-TU) Project Implementation 1973-80 Percentage Completed by End Year 1973 1974 1975 1976 1977 1978 1979 1980 1981 Way and Works 39 59 87 91 94 94 96 97 100 Signalling and Telecoumunications 10 30 50 76 76 80 95 100 100 Traction & Rolling Stock 44 60 82 90 92 92 94 96 98 Workshops and Depots 22 65 82 92 95 95 97 100 100 Training and Technical Assistance - 20 40 40 40 40 80 100 100 Other Investments 15 30 65 98 100 100 100 100 100 PROJECT COMPLETION REPORT TURKISH RAILWAY PRDJECT (Loan 893-TU) Actual and Appraisal Estimates of Project Costs Actual Cost Appraisal Estimates Cost Actual Cost as a Major Works and Components Local Foreign Total Local Foreign Total Proportion of TL million US$million US$aillion TL million USillion US$million Appraisal Estimate I (1) Way and Works 1470.8 37.84 137.9 556.5 18.5 58.2 237 (2) Signalling & Telecommunications 224.4 7.36 21.6 132.4 2.6 12.0 180 (3) Traction and Rolling Stock 2330.3 74.76 231.4 799.3 26.1 83.2 278 (4) Workshop & Depot Facilities 350.7 7.27 31.1 122.5 8.1 16.9 184 (5) Training & Technical Assistance 16.5 0.43 1.4 7.8 0.6 1.1 127 (6) Ocher Investment. 240.6 1.33 17.8 121.9 1.6 10.3 173 (7) Contingencies 340.__9.340..99. Total 4633.3 128.99 441.2 2081.0 67.0 215.6 205 Source TCDD and Bank Mission Exchange latess Appraisal Rstimatess US$l.0*TL14.0O Actualt US$1.001972 TL14.15; 1973 TL14.15; 1974 TL13.93; 1975 TL14.44; 1976 TL16.05; 1977 TLI8.00; 1978 TL24.28; 1979 TL31.08; 1980 TL76.04; 1981 TL1I1.22 (b PROJECT COMPLETION REPORT TURKISH RAILWAY PROJECT (Loan 893-TU) Revenue Earning Freight Traffic -------------- Actual ---------------- -- Appraisal Forecast - ------------- Actual----------- Year Total tons Total Ton-Km Average Total ton-ka Lignite (million) (million) Haul (km) (million) Iron Ore Coal and Inter With Without Coke national Project Project --------- Million ton-km -------- 1964 13.23 4,387 332 - - 716 1,000 n.a. 1965 14.13 4,328 378 - - 1,248 945 n.a. 1966 14.71 5,484 373 - - 10127 762 n.a. 1967 1J.82 5,052 366 - - 1,169 782 n.a. 19t8 14.00 5,235 374 - - 1,315 675 323 1969 13.20 5.235 397 - - 1,446 680 303 1970 13.82 5,622 407 - - 1,863 707 178 19?1 15.26 5,748 377 - - 1,384 821 163 1972 15.76 6,641 421 5,959 5,959 1,444 904 805 1973 14.87 b,693 450 6,135 5,890 1,882 855 758 0' 1974 13.61 6,376 468 6,476 5,820 1,118 887 1,476 1975 13.46 6,774 503 6,668 5,750 1,646 865 1,631 &916 14.69 7,499 511 8,480 5,680 1,914 862 1,831 1977 13.83 6,334 458 8,594 5,650 1,261 973 1,187 1978 13.21 5,635 427 9,282 5,620 1,133 998 381 1979 12.45 5,548 446 10,024 5,590 1,442 853 496 1980 11.36 4,9?1 438 11,402 5,550 1,249 753 727 1981(Proviaional) 12.79 6,091 476 12,200 5,510 1,539 n.e. 1,372 Sources Appraisal Report, Supervision Reports, and TCDD statistics. Where statistice differ between alternative sources the latest available figures have been taken. The differences do not affect the main conclusions). 1-3 lb3 PROJECT COMPLETION REPORT TUKYISH STASE RAILWAYS (LOAN 893-TU) Passenzer Traffic ----------- Suburban ---------- ----------- Main Line -------------- -------------- Total -------------- Number of Average Number of Average Number of Average Passengers Journey Passengers Journey Passengers Journey Year (million) (kM) (million) (km) (million) (kmu) Appraisal Appraisal Appraisal Appraisal Appraisal Appraisal Actual forecast Actual forecast Actual forecast Actual forecast Actual forecast Actual forecast 1964 59.6 11 21.6 144 81.2 46 195 61.0 11 22.7 150 83.7 49 1966 63.6 I 22.3 156 86.0 49 1967 68.6 it 23.7 150 92.4 47 1968 72.9 12 25.2 145 98.1 46 1969 78.2 12 24.3 150 102.6 45 1970 80.2 26 23.8 145 104.0 53 1971 85.1 27 25.6 135 110.7 52 1972 90.8 85.4 27 26 22.2 25.2 114 135 113.0 110.6 47 51 1913 100.4 86.9 27 26 17.1 20.1 166 129 117.5 107.0 44 45 1974 109.6 n.a. 27 n.a. 18.8 n.a. 117 n.a. 128.4 n.a. 45 n.s. 'D 1975 95.1 91.5 27 26 14.6 15.9 151 126 109.7 107.4 43 41 1976 94.2 93.1 27 26 13.6 15.7 155 121 107.8 108.8 43 40 1977 97.7 94.6 27 26 14.9 15.7 167 121 112.6 110.3 45 40 1978 99.2 27 16.4 181 115.7 48 1979 102.1 27 23.9 169 126.6 54 1980 92.3 27 21.6 164 113.9 53 PR0JECT COMPLITION REPORT TUKiSt RAILWAY PROJECT - IAAN 893-TU Selected Operatint Statistics 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Actual Actual Actual Appra. Actual Appra. Actual Appra. Actual Actual Actual Actual Actual Actual Target Target Target 1. Moute km 8,022 8.133 8,141 8,141 8,138 8,138 8,139 8,139 8,139 8,193 6.193 2. team locomotives (number) 840 619 781 767 725 646 603 541 $37 537 530 3. Dieset lucootives (number) 125 154 176 192 242 292 342 384 420 451 470 4. Electric locomotaves (number) 4 12 18 18 18 18 18 18 t8 16 18 5. Diesel railcars (number) 25 25 25 25 25 24 23 23 29 18 16 Availabilityi 6. Steam lucootkves 3 72 70 65 6b 69 70 14 75 75 76 67 61 67 56 7. Diesel " 1 76 18 80 $1 at 83 63 85 77 71 52 64 62 61 d. Electric " x 75 VL 80 - 94 - 92 - 88 88 83 61 56 61 9. Diesel railcars I n.a. 71 74 75 73 80 80 65 83 72 72 55 56 57 Engine km per loco.day . 10. Steam locomotives (kM) n.a. 231 227 a. 190 216 131 113 103 68 118 11. Diesel " (ka) n.a. 390 384 na. 390 438 400 427 3129 313 355 12. Electric (km) n.a. 457 341 n.a. 320 342 381 368 5M5 425 437 Diesel railcars (M) 247 237 233 247 233 234 200 210 195 I. Passenger coaches (number) 1,219 1,175 1,078 1,053 1.278 1,289 1,329 1.340 1,390 1.351 1.318 14. Passenger km per km at line (000) 115 656 641 707 582 567 625 685 535 134 745 10. Freight cars (number) 16,423 16,036 15,989 15,998 16,750 17,489 18,951 17.599 19,115 19,366 19.955 Lb. Carrying capacity 000 tone) 384 385 398 na.. 483 490 506 513 550 560 581 17. Tons carried (mil.tons) 15.26 15.76 14.87 16.6 13.6 13.5 14.7 13.8 13.2 12.5 11.4 12.8 to. Turn round time (days) 6.4 6.5 6.8 5.2 8.8 8.3 8.2 10.0 11.0 13.2 12.2 Sources TCW I- fo PROJECT COMPLETION REPORT TURKISH RAILWAY PROJECT - LOAN 893-TU TCDD - Actual and Forecast Income Accounts 1972-1980 (TL Million) 1972 1973 19714 1975 1976 1977 1978 1979 1980 1981 Actual Appra. Actual Appra. Actual Appra Actual Appra. Actual Appra. Actual Appra. Actul Actual IARU A MU41 OPERAING REVENU Freight 90U 791 1.12Y SUb 1,244 850 2,300 876 3,204 1,111 2,861 1.128 3,801 5,975 19,915 29,357 Passenger and Saggage 231 231 227 191 262 112 332 163 376 158 424 160 720 988 2,591 3,355 Other 108 85 154 84 159 85 214 85 258 85 406 88 404 521 23 47 Additional, Tariff Changes - 45 - 273 - 285 - 451 - 552 - 758 - - - - Total Operating Revenue 1,240 1,152 1,508 1,354 1.665 1,392 2,846 1,575 3,838 1,906 3,691 2,134 4,925 7,684 22,529 32.759 OPERATING EXPENSES ?,607 13,222 24,575 27,608 Staff and Labor 1,386 1,436 1,553 1.418 2.018 1,401 3,105 1,385 4.006 1.381 5,266 1.381 1,000 1,931 5,398 9,461 Fuel and Electricity 419 470 491 465 726 450 770 445 732 470 704 425 775 1,161 2,461 4,181 Other Material 2y6 247 296 255 412 263 451 270 621 285 455 290 1,838 2,653 6,452 8,435 Uther (Including Tax) 219 167 253 200 367 215 498 240 627 250 1,388 260 Total Workang Kapenses 2,360 2,340 2,593 2,336 3,523 2,329 4.,824 2,340 5,986 2,386 7,813 2,356 11,220 18,967 38,886 49,685 Depreciation 217 265 240 312 271 375 326 445 391 560 472 538 534 759 1,122 1.460 TotPL Operstng Ep 2,577 2,605 2,833 2,650 3,794 2,704 5,150 2,785 3,377 2,946 8,285 2,994 I,754 19,726 40,008 51,145 Workg a .n(Loss) (1,120) (1,118) (1,055) (984) (1,858) (937) (1,978) (765) (2,148) (180) (4,122) (222) (6,295) (11.483) (16,357) (16,926) Less Reduction of Losses in respect of Uneconomic Lines and ServLces - - - 10 - 40 535 70 554 100 941 130 1,381 2,421 3,690 4,132 Nac Working Uain (Loss) (1120) (1,186) (1,085) (974) (1,858) (897) 1W) (695)(IA94) (380) 3.t8l) (92) j4.91) A") (12.667) (12,794) NET UVEKATINU REVENUE (1,337) (,453) (1,325)(1,286) (2,129)(1,272) (2,304)1,140)2,539) (940) (3,653) (730) (5,448) (9,821) (13.789) (14,254) Non-Operating Revenue (Net) 68 120 123 120 199 120 141 120 265 120 334 120 702 (236) 1,621 (767) Interest 140 125 125 128 133 140 243 153 203 176 231 195 444 573 1,300 1.861 NET iLOME (1.409) (1,458) (1,327) (1,294) (2,063)(1,292)(2,406) (1,173) (2,.477) (996) (3.550) (805) (5,190) (10,630) (16,710) (16,902) Ovt Reiabursement of Track Expenses 362 358 423 400 539 400 851 400 1,229 400 1,727 400 2,171 4,733 9,295 (10,282) Working Ratia2/ (Original Formula) 190 203 172 172 212 165 170 144 156 120 212 104 248 271 267 218 Uperattang atto2/ (Original Formula) 208 226 188 196 228 192 181 173 166 150 224 135 260 281 274 225 Working Ra&iuj/ (Revised Formo a) 218 236 241 200 OperatIg Rato3 (Revised Formula) 230 247 249 206 Wages as % of Working Expenses 59 61 60 61 57 60 64 59 67 58 67 59 68 70 63 56 f Wages as Z of Oper- ating .xpensea 54 55 55 54 53 52 60 50 63 47 63 46 65 67 56 54 a Sources TCUb Ntes& 1/ includes subsidies for tariff increases withheld as follows% 1978 TLALi million, 19791 TLA&4 million, 1980. TL7945 million, 19811 TL10003 million 2/ After exclusion of all subsidies 2/ After exclusion of all subsidies except that for economic lines PROJECT COMPLETION REPORT TUKKISH RAILWAY PROJECT - LOAN 893-TU Government Subsidies to TCDD and Railvay User Charges (TL MILLION) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Subsidies fort Track Expenditures 362 412 539 851 1,229 1.727 2.471 4,733 9,295 10,282 Freight Rate Increases Refused 411 484 7,945 10,003 Services on Uneconomic Lines 535 554 941 1,381 2,421 3,690 4.132 Total 362 412 539 1,385 1,783 2,668 4,263 7,638 20,930 24,417 Jross Oparattng Revenue, Exclusive of all Subsidies 1,240 1,508 1,665 2,846 3,838 3,691 4,514 7,000 14,584 22,756 -8 Total 1,602 1,920 2,204 4,231 5,621 6,359 8,777 14,638 43,514 47,173 X Paid by Users 77 79 76 67 68 58 51 48 41 48 1- PROJECT COMPLETION REPORT TURKISH VAILVAY PrWJECT - LOAN 893-TU T(u - Actual and Forecast Balance Sheets as of December 31, 1972-1980 (TIL Milto) L912 1973 1974 1975 1976 1977 1978 1979 1980 Actual Appra. Actual Appra. Actual Appra Actual Appra. Actual Appra. Actual Appra. Actual Actual tva AWITS Current Asses Cash 84 40 64 60 95 60 194 60 329 60 450 60 177 820 764 Inventury 890 160 992 155 1,601 750 1,916 750 2,348 745 3,168 140 3,949 5,565 12,136 Uther 8b2 709 1.338 730 JJbI 152 2S 775 2.466 198 3.059 a2 5.523 9.296 21.54 total C1urrent Asset* 1,836 1,509 2.394 1,545 3.364 1,562 4,367 1.585 5.t63 1,603 6,101 1.622 9,649 15.681 34,440 fi-Current Assets 8 1 60 1 8 1 77 1 94 1 100 1 89 113 52 Vixed Assets Croas Pige4 Assets in Use 6,552 ?,795 1,015 8,988 7,905 10,2a5 9,405 11,778 11,339 14,553 13,402 16,063 16,206 20,657 30,001 Leas Accumulated Vaprecieation 2.553 2 2L54L 2.941 2,91 3.35 3,228 3.834 3,562 4 4,063 5,102 4 _&308 6.396 Net Fixed Assets in use 3,999 5,192 4.434 6,041 4,992 6,930 6,171 7,944 7,176 10.124 9,339 10.961 11,631 15,349 23,605 WQrk-Ln-Proress 288 ISO 331 301 3144 385 653 393 825 407 1 436 t.9tS 2,977 5,435 Total Pied Assets 4,28Y j.j 4.)0 6,342 5016 7.30 6,830 8,337 6,601 10,531 10.869 11.l97 13.546 18.326 2.043 rUTAL ASSETS 6,131 _,62 7L219 JLOBS !~ _,dL7 8 A? t1.2?4 _9.923 13j358 12,135 1 7 13,020 23.284 34 120 63,535 1,dABILITIES Current Liabiliates 106 917 1,35) 9t? 1,438 912 1,253 916 4,421 921 8,34'-1 927 9,630 20,499 37,556 lon-Current Liabilities 30t 312 5 312 6 312 7 312 a 312 248 312 3,92) 5,560 7,50 LoiiS-Turm Debt Varesgn 150 111 43$ 7 199 938 1,056 1,343 1,018 1,166 1,122 2,158 1,304 1.315 1,417 ue-i 1,610 1,526 1,302 1.31 J4511, 1.10 2153 973 2058 847 2,486 127 3L965 6.011 1.878 Totl 1,160 1 70) ,737 1,7 8 2,310 Z,04 3.209 2,316 3,136 2,593 3,607 2,885 5,259 7,393 3,295 iteserves (Insurance) 40 38 S 42 69 48 96 53 123 s8 1.6 63 116 179 185 Equity .J,324 342.L 4,0 4,2 4,2 5,6 7109 b,326 610 81251 5,3 8,3 4, 484-11,695 rULAL LIA41LITIES b&13k b L_1162 _'4219 7A'835 _8 6.7 8 L114 _9.923 1385 12,135 1 ?jO76 13,020 23.284 34L120 63.535 Currency Vatio 2.6 1.6 1.8 1.1 2.3 L.7 1.9 1.7 1.2 1.7 0.8 1.7 L.0 0.8 0.9 ULquid Ratio 1.3 0.8 1.0 0.9 1.2 0.9 1.1 0.9 0.6 0.9 0.6 0.9 0.6 0.5 0.6 110a Debt/EquLty Ratko 35/65 30/lU 0/70 27/13 33/77 27/73 36/66 27/73 34/66 24/176 40/60 25/15 55/45 94/6 18/82 19 1/ Uf wich 3,000 trom State Investment bank and 1,100 trom Treasury to be converted in long-term debt or equity. 1/ No L1n90reacton could be found vth regard to Elie reducciat of equity in 1919. PROJEct CONPLETION REPORT TURKISH MAILtAY PROJECT - LOAN 893-TU Actual and Forecast Cash Flow 1973-1980 1/ (TL Million) 1973 1974 1975 1976 1977 1978 1979 1980 Actual Appraisal Actual Appraisal Actual Apprasal Actual Appraisal Actual Apprel Actual Actu&T Actual FUNDS ACQUIRnD A. Investment - Local 546 755 856 927 1,340 965 1,539 1,071 765 1.163 874 1,174 1.808 - Foreign 230 338 430 436 480 406 448 407 164 443 118 120 153 - Total 776 1,093 1,286 1,363 1,820 1,371 1,987 1.478 929 1 60U V9 T729T .9 B. Debt Service - Interest 125 128 133 141 243 152 203 176 231 195 444 573 1,300 - Repayment 217 202 137 130 150 - Total 345 343 289 306 345 C. Increase (Decr.) in Working Capital. Except Cash (69) 16 854 23 89 17 (1,507) 13 2,526 13 (1,955) (5.480) 1.458 0. Net Warking Loss 1.085 974 1858 896 43 696 1.594 379 3.151 92 4.914 9.062 2.667 2,428 2,625 2,373 2,176 2,056 TOTAL FUNDS REQUIRED FUNDS AVAILABLE From Railways: - Net Non-operating Revenue 123 120 199 120 141 120 265 120 334 120 702 (236) 1,621 - Increase in insurance Reserves 11 5 18 5 27 5 127 5 25 5 28 3 6 Total 134 12S -i7 125 -1U 125 _W2 -Tr- 359 -11 73 ) ;W Rorrowingg * 'BD Loan 893-TU 131 205 195 356 119 98 22 - 41 - 72 27 54 - KIB and French Aid 97 105 94 79 87 - Other International Sources * - 214 327 356 Total 302 - 406 406 - - - Covernment 2 021 2 0 ___ 1 842 t 645 1 488 TOTAL FUNDS AVAILABLE Cash at beginning of Year 84 40 64 60 95 60 194 60 329 60 480 177 820 Cash at 9nd of Year 64 60 95 60 194 60 329 60 480 60 177 820 764 ' L/ Information regarding Debt Repayment and Covernment Funds made available which, although requested from TCDD has not been received, prevents the completion of this statement. - 75 - PROJECT COMPLETION REPORT Annex I Turkish Railway Project (Loan 893-TU) SCHEDULE 5 Plan of Action for Railways Development (as amended by letter of Aur. 5. 1975) 1. PoLicles and Targets A. Working Ratios. The Sorrover will reduce costs and raise revenues in order to reduce its working rat Lo to 100 by 1980 and to achieve the following yearly targets in Lh Interim: 1974 1975 1976 1977 1978 1979 1980 211 160 145 130 115 110 100 For the purposes of the above, "working r-:tio" means all working expenses such as personnel costs, track and other maintenance costs and mLscellaneous other costs excluding depreciation, interest and other charges in debt expressed as a percentage-of gross operating revenue accruing from the Bnrrnwer's services exclusive of subsidies from the Guarantor and reimbursement by th Cuarantor of expenses such as track and infrastructure maintenance. The Largets for the years 1977 to 1980 shall be reviewed with the Bank not later th.n June 30, 1976. B. Operating Targets. To obtain needed cost savings, the Borrower will take all action needed to achieve the following Operating Targets: 1974 1975 1976 (Actual) (Target) (Target) () Availability of diesel locomotives (per cent) 81.0 83.0 85.0 (Ui) (a) Availability of steam locomotives (per cent) 66.0 70.0 75.0 (b) Availability oE diesel railcars (per cent) 75.0 80.0 85.0 (111) Loaded journeys per month for iron-ore wagons from Demirdal to Ulku 4 4-5 5 - 76 - Annex 1 page 2 (iv) Loaded journeys per month for iron-ore wagons from Hekidian and Kar.gal stations to Samsun 5 5-6 6 (v) Loaded 1ourneys or month for copper and chrnme transport from Maden to Iskenderun 4 4-5 5 (vi) By December 31, 1976, complete dieselization of the iron-ore traffic (vii) Savings Erom abandonment or rationalization of uneconomic lines, stations and services: (TL million) 1975 1976 1977 1978 - 75 150 150 C. Investments. (i) The Borrower will not undertake railway investments until their technical, financial and economic feasibility has been demonstrated. (ii) Drawing on tNe recommendations of consultants, the Borrower will prepare a plan, satisfactory to the Bank, to be ready by Aoril 30, 1974 or such other date as shall be agreed with the Bank for signalling investments on the lines Ankara-Sivas-Divrigi; Irmak-ZonRuldak; Basmane-Cigli; and Adana-Cetinkaya, including the section Toprakkale-Narli. D. Commrcial Policy. To obtain an increase in its revenue, and to rationalize ertain commercial practices, the Borrower will take all action needed to establish in a manner satisfactory to the Bank, by March 31, 1976, or such other date as shall be agreed with the Bank, and thereafter maintain: (a) a traffic costing system; (b) a revised freight ar.d passenger tariff system based thereon, including tariff adjustments in real terms and LneludIng for the rur:ose of reactino flexibly and effectively to changes in comoctitive circumstances, provision for varvina any individual freisht tartff at such times and to such dezree as the Borrower deems advisable- and (c) improvements in the quality of service. - 77 - Annex 1 Page 3 II. Orgnnization, Manapement and Staff Improvements. A. The 11orrower wi 1! es tab I ish, in consul tation wi th the Hank, ty Jiune 30, 1973, or such other date as shall he agreed with the Bank and under the chairmanship of its Director General, a Prniect Coordinating Committee. l. (W) The Borrower will adopt by December 31, 1975 or such other date as shall be agreed with the Bank, a pLan rf reorganization and management improvement for the Railways. (iL) The Borrower shall contain its operational staff within the following levels: 1975 1976 1977 49,500 50,500 50,500 Subject to the level for 1977 being reviewed with the Bank not later than June 30, 1976. C. The Borrower will prepare a program of staff career training in Turkey and management training abroad of senior staff, satisfactory to the Bank, such training abroad to be cemmenced not later than October 1, 1975 for staff to be trained in engineering functions and January 1, 1976 for other staff, or such other dates as'shall be agreed with the Bank. iI. Consultants. Tn order to assist in the Borrower's ph-'-ical and financial rehabilitation, the following consulting services have been or will be obtained by the Guarantor or the Borrower: A. United Nations Developmaent Program studies for the Borrower: (M) Management and reorganization study to be completed by April 30, 1974, or such other date as shall be agreed with the Bank. (M1) Studies of the abandonment or rationalization of uneconomic Lines, stations, and services, with the consultants' recommendations to be completed and reviewed with the Bank by May 31, 1974 or such other date as shall be agreed with the Bank. (fi1) Feasibility studies on the construction of the Tecer-Kangel shortcut and the Eregli-Zonguldak connection, to be completed by December 31, 1973, or such other date as shall be agreed with the Bank. - 78 - Annex 1 Page 4 (v) Technical and economic studies on outimum signallin investments, to be comoleted by Aoril 30, 1974 or such other date as shall be agreed with the Bank. B. The Horrower will retain consultants accentable to the Bank, upon terms and conditions sntisfactory to the Bank, and by dates mutuallv arcrintabic Lo the Mank and the Borrower to undertake the following work: (i) Tn itq.qt the Borrower in the imnlementation of the comuretal noltev reforms referred to in subparapranh T.D. of tlLs Schedule. (II) To zn%sist the Borrower in suvervising the orRanization and execution of its track renewal and sixnalling prosrarm. (LU) To assist the Borrower in monitoring the progress o- its pe?n of AteqCli!!atjon of loco-otives, workshous and depots.