Turkey - Second Railway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.5898-TU STAFF APPRAISAL REPORT REPUBLIC OF TIIRKEY SECOND RAILWAY PROJECT June 2, 1986 Regional Projects Department Europe, Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Unit = Turkish Lira (TL) US$1 = TL 540 TL 1 = US$0.00185 TL 1 = 100 Kurus (Krs) (as of July 1985) FISCAL YE-AR January 1 - December 31 WEIGHTS AND MEASURES Metric System British/US System 1 meter (m) = 3.2808 feet (ft) 1 kilometer (km) = 0.6214 mile (mi) I square kilometer (kmz) = 0.3861 square mile (mi2) 1 kilogram (kg) = 2.2046 pounds (lbs) 1 tonne (t) = 1000 kgs (2205 lbs) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ALB - Automatic Line Block CTC - Centralized Traffic Control DLH - General Directorate of Construction of Harbour, Ports, Airports and Railways, Ministry of Public Works and Settlement EDP - Electronic Data Processing ELMS - TCDD Locomotive Factory in Eskisehir ER - Economic Return FYR - First Year Return GTKM - Gross Ton Kilometer TBRD - International Bank for Reconstruction and Development ICB - International Competitive Bidding LCB - Local Competitive Bidding MAFRA - Ministry of Agriculture, Forestry and Rural Affairs MOF - Ministry of Finance MPW - Ministry of Public Works and Settlement NTKM - Net Ton KilomeLer NTMP - National Transport Master Plan PCR - Project Completion Report PEE - Public Economic Enterprise PKM - Passenger Kilometer SEE - State Economic Enterprise  FOR OFFICIAL USE ONLY - 11 - SKIS - Specialized Management Information System SPO - State Planning Organization TAS - Traiu Automatic Stopping TCDD - Turkish State Railways TCL - Turkish Cargo Lines TDC - Turkish Iron and Steelworks TDI - Turkish Maritime Organization TRY - Turkish Airlines TPH - Tonnes per Hour TSM - Transport Sector Memorandum TU - Traffic Units TUII - Technical University Institute of Istanbul UB - Ministry of Transport and Commntications UIC - International Railway Union Thi documnt hs a rtriced distibution md may be usd by repients only in the perfomne of thi oci.d duis Its contests may not oderwe be diuamed wihout Word Dank Abtor bon.  REPUBUC OF TURKEY STAFF APPRAIAL REPORT SECOND RAELWAY PROJECT Table of Contents Page No. I. THE TRANSPORT SECTOR 1 A. The Transport System . . . . . . . . . . . . . . . . 1 B. Transport Planning, Policy & Coordination. 2 C. The Railways Subsector . . . . . . . . . . . . . . . 3 D. Previous Bank Experience in the Transport Sector . 4 II. THE RAILWAYS 6 A. Organization . . . . . . . . . . . . . . . . . . . . 6 B. Management and Staff . . . . . . . . . . . . . . . . 6 C. Railway Property . . . . . . . . . . . . . . . . . . 7 D. Workshop and Depots . . . . . . . . . . . . . . . . 8 E. Traffic . . . . . . I . I I . I I . I I I . 9 F. Operations and Action Plan . . . . . . . . . . . . . 10 G. Tariffs . . . . . . . . . . . . . . . . . . . . . . 11 H. Investment Plan (1985-89) . . . . . . . . . . . . . 12 I. Financing . . . . . . . . . . . . . . . . . . . . 14 Ill. THE PROJECT 15 A. Objectives . . . . . . . . . . . . . . . . . . . . . 15 B. Description . . . . . . . . . . . . . . . . . . . . 16 C. Cost Estimates . . . . . . . . . . . . . . . . . . . 18 D. Financing . . . . . . . . . . . . . . . . . . . . . 20 E. The Loan, the Borrower and Beneficiaries . . . . 21 F. Implementation . . . . . ... . . . . . . . . . . . . 21 C. Procurement. .......... 22 H. Disbursements. . . . . . . . . . . . . . . . . . . . 24 I. Environmental Impact . . . . . . . . . . . . . . . . 24 IV. ECONOMIC EVALUATION 25 A. General . . . . . . . . . . . . . . . . . . . . . . 25 B. Project Costs and Benefits . . . . . . . . . . . . . 26 C. Economic Return . . . . . . . . . . . . . . . . . . 27 D. Project Risks . . . . . . . . . . . . . . . . . . . 30 This report is prepared by Messrs. M.K. Ganguli (Transport Economist). S.B. Orlic (Railway Engineer), E. Pogson (Financial Analyst), W. Reck and K.S. Banerjee (Consultants) on the basis of an appraisal mission to Turkey during July 1985. Kues. S. Morris and N. Muhoho (Research Assistants) assisted the appraisal/post appraisal missions in the preparation of cost tables and financial forecasts.  TABLE OF CONTENTS (Continued) Page No. V. FINANCIAL EVALUATION 31 A. General . . . . . . . . . . . . . . . . . . . . . . . . 31 B. Recent Financial Results . . . . . . . . . . . . . . . . 32 C. Financial Forecas.. . . . . . . . . . . . . . . . . . . 35 VI. AGREEMENTS REACHD AND E EDAIONS. . . . . . . . . 40 1. Improvement of Locomotive Availability and Efficiency 42 2. Action Plan. . . . . . . . . . . . . . . . . . . . . . . 48 3. Traffic Analysis . . . . . . . . . . . . . . . . . . . . 53 4. Senior Technical Advisors and Assistants: Ters of Reference . . . . . . . . . . . . . . . . . . 61 5. A Study of Specialized Management Information System for Locomotive Maintenance and Operation: Terms of Reference . . . . . . . . . . . . . . . . . . 67 6. Operational Strategy . . . . . . . . . . . . . . . . . . 72 7. Economic Analysis - Approach and Methodology . . . . . . 79 8. Financial Analysis - Main Accounting Assumptions . . . . 82 9. Related Documents and Data Available in the Project File . . . . . . . . . . . . . . . . . . . . . 89 TABLES 1. Operating Efficiency and Staff Productivity 1980-84 . 91 2. Comparison with Selected Other Railways . . . . . . . . 92 3. Selected Operating Statistics 1980-84 . . . . . . . . . 93 4. Motive Power and Rolling Stock - Yearly Averages 1980-84 . . . . . . . . . . . . . . . . . . . 94 5. TCDD's Investment Plan 1985-89 . . . . . . . . . . . . . 95 6. DLR's Investment Summary ... . . . . . ... . . . . . . . 96 7. Track Overhaul 1985-89 . . . . . . . . . . . . . . . . . 97 8. Modernization of Signalling and Telecommunications (1985-89) . . . . . . . . . . . . . . . . . . . . . . 98 9. Technical Assistance and Training Program . . . . . . . 99 10. Summary of Project Cost Estimates . . . . . . I . . . 100 11. Procurement of Items Eligible for Loan Financing . . . 102 12. Implementation Schedule . . . . . . . . . . . . . . . . 104 13. Estimated Schedule of Procurement . . . . . . . . . . . 105 14. Estimated Schedule of Disbursement . . . . . . . . . . 106 CHART TCDO Railway Organization Chart: World Bank 27683 . . . . . 107 MAP IBRD 19221 - Turkey - Transport Infrastructure  REPUBDIC OF TURKEY STAFF APPRAISAL REPORT SECOND RAELWAY PROJECT Loan and Proiect Summary Borrower: Republic of Turkey Beneficiaries: Turkish State Railways (TCDD) and General Directorate of Construction of Harbour, Ports, Airports and Railways (DLI). Amount: US$197 million equivalent. Terms: Repayable in 17 years including four years of grace at the standard variable interest rate. Lending Terms: US$188 million would be on lent by the Borrower to the TCDD for a period of 17 years on the same terms and conditions of the Bank loan; TCDD being responsible for any foreign exchange risk. Proiect Objectives and Description: The main objectives of the proposed project are to support the Government's policies of overcoming key bottlenecks to railway transportation, increasing operational efficiency sand assisting the railways in their financial recovery and thereby reducing the burden of subsidies on the budget. The project consists of: (i) a comprehensive program for improving the management of the locomotive fleet; (ii) overhaul of about 740 km of main line track, and provision of track overhaul equipment; (iii) modernization of main line signalling (about 700 km); (iv) construction of about 65 km track; and (v) technical assistance and training for all components. The proposed project is also designed to bring to the forefront important institutional development measures such as introduction of modern management methods with extended application of computers to railway operation and management.  -ii- Benefits and Risks: The principal beneficiaries of the proposed project would be users of railway freight services, particularly producers, shippers and consumers of bulk freight. The Bank-assisted components would help the Turkish railways to register an all-round improvement in operation and a better safety standard. Project risks are considered small as the technical solutions envisaged are based on proven technology. Furthermore, the rolling annual plan mechanism to be followed by the Government and TCDD will allow flexibility in progressive adjustment of investments to correspond with changes in traffic levels and thereby reduce the risk of over investment. The impact on the environment would be positive. Estimated Costs: Local Foreign Total US$ million 1. Improvement of diesel locomotives 82.4 62.7 145.1 2. Track Overhaul 73.1 45.2 118.3 3. Track Overhaul machinery 5.7 13.5 19.2 4. Signalling and Telecom- munications 28.6 30.6 59.2 5. Line Capacity Works 75.6 18.9 94.5 6. Technical Assistance and Training 1.7 3.1 4.8 TOTAL BASE COST 267.1 174.0 441.1 Physical Contingencies 26.0 15.8 41.8 Financial Contingencies 64.6 34.7 99.3 TOTAL PROJECT COST 357.7 ' 224.5 582.2 1I Includes US$151.6 million of taxes and duties.  -iii- Financint Plan: Local Forei Total World Bank - 197.0 197.D Government 357.7 18.5 376.2 Supplierst Credit (or co-financhng)'' - 9.0 9.0 357.7 224.5 582.2 Estimated Disbursements: IBRD FT 1987 1988 1989 1990 1991 1992 1993 Annual 22.0 42.0 45.0 37.0 30.0 17.0 4.0 Cumulative 22.0 64.0 109.0 146.0 176.0 193.0 197.0 Rate of Return: About 22Z 1J Government would retain financing responsibility in case the anticipated suppliers' credit (or co-financing) does not materialize.  L THE TRANSPORT SECTOR A. The Transport System 1.01 Turkey has an extensive and diversified transport network to integrate its 780,000 sq. km of territory (approximately the same as France and West Germany taken together) and to serve the needs of its population of about 48 million. Transport plays a vital role in the economy by providing essential support for commercial and industrial activity, foreign trade and transit traffic. The wide-spread distribution of population and economic activity and the difficult terrain over much of the country means that trans- port is relatively costly. Turkey is also a vital transport bridge between Europe and the Middle East; its trunk routes and international connections are of special concern because Turkey aims to improve its integration with the world economy through increased international trade and appropriate develop- ment of transport infrastructure. 1.02 The current transport system in Turkey consists of about 300,000 km of state, provincial and local roads, 8,200 km of railways, 12 major public ports, which handle a significant volume of cargo, and includes coastal traffic, civil and military pipelines, and airlines which serves several domestic and international routes (Map IBRD 19221). The Government of Turkey recognizes the importance of the transport sector in the grovth of the economy and its importance in achieving balanced regional development. During the last decade the transport and communications sectors accounted for about 202 of total public investment. 1.03 Road transport dominates the present transport market in Turkey. The railway's share of total freight traffic decreased from 55X in 1960 to only about 12X in the 1980's, while the share of road transport rose from 43Z to 75, during the same period. Railway freight traffic, despite low tariffs, has declined in absolute terms since the peak year of 1976, when it carried about 7.5 billion net ton-kilometer. However, freight traffic has increased since 1980 from 5.0 billion net ton-kilometer to 7.5 billion net ton-kilometer in 1984. Road transport, in contrast, has expanded at an average annual rate of about 8Z during the 1970's and 1980's, despite increases in fuel costs and the recent slackening of world economic growth, and today, carries about 951 of domestic passenger transport. The road transport has been able to cope with this increase in traffic due to the resilience and responsiveness of private operators who enjoy considerable freedom to negotiate rates and operate commercially. Nevertheless, the road traffic has been carried at a great cost, since many of the main trunk routes have severely deteriorated due to the increased heavy traffic and road travel is often hazardous. Heavy bulk commnodities such as lignite, cement, fertilizers which should economically be carried by rail to long distances are carried by road transport because of the railways limited capacity and poor reputation for reliability.  -2- 1.04 The ports and customs organizations have also responded quite quickly to the changing pattern of trade, particularly to the unusual up- surge of transit traffic as a result of the outbreak of 1980 hostilities in the Gulf. The Bank's Second Port Project (Loan 1741-TU for US$75 million dated July 2, 1979) contributed effectively by the acquisition of need- based equipment and rehabilitation. However, several ports are now experiencing some constraints arising, for example, from increased export traffic and changing emphasis fLuu general cargo to container traffic. The Bank's Third Ports Loan 2535-TU approved in May 1985 would assist in re- solving these problems. 1.05 Maintenance and replacement of transport assets have received in- sufficient attention. Many highway trunk routes are below standard for the traffic they carry; railway track is 'orn out and the railways lack adequate motive power and other suppoit facilities; and the ports lack modern equipment to handle the rapidly growing volume of container traffic. The main problem, however, is that the railways have failed to realize their potential and have become a serious bottleneck for the development of the core sector of the economy, namely, mining, iron and steel and other key bulk industries. 1.06 Energy has become a critical sector for the Turkish economy and transport accounts for about 40% of total oil product consumption because of the rapidly increasing and widespread role of road transport. Oil imports, which were only US$200 million in 1970, rose to about US$3.7 billion in 1983, equivalent to about 65X of Turkey's merchandise export earnings. The Government is anxious, therefore, to make better use of the energy efficient railway and shipping transport modes wherever appropriate. As regards road transport, energy efficiency is sought through such actions as better vehicle operation and maintenance, improved urban traffic management, raising the average payload of trucks and drivers' training. B. Transport Planning, Policy and Coordination 1.07 Responsibility for transport sector planning, policy development, and investment is divided among four key ministries and agencies. The main agencies involved are: (a) the Ministry of Transport and Communications (UB), which significantly contributes to transport policy and also oversees the main agencies in the transport sector - Turkish State Railways (TCDD), the Turkish Maritime Organization (TDI), Turkish Cargo Lines (TCL), Turkish Airlines (THY); (b) the Ministry of Public Works and Settlement (MPW) which is primarily responsible for execution of all transport infra- structure projects including planning, policy and construction and maintenance of state and provincial highways and execution of port and railway new infrastructure; (c) the Ministry of Agriculture, Forestry and Rural Affairs (MAFRA) which is responsible for construction and maintenance of the large network of local and forestry roads; and (d) the State Planning Organization (SPO) which coordinates with the Ministry of Finance to determine investment priorities.  -3- 1.08 The need for improved coordination in the transport sector and a system for ensuring an appropriate determination of modal, sector, and national priorities has been recognized by the Government and incorporated as a major goal in its development plans. The Government's plans for the development of the sector are embodied principally in the stabilization programs pursued since 1980 and, especially, in the National Transport Master Plan (NITMP) for the period 1983-1993. Although more difficult economic conditions than anticipated have caused some reductions in the targets included in the NTMP, the plan still provides a valuable general policy framework for the development of the sector. The Government's basic goal has been to increase the systems capacity fast enough to support economic growth, avoid bottlenecks and conserve energy with the main policy instruments being transport investments in different modes including foreign exchange allocations and pricing measures. The Government intends to update the NTMP every three years, the first revision being scheduled for 1986. The NTMP is supported by five-year programs for each transport agency, which are now being established as a rolling-plan for the period 1985-89. 1.09 The Bank has been involved in detailed policy discussions and institutional issues in the transport sector and on modal investment plans through preparation of a Transport Sector Memorandum (TSM) in 1983 and more recently through a Transport Investment Plan Review concluded in July 1985. Through its involvement in the sector, the Bank has reached a broad consensus with the Turkish authorities on the main issues and goals of the transport sector. In particular, the authorities appreciate the need to increase operational efficiency, to reduce railway deficits and to remedy deficiencies in project preparation and implementation. The Bank also has assisted the authorities in addressing a wide range of sector issues through its involvement in project preparation and implementation in highways, railways and ports. Improved planning and better selection of highway projects, as well as a shift from force account work to construct- ion by contract, are being achieved under two existing highway projects. Assistance is provided for the introduction of a modern system of handling containers, and related improved documentation in the recent port project supported by the Bank (para. 1.04). In the proposed Second Railway Project, assistance would be provided to remedy major deficiencies in railway operations, particularly, reduction of deficits and improvement in locomotive availability, traffic organization and safety. C. The Railway Subsector 1.10 Today, the railway's inability to carry the traffic currently being offered is a significant impediment to Turkey's development efforts and forces bulk commodities to be carried by road over long distances. The railway's crucial problem is the low availability of motive power (para. 1.05). Concerted efforts should be made to improve the reliability and efficiency of the diesel locomotives of TCDD. Furthermore, TCDD plans to phase out virtually all steam traction by the end of 1986, on  - 4 - operational, economic and energy-efficiency considerations. The change from steam to diesel traction will bring a need for radical change in systems and technology for maintenance and locomotive control requiring technical assistance and training of operational and maintenance support personnel. 1.11 The Government attaches a very high priority to the development of the core sector of the economy, namely, the iron and steel industry, mining and power. The Bank has provided considerable financial and technical assistance towards achieving these mutually shared development objectives. There is a clear economic role for TCDD's trunk liues which are ideally suited to low cost, long distance bulk transport and there is an urgent need to develop effectively the rail transport capacity for these pur- poses. The modernization of railways has also assumed a greater urgency because of the rapidly increasing and wide-spread use by road transport of scarce and costly imported petroleum (para. 1.06). The Government's strategy is to develop the railways as an energy efficient mode for bulk commodity transport whenever appropriate. However, the rehabilitation of TCDD will be a formidable task. The proposed project is designed to begin the complex but worthwhile task of modernizing and restructuring TCDD to improve operational efficiency and to support the Government's efforts towards TCDD's financial recovery. This is in accord with the country objectives of decreasing budgetary pressures and increasing economic efficiency. D. Previous Bank Experience in the Transport Sector 1.12 Since 1950, the Bank has participated in six projects in the transport sector, three port projects of which two (Loans 28-TU and 1741-TU) are completed, one completed railway project (Loan 893-TU) and two highway projects (Loan 2137-TU and 2439-TU), both of which are ongoing and scheduled for completion in June 1987 and December 1990. 1.13 Project implementation in general, though experiencing delays, has been to a large extent satisfactory in achieving physical targets. Most of the problems are confined to implementing policy reform agreements and pro- curement delays. However, the implementing agencies are now more familiar with Bank procurement guidelines and the Government recently adopted a more coordinated and realistic approach towards transport sector policy. This has been shown in the quality of preparation of the proposed project and in the Government's willingness to discuss the important sector issues, including the overall investment program (1985-89) covering all modes of transport. 1.14 The First Railway Project (Loan 893-TU of US$47 million) which covered the first three-year tranche of the railway's 1972-77 Investment Plan closed June 30, 1981 and the Ports Rehabilitations Project (Loan 1741-TU of US$75 million). have been the subject of Project Com- pletion Reports (PCRs). An Audit Report (No. 5768 of June 30, 1985) regarding the First Railway Project has been issued.  The main conclusions of the Audit Report are that the reforms contemplated in the railway project were overly ambitious and pervasive while the time frame for execution was short. Operational and financial improvements were not achieved due to poor availability of locomotives, for lack of spare parts and insufficient tariff adjustments. Procurement problems delayed completion of the project. The project was completed with a cost overrun of lOOS mainly due to inflation, and a time overrun of 220%, primarily due to delay in procurement actions and slow progress in arranging technical assistance. 1.15 The proposed Second Railway project is designed to address the above issues, based on the lessons learnt in the first project. Improving the reliability and efficiency of the diesel locomotives of TCDD, including improvement of workshop facilities, locomotive technology and maintenance, would be the centrepiece of the new project. That is to say that the project is concentrated as distinct from the first loan which was for a time slice of the investment program. A total period of 6 1/2 years has been allowed for disbursement (Table 14). The staff of the TCDD now are conversant with the Bank's procurement procedures. Furthermore, the Government has made increasing efficiency of state-owned enterprises and reduction of their burden on the budget a major aim of its policy pro- nouncements. Agreements have also been reached with the Government on a detailed Action Plan, to be implemented during 1985-89 by TCDD, covering all the important facets of railway activities, namely, traffic operation, planning, traction and rolling stock, track rehabilitation, signalling and telecowmunication, staff training and productivity (paras. 2.19 and 2.20, and Annex 2). The prospects of additional railway traffic have been care- fully assessed (paras. 2.13-2.17 and Annex 3) and an operational strategy spelled out to deal effectively with important streams of bulk traffic. In addition, strategies for the necessary improvement of railway finances have been addressed in depth (paras. 5.08-5.12). The proposed package is there- fore intended to bring about much needed reforms in railway operations and to introduce more commercial management methods.  -6- EL THE RAILWAYS A. Organization 2.01 TCDD is responsible for the maintenance and operation of the entire railway system in the country and has the legal status of a Public Economic EstablishmentL' consisting of six regions and regulated by law (Decree No. KHK/233 dated June 8, 1984). On behalf of the Government UB supervises TCDD. Government's approval is required for such items as investment plans, annual operating accounts and, until recently, tariff increases (para. 5.01). The State Planning Organization (SPO) coordinates and helps determine investment priorities in conjunction with the Ministry of Finance. The responsibility for new infrastructure investment and construction lies with the General Directorate of Railways, Ports and Airports Construction (DLH) in the MPW which is largely independent from TCDD. TCDD is also subject to financial, administrative and technical control by the High Control Board, a Government auditing body responsible to the Prime Minister. TCDD also owns six major ports, and manufactures locomotives and rolling stock in three factories (ELMS, SIDEMAS and ADVAS) (see Chart 27683). The ports are separately organized and like the railway factories are each managed as independent self accounting units. B. Management and Staff 2.02 The Board of Directors, consisting of six members, including the Director General as Chairman, determines railway policy. The Director General, assisted by five Deputy Director Generals, is the Chief Executive Officer of TCDD and he is appointed or dismissed by proposal of the Minister of Transport and Commmications. The different departments are headed by Directors who are responsible to the respective Deputy Director General. Planning is weak and poorly co-ordinated (see Action Plan, Annex 2 para. 2(2). 2.03 The railways experience a shortage of qualified senior engineering and commercial personnel and it is difficult to attract qualified and promis- ing staff at all levels because (a) salaries are much lower than in private industry; and (b) promotions for sew staff are slow since they depend more on seniority than on merit. Under these circumstances, TCDD envisages supple- mentary training abroad of operational and engineering staff at executive level to help the introduction of modern management techniques. TCDD has recently been authorised to pay salaries comparable to those outside the public sector for a restricted number of employees. 1/ Public Economic Establishments are public economic ventures whose public service aspects are sufficient to justify some deviations from commercial principles of operation. These are different from State Economic Enter- prises, which are supposed to operate in accordance with commercial principles.  -7- 2.04 During the past five years, TCDD employed from 58,000 to 62,000 people, of which 20 to 22% were workers in production shops (Table 1). Staff productivity has increased by about 23% from 241,400 in 1980 to 295,800 traffic units per employee in 1984 (Table 1) and is reasonable compared with other railways (Table 2). C. Railway Property 2.05 Network - The Turkish railway system links the European railway system via the Bosphorus train ferry to the systems of Iran, Iraq, Syria and the USSR. The railway network comprises about 8,200 route km of standard gauge of which about 95% are in Asia. Suburban lines in Istanbul, Ankara and Izmir are electrified and double-tracked. The total length of double-tracked routes is about 231 km (Table 3). The operation and development of the rail- way system are constrained by the difficult mountainous terrain and further extensions or short cuts will be difficult and costly to build. The track is generally in poor condition (about 60% of the rail is over 30 years old) and track overhaul is heavily in arrears. The track is mainly (about 85%) 46 kg/m or less rails, mostly without welded joints, laid on wooden sleepers (46%), steel (33%) and concrete sleepers (21%), generally fastened by screws without plates. The ballast is of poor quality stone and formation. Embankments and cuttings in many stretches need repairs. About 85% of the network is suitable for axle loads of 18-20 tons per axle. Poor track conditions have aggravated railway operation and have become a serious safety problem requiring urgent attention. At present, speed and axle load restrictions are imposed on many mainline sections because of poor track conditions which reduces line capacity and significantly increases the operation and maintenance costs. 2.06 Stations, Loops and Yards - The Turkish railway has 54 central stations, 112 main stations, 403 hold-stations and 543 crossing (stop) stations. The stations are generally suitable for train lengths from 400 to 600 m (about 110 axles in average). On the iron ore line, the stations are of 500 m clear length permitting up to 30 wagons per train of about 2,000 tons trailing load. The railway system is characterized by the absence of mechanized gravity marshalling yards and appropriate container terminals. Instead of marshalling yards, there is a multiplicity of sidings and holding lines at the stations serving them. 2.07 Signalling and Telecommunications - A major part of telecommunication system is adequate. The signalling system is, however, outmoded and about 60% of lines are without appropriate safety and signalling installations. Some of the better equipped lines on the TCDD are: Sirkeci-Halkali (28 km of double track) with automatic line block (ALB) system and Haydarpasa-Ankara line (590 km of which 127 km is double track) with centralized traffic control system (CTC). Divrigi-Iskenderun single line (577 km) is an on-going project which will include CTC devices.  -8- 2.08 Traction and Rolling Stock - The main type of traction is diesel- electric accounting for about 84X of traffic (in gross-ton-kms) with about 456 mainline locomotives, 78 shunting locomotives and 27 diesel-electric units. About 10% of the traffic was moved by steam locomotives in 1984 (Table 3), all of them older than 35 years. TCDD plans to phase out all steam fleet by the end of 1986. The proportion of traffic hauled by electric traction is about 6S, mostly in suburban traffic, with 18 electric locomotives and 70 electric-motor units (Table 4). 2.09 TCDD owns 1,379 passenger units (881 coaches, 153 sleepers, 20 restaurant cars and 325 self-propelled units) with total capacity of 96,500 seats (Table 4), 827 of which are up to 30 years old. The remainder are all over 30 years old and have reached the end of their economic life and about half (mostly two-axle cars) should be scrapped as soon as possible. 2.10 TCDD's freight fleet consists of 20,9941-' of all types of wagons (Table 4) with average wagon capacity of 31 tons and availability of about 912. About 6,000 wagons or 302 are over 35 years old and should soon be withdrawn from service and replaced by modern wagons of higher capacity, in- cluding container wagons required for intermodal transport. D. Workshops and Depots 2.11 The level of technical quality of the workshop facilities for loco- motives, freight and passenger cars is unsatisfactory. The car fleet and the steam locomotive fleet are largely obsolete. The main part of the diesel locomotive fleet presents many technical deficiencies and problems. Their performance is greatly handicapped by low efficiency of the maintenance system and lack of spare parts. 2.12 At present, the principal emphasis of former main workshops has shifted to construction of new vehicles and the manufacture of new parts and components, in Eskisehir for diesel and electric locomotives, in Sivas for freight cars and in Adapazari for passenger cars and self-propelled train- sets. Overhaul of locomotives and rolling stock has been relegated to secondary activities in these workshops. The TCDD is, however, in the process of building new main workshops. One, for Diesel locomotives in Behicbey near Ankara, is already erected but only partly equipped and in operation. Others are to follow for rolling stock overhaul in Malatya and Afyon. This trans- ition situation had a negative influence on the efficiency of diesel loco- motive maintenance because it led to scattered overhaul activities in a number of depots, overdimensioned and overequipped for this purpose. Furthermore, there is an important gap, the absence of a central maintenance management agency which should ensure planning, control and supervision of all maintenance activities as one integrated system. The proposed project addresses the need and urgency of reorganizing the locomotive maintenance and 1/ excluding private wagons (about 1,300 mostly for special purposes)  - 9 - locomotive operation system and includes specific understandings regarding improvement of locomotive technology, introduction of part exchange method,and concentration of overhaul work in one main workshop. The current maintenance set up is to be reorganized in a small number of home depots and a maintenance management unit is to be established within TCDD's Headquarters with extended use of electronic data processing (EDP) system (Annex 1). During project appraisal, these suggestions were discussed with TCDD and Action Plan (Annex 2), incorporating these items, was drawn up and agreed. E. Traffic Freight Traffic 2.13 The Fifth Five-Year Plan (1985-89) of Turkey has envisaged a growth rate of 13Z per year in rail freight traffic and an increase of the railways' share in the country's freight traffic from about 10% to 18% during this period. The target fixed for 1989 is 12 billion NTKM. On the basis of an average haul of about 500 km this works out to about 24 million tonnes of originating traffic, against about 14.8 million tonnes of originating traffic and 7.5 billion NTKM in 1984. This appears very ambitious. Analysis of the trends of important streams of traffic and forecasts of increases of various bulk commodities show that at least 5 to 6 million tonnes of additional freight should materialize by 1989, consisting of about 2 to 3 million tonnes of iron ore, 1 million tonnes of lignite, 0.5 million tonnes of anthracite coal and 1.5 million tonnes of transit traffic and other goods like fertil- izers, cereals, iron and steel products etc. (Annex 3). In our assessment, TCDD stands a good chance of carrying about 10 billion NTKM in 1989. 2.14 To be specific, the requirements of iron ore for the three steel- plants are expected to increase from about 5.3 million tonnes (including imports) in 1984 to about 8.3 million tonnes in 1989 on account of programmed increase in the capacity of steel production from 3.1 million tonnes to 4.8 million tonnes during this period (Annex 3). The SPO has estimated that out of this total requirement. 5.8 million tonnes will be domestic ore (against 3.8 million tonnes, actual, in 1984) and 2.5 million tonnes imported ore (against about 1.5 million tonnes in 1984). The production of iron ore in Turkey is at present insufficient to meet the country's demands and its quality is low (iron ore content 55%). Consequently, the country has to supplement the ore requirements through import to meet the balance and for blending purposes. The cost of imported iron ore at the different steel plants varied between US$28 and US$33 per tonne as against US$18-19 for domes- tic ore in 1984. Since then, there has been some significant change. Divrigi Iron Ore Corporation's new iron ore beneficiation plant at Demirdag has gone into production (1985). This plant is designed to produce per year 2 million tonnes of iron ore concentrate and another 1.3 million tonnes of iron ore pellets with 65-68Z Fe contents, reducing the requirements for high quality imported ore for blending purposes. Another such plant is contemplated at Malatya. Thus, actual intake of domestic iron ore may be somewhat more than 5.8 million tonnes in 1989, if transportation is assured (Annex 3).  - 10 - 2.15 Another important commodity to the railway is lignite. Almost the entire rail traffic of 1.8 million tonnes of lignite in 1984 came from three points, Soma, Tuncbilek and Seyitomer in Western Turkey. The most important rail movements are to Izmir Power House (0.2 million tonnes a year) from Soma, to a fertilizer plant (0.6 million tonnes a year) from Seyitemer and to Ankara and other towns from Tuncbilek (about 0.7 million tonnes a year). The latter movement of lignite by rail is, however, dispersed and piecemeal. Transit is slow and often demand cannot be met for want of wagons. Substantial quanti- ties of lignite are at present moving by road (e.g., 730,000 tonnes a year to Ankara, 375 km; 230,000 tonnes a year to Eskisebir, 150 km; about 50,000 toDnes a year to Konya, 450 km; about 40,000 tonnes a year to Isparta, 250 km). Surprisingly, a low-rated commodity such as lignite is moving long distance by road from Kutahya region to distant points like Sivas and Malatya, even though rail freight is ostensibly cheaper (e.g., rail freight from Tuncbilek to Ankara TL 2,250 per ton in 1984 against corresponding road freight rate of TL 4,900 per ton). The present long-distance movement of large quantities of lignite by road is about 1 million tonnes per year (Annex 3). Railways, by arranging fast movements in block rakes and by rationalizing distribution through dumps should be able to step up the origin- ating traffic in lignite from 1.8 million tonnes in 1984 to at least 3 million tonnes in 1989. Most of this traffic is already available to the railways. In addition, traffic to Karabuk steelplant is expected to go up by about 0.5 million tonnes due to the commissioning of the third coke oven battery. 2.16 Opportunity exists for increase in transit traffic and a million tonnes of additional traffic by rails should be possible by providing fast express goods trains carrying containers as well. Additional 0.5 million tonnes of traffic should materialize in cereals, fertilizers and iron steel products by bulking piecemeal movements into rake-movements to important con- suming centres and ensuring an adequate supply of wagons. Passengers 2.17 Turkish State Railways carry only 4% of total passenger traffic and the SPO does not envisage any increase in the percentage during Fifth Five-Year Plan, mainly because any reduction in the railway's share of inter-city traffic is likely to be offset bv corresponding increase in it's share of suburban traffic. F. Operations and Action Plan Operations 2.18 The operating performance of TCDD in 1984 has registered a signifi- cant improvement in certain aspects when compared to 1980, but is still faltering in many operational areas (Tables 1, 3 and 4). Freight traffic in 1984 was about 50S higher (in NTKM) than in 1980 and passenger traffic about 5S (in PKM) higher during the same neriod (Annex 3 Table 1 & 2). The  - 11 - availability of diesel locomotives increased from 62S in 1980 to 78Z in 1983 but decreased again to 70S in 1984. The main reasons for this low rate of availability were: (a) engine failures; (b) damage caused by accidents; (c) poor preventative maintenance; (d) deficiencies in workshop operations and (e) waiting for spare parts due to a chronic shortage. The availability of the small number of electric locomotives increased significantly from 561 in I'0 to 89% in 1983 but thereafter slipped back to 851 in 1984. Wagon utili- zation, measured in net ton-km per capacity of fleet, increased by 291 between 1980 and 1984. The turnaround time during the last five-year period shows a slight improvement (from 13.6 to 11.5 days), mostly because more use is being made of block trains. It is still high, even for an average haul of about 500 km. This is ascribed mainly due to delays in loading and unloading, in- efficient marshalling operations and poor availability of locomotives. Utilization of passenger cars, measured in passenger-km per seat, is stable (at about 60-65,000 pkm/seat) and has been satisfactory. Action Plan 2.19 In the course of project preparation, the mission discussed TCDD's draft operational plans for traction and rolling stock; traction maintenance, track overhaul, including track maintenance machinery, signalling and tele- communications based on a methodology previously supplied by a Bank mission. For these operational plans, TCDD's staff had prepared operational targets for 1985-90 (Annex 2, Table 1) and during appraisal understandings were reached with TCDD on them. These were further reviewed with the Borrower during loan negotiations and confirmed. 2.20 Based on an approach suggested by the Bank mission, TCDD has prepared and agreed on a firm Action Plan for the railway operation and management for 1985-89. The Action Plan will become an important means for extending TCDD's planning process and will specify measures which will be required to achieve planned objectives. These include: planning, investments, organizational, financial, staff productivity, and marketing objectives, as well as improve- ments in technical and operational performance. The overall objective of the Action Plan is to improve the utilization of capacity and manpower of the existing railway system, as part of a coordinated transport system (Annex 2). Appropriately updated, this Action Plan has a continuing role in the develop- ment of the TCDD. The Action Plan would be reviewed annually and TCDD would keep the Bank informed of progress in achieving planned improvements. During negotiations, the various aspects of Action Plan were further reviewed and agreed. G. Tariffs 2.21 The present structure of tariffs was adopted in 1976 and 1977 as a part of the first Bank-financed project. The scale for freight has six groups with goods in Group V being the standard commodity (100) tapered with distance. Bulk commodities such as ore and coal are in Category IV and have rates between 701 and 351 of the standard depending upon distance. Inter- national traffic is charged at rates agreed by the International  - 12 - Balkan/Near East Freight Conference which are much higher than domestic rates. The system is simple to understand and administer. Passenger fares have a similar structure with the rate for the second class service on an Express train being the standard (100). Second class fares on a stopping train are expressed at 852 and a first class seat on the Inter City Express (Blue Trains) being 210. Suburban riders pay a flat fare (TL50 in 1985). While the structure of tariffs is satisfactory, the levels are not, as they were set below costs by government policy. A reduction in the level of government payments is one objective of the project and this is discussed in Paras. 5.07 to 5.10. H. Investment Plan (1985-89) 2.22 The railway investment program during 1985-89 is a part of the country's Five Year Plan investment program which has been approved by the Government and the Parliament. The Plan is flexible and will be reviewed annually on a rolling plan basis. 2.23 The investment proposed by TCDD and DLH for the Fifth Five Year Plan (1985-89) as given to the Bank mission by the respective agencies are shown in Tables 5 and 6 in juxtaposition with corresponding figures for the previous five year period 1980-84. The total railway investments proposed (TCDD: TL519 billion and DIX: TL245 billion = Total TL764 billion) by TCDD and DLH are far in excess of the Plan provision (TL 409 billion) at 1984 prices. Based on the discussions with users and operators, the Bank mission made specific recommendations to sharpen the investment profile in the transport sector including railways and to avoid over-investment. The mission's invest- ment review has attempted to establish priorities within the transport sector and to draw attention to the policy implications. The investment program in railways recommended/endorsed by the Bank mission is about 55Z of the level originally requested by the railways and is close to the Plan provision. Further, the mission identified lower priority investments which could be deferred if adequate resources do not materialize. The mission's draft report was discussed with the Government and the operating agencies concerned.  - 13 - Table 2.1: Railway Investments Recommended (1985-89) Proposed by the Railways Recommended and DLH by Bank Mission - (in billion TL at 1984 prices) Railways (TCDD) Infrastructure 229.0 154.0 Traction and Rolling 207.0 106.0 Stock Workshops, loco depots 38.0 ) } 60.0 Buildings, Designing, 45.0 ) Technical studies, etc. Subtotal 519.0 320.0 Railways (DLH) Construction/rehabilitation/ 245.0 120.0 new lines GRAND TOTAL 764.0 440.0 SPO officials have indicated agreement in principle with the recoummend- ations of the Bank mission's trsnsport sector investment review report regarding priorities for transport investment, including in particular railways, and investment allocations suggested by the mission have been adopted as guidelines. The mission's recommendations were reviewed further by the Bank multi-sector investment review mission and the size, and composition of the railways program as recommended above was confirmed. 2.24 During project preparation, the long-standing issue of the con- struction of the Arifiye-Sincan (260 km) high speed line from Istanbul to Ankara, appears to have been resolved. SPO staff have indicated that there would be no further investments on this line beyond the on-going contracts (to be completed by the end of 1986) bringing the line to Cayrihan, unless and until a feasibility study demonstrates the economic viability of further investment. This could save about 85% of the total investment cost of the high-speed line.  - 14 - 2.25 For rolling stock, TCDD agreed to use the Bank methodology for operational plans and to make successive procurement tranches for rolling stock under a rolling plan commensurate with actual traffic growth and so avoid the risk of over investment. Understanding was also reached with TCDD on the relative priorities of the various sections proposed for electrification and track overhaul (Table 7). Ongoing electrification works on short stretches of suburban lines and the Divrigi-Iskenderun main iron ore line are high priority works and should be completed as soon as possible. Electrification of other main lines, however, such as Karabuk-Zonguldak, Karabuk-Irmak-Sivas-C. Kaya, Sivas-Samsun, should be taken up only if they are justified on sound economic and operational grounds. TCDD, following a suggestion by the Bank mission, has agreed to adopt a staged development of modernizing signalling and telecommunications to match capacity needs (Table 8). This will cost less than the immnediate installation of a CTC system as was planned. 2.26 DLH's program during 1985-89 would be limited to completing the construction of high-priority ongoing projects on certain new lines but to single track standards, rather than double track as was planned. At present there is no gravity-oriented mechanized marshalling yard in Turkish railways, which leads to operational inefficiency. The railways agreed with the Bank mission's suggestion to establish at least two or three such marshalling yards at suitable locations like Sivas, Eskisehir, Ankara etc. Accordingly the Technical University of Istanbul has been entrusted with feasibility studies of appropriate locations, number and other technical aspects of such yards. The results of these studies are expected to be available in early 1987 and would be reviewed by TCDD and DLH in consult- ation with the Bank. 2.27 In terms of railway policy, TCDD has agreed that the main focus will be to concentrate on freight traffic and to improve locomotive avail- ability through improved technology and maintenance, access to spare parts and better operating methods. During Loan negotiations agreements were reached with the Government and the railways that no major new investments for the railways would be undertaken without appropriate economic and feasibility studies, and the understanding described above regarding stopping work on the Arifiye-Sincan line at Cayrihan was confirmed. I. Financing 2.28 TCDD has financed itself from its revenues, the operating surplus of its ports, by Government funds provided as capital, and by borrowing in other currerLcies to pay for part of its foreign exchange needs. Up to 1984, the accounting system did not separately record the funds and balances of the ports and railway operations, but this is now being done. It is expected that the TCDD investment plan for 1985-89 will be financed in the same manner as before with an increase in the level of sums provided from TCDD railway operations (para. 5.12).  - 15 - UL THE PROJECT A. Obiectives 3.01 The selection of project components had as objectives the provision of support to the Government's policies aimed at overcoming key bottlenecks in railway transportation, increasing operational efficiency and assisting the railways in their financial recovery and thereby reducing the burden of subsidies on the budget. At the same time the proposed Bank financing would begin the complex and worthwhile task of modernizing and restructuring TCDD's locomotive technology and locomotive maintenance, while bringing to the forefront important institutional development measures such as introduction of modern management methods with extended application of computer to railway operation and control. The central economic ministries (Treasury and SPO) had welcomed technical assistance from the Bank as a way to familiarize railway managers with modern methods of operation and to provide for technology transfer. All the elements taken together, the proposed project would strongly influence the future railway performance. 3.02 To achieve these broad objectives, the project would specifically seek to: (a) continue a constructive dialogue with the authorities relating to crucial rail transport problems/issues and provide necessary support; (b) provide essential maintenance and technical assistance for the improvement of diesel locomotive maintenance, technology and operation with the aim of increasing locomotive availability and efficiency to sustain and consolidate the railway operations; (c) ease critical railway bottlenecks on Turkey's principal rail- way networks vital for the movement of key bulk comnodities (such as iron ore and lignite) and transit traffic for inter- national trade; (d) raise the level of operational performance and safety by introducing corporate planning, Action and Operatioaal Plans and improving poor track conditions and replacing '3ut-moded signalling on a phased basis on the main trunk lines to match capacity needs; and (e) familiarize the railway organizations (both TCDD and DLH) with recent development and trends in operating, monitoring and maintenance techniques utilizing the latest technology.  - 16 - B. Description 3.03 The proposed project would address the country's high priority rail transport requirements during the Five-Year Plan (1985-89). The data used in the preparation of the project and the source material are listed in Annex 9. The components are suummarized below and described subsequently in more detail. They are: (a) a comprehensive program for improving the management of the locomotive fleet, as regards both maintenance and operations, including spare parts; (b) overhaul of about 740 km of main line track, and provision of track overhaul equipment; (c) modernization of main line signalling (about 700 km); (d) construction of Bedirli/Hanli-Bostankaya (about 65 km) track, consisting of a second track on new alignment; and (e) technical assistance and training for components (i)-(iv). 3.04 Improvement of Diesel locomotive availability and efficiency - The low availability and efficiency of the diesel locomotive fleet reduces seriously the capacity and the profitability of the TCDD system as a whole. Improvement of locomotive availability and efficiency is considered the centerpiece of the project. This task concerns the technology of the locomotizes as well as the system and efficiency of their operation. Therefore, it is necessary to reorganize and to centralize both the loco- motive maintenance and operation systems. The reorganization of the whole locomotive maintenance and operation system would mainly comprise system- atic use of the part exchange method, centralized reconditioning of the dismantled parts, improved turnaround planning and deployment control, modernization of the workshop and stores equipment, and procurement of a basic stock of components and spare parts. The proposed modernization would also involve one-tim basic overhaul of the immobilized and the un- reliable locomotives, phasing-out weak points in locomotive design, improvement of the management system with extended use of electronic data processing for cost accounting, statistics and supervision (Annexes 1, 4 and 5). 3.05 Capital Overhaul of Track - Poor track conditions have aggravated the railway operations and have become a serious safety problem, resulting in reduced line capacity and a significant increase in operation and main- tenance costs (para. 2.05). About 740 km of track, in some cases about 55 years old, would be renewed with new-type 49 kg/meter rails to increase the permissible axle load to 20 tons and speed to 120 km/h. Without the proposed track renewals, the poor track conditions would deteriorate further and restrict the daily number of trains.  - 17 - 3.06 Track Maintenance MachinerY - Turkish State Railways are characterized by high volume of track rehabilitation needs. In the Fifth Five Year Plan, about 1,000 km of track overhaul deserves high priority (Table 7). The proposed procurement of the track-maintenance machinery is, therefore, of special significance for TCDD's efficient operation. 3.07 Signalling and Telecommunications - An obsolete signalling system with technical characteristics below modern safety standards would be re- placed on about 700 km of Kayas-Cetinkaya line by modern station signal- ling, including automatic line block (ALB) and train automatic stopping equipment (TAS). This would provide safety, improve line capacity and rolling stock utilization. A part of this line, namely Hanli-Sivas-Cetinkaya section, will be controlled from a CTC tower in Sivas, the construction of which is already completed under the on-going signalling project Divrigi-Cetinkaya-Iskenderun. If a feasibility study should demonstrate at a later date, (based upon increased traffic growth and other considerations) that further upgrading of the signalling system is justified, this could be accommodated through a phased addition to the proposed equipment, and could be considered for financing under subsequent Bank assistance. 3.08 New Construction - Improvement of line capacity on the short stretch between Bedirli/Hanli and Bostankaya (Map IBRD 19221) would greatly facilitate long distance movement of iron ore from Divrigi mines to the steel plants in the north-western region as well as international transit traffic. These track capacity works would yield network-wide benefits by allowing a higher level of utilization of existing infrastructure. 3.09 Technical Assistance and Training - Technical assistance to strengthen railway operations, locomotive maintenance and management in- formation system would be undertaken by three senior experts supported by five middle-level assistants appointed to "in-line" positions within TCDD for 48 man-months: (i) one senior expert with two assistants for locomotive maintenance and technology (18 man-months); (ii) one senior expert with three assistants for locomotive operation (24 man-months); and (iii) one senior specialist responsible to organize and streamline the movement of bulk commodities in block rakes (6 man-months). These advisors and their assistants, as part of TCDD, will make a significant contribution in the institutional building, management and new technology improvement. At loan negotiations, the Turkish railway's commitment to an effective locomotive maintenance and operation system was ensured, in accordance with the Action and Operation Plans already discussed and agreed during project prep- aration. Terms of reference for engagement of senior experts and their assistants (Annex 4) were discussed with the authorities concerned and were further reviewed and agreed during loan negotiations. 3.10 The TCDD has a serious manpower problem due to high turnover of staff resulting from unattractive employment conditions (para. 2.03) which will be partially mitigated by the new law by which TCDD has recently been authorized to pay salaries comparable to those outside the public spctor for its key personnel. As a part of TCDD's training program, the Bank assistance provides for about 306 man-months (Table 9) of technical visits  - 18 - and training for railway senior/middle management and specialists through "twinning" arrangements with other European railways engaged in similar works. The project also provides for a training program for craftsmen, and loco drivers, to be executed partly abroad, partly in the country, including training equipment and materials (Table 9). The details of this foreign training program were agreed at negotiations. Other training will be carried out in TCDD's existing training center. The project provides financing for training equipment and materials including a 'simulator' for training locomotive drivers. TCDD would submit by June 30, 1987 its proposed program for use of this simulator to be approved prior to purchase of this equipment. Furthermore, the project provides for a study of a computer-assisted specialized management information system for loco- motive maintenance and operation which would be carried out by TCDD's electronic data processing (EDP) center with close cooperation of the senior locomotive maintenance/ operation experts mentioned above. The Study should be started not later than June 30, 1987, and completed by June 30, 1989. The terms of reference (Annex 5) for the study was dis- cussed with TCDD and was agreed during loan negotiations. Similarly, DLH's training program includes 30 man-months of technical visits and training abroad for key technical personnel. Submission of a satisfactory training plan for DLH will be a condition of disbursement for this component. 3.11 The Bank loan would finance the direct foreign exchange cost of about $1.1 million for sending TCDD's staff and about $120,000 for DLH's staff abroad and training and seminars in the country; about $360,000 for the engagement of the senior advisors and their assistants; and about $1.3 million for the procurement of teaching equipment (Table 9). The above figures exclude about US$320,000 allocated for price contingencies. C. Cost Estimates 3.12 The-total project cost (including contingencies, taxes and duties) is estimated to be about US$582.2 million, consisting of locomotive improvement US$192.5 million, track overhaul US$165.3 million, track machinery US$22.2 million, signalling with telecommunications US$78.2 million, new line works US$118.5 million and technical assistance and training US$5.5 million (Table 10). The estimated total foreign ex- change component would be about US$224.5 million, or about 39Z of the total project cost. Cost estimates were prepared by the agencies concerned on the basis of quantity estimates from substantially completed detailed engineering and unit prices at mid-1985 prices and updated to end 1985. Project costs by component are summarized below:  - 19 - Table 3.1: Project Cost Estimates (1985 prices) 1/ USt Hillion FEC (X) Bank Ln ITEYS Local 2/ Foren Total of Total USiu ml Improvement of diesel locomotive maintenance and operation 82.43 62.70 145.13 43.2 55.50 Track overhaul (740 km) 73.11 45.2S 118.36 38.2 42.50 Track overhaul machinery 5.72 13.50 19.22 70.2 13.50 Signalling and Tele- camiunication of Kayas- Cetinkaya Line (700 km) 28.57 30.60 59.17 51.7 30.60 Line capacity works (Bedrir1/Hanli-Bostankaya section about 65 km) 75.55 18.89 94.44 20.0 7.28 Technical Assistance and Training 1.7l 3.12 4.83.64 5L3.12 TOTAL BASE COST ZfiLS 325aM MLJS 39L5 JISLAL Contingencies Physical 25.96 15.74 41.70 37.7 13.54 Price 64.65 34.71 9S.L3 i3.0 30 96 TOTAL CONTINGENCIES 90.61 50.45 141.06 35.8 44.50 GRAND TOTAL 35a 224a51 522 2J. Ji Z..M ]/ Exchange rate of base cost 1US$ = TLS48. Price contingencies in USS terms are based on following annual rates (in percentage terms) i19S 1986 IR ISIS 1981 1221 -0.5 7.0 7.0 7.S 7.7 7.6 In calculating the local cost contingencies it is assumed that the Government will maintain current policies for adjbsting exchange rates to compensate for the differences between local and foreign inflation. Z/ Taxes and duties are inc:)uded In local components (about $151.6 million) Taxes: 20X for all coyponents; Duties: 23X for track-iteel material. signalling and teleco_uni- cation equiprment. 35X for locomotive spare parts. components ano-workshops equipment and 7.5% for track maintenance machinery.  - 20 - Price contingencies are based on cost escalation as shown in footnote to Table 3.1. Taxes and duties were estimated to amount to be about 26Z of total project cost csasisting principally of taxes and duties on imported equipment and material. 3.13 The proposed Bank loan of US$197.0 million would cover about 88Z of the total foreign exchange cost of the project. The Bank assistance was particularly sought for the procurement of project-related equipment, -materials, training and other technical assistance. A list of materials and equipment suitable for Bank financing is shown in Table 11. The procurement of all these materials and equipment will be by International Competitive Bidding (ICB) in accordance with the Bank Guidelines. During loan negotiations, the project cost estimates and the bank financed project components were confirmed. D. Financing 3.14 The estimated costs of the project together with proposals for Bank financing are suz-uarized in the table below: Table 3.2: Proiect Cost Financing Project Cost Source of Financino GOVERNMENT Supplier's Items Local Foreian ITtal Local Foreian IRI _Cred1 Total --------- USS millions ----------------------- Improvement of Diesel Locomotive Maintenance and Operation 111.0 81.5 192.5 111.0 -- 72.3 9.2 192.5 Track Overhaul (740 km) 104.1 61.2 165.3 104.1 4.2 57.0 -- 165.3 Track overhaul machinery 6.7 15.5 22.2 6.7 __ 15.5 _2.2 Signalling and tele- communication of lines (about 700 km) 38.6 39.6 78.2 38.6 -- 39.6 __ 78.2 New Works (Bedirli/-Hanli Bostankaya line about 65 km) 95.3 23.2 118.5 95.3 14.1 9.1 -- 118.5 TA and Training 2,0 3-5 5.S 2.0 -z- _1 -- 5.i TOTAL 357.7 224.5 S82.2 357.7 18.3 197.0 _.2i S2z.2  - 21 - 3.15 The proposed Bank loan of US$197.0 million meets about 34Z of total project costs and about 96X of the direct foreign exchange elements (about US$206.0 million). The balance of the project costs, namely US$385.2 million (about US$357.7 million of local costs and about US$27.5 million foreign costs) would be financed either entirely by the Government or by the Government together with supplier's credits. It is estimated that supplier's credit should be available to cover about us$9.0 million of US$27.5 million remaining foreign exchange costs. During loan negotiations, the above project financing details were reviewed and agreed with the Government. E. The Loan, the Borrower and Beneficiaries 3.16 The Borrower for the proposed loan would be the Republic of Turkey. The beneficiaries of the project would be TCDD and DLH.1' The latter is a Government Department under the MPW and is not a revenue earning entity and would receive project funds through the Treasury channel. The Bank would enter into a Project Agreement with TCDD to whom the Government would on-lend loan funds uider terms and conditions satis- factory to the Bank (para. 5.12). These arrangements were confirmed with the Government during negotiations. Signing of the subsidiary loan agrea- ment would be a special condition of loan effectiveness. F. Implementation 3.17 Detailed engineering for both TCDD and DLH component is sub- stantially completed and is satisfactory. Studies and drawings for the main components were prepared by the DLH, TCDD and Technical University Institute of Istanbul. DLI will be responsible for the implementation of the new line works and TCDD ior all other project components. They have the necessary capability and compeLence to carry out the project. TCDD's own Material Supply Organization would procure all components, parts, tools, machinery and other materials and equipment eligible for financing under the loan, for TCDD's component and DLH would handle procurement of the track steel materials, signalling and telecommunication equipment for new line works. TCDD's purchasing department is familiar with Bank procurement guidelines from its experience with first railway and first and second port projects. 3.18 The technical assistance team (para 3.09) will assist in the implementation of the whole reorganization for locomotive maintenance and operation as described in Annexes 1 and 4. In addition, the team would 1/ DLH for steel track materials, signalling and telecommunications equipment and training on Bedirli/Hanli-Bostankaya section (about US$9.0 million - Table 11), and the balance of the loan amount (about US$188.0 million equivalent) will relate to TCDD works.  - 22 - provide assistance for the Specialized Management Information System (SMIS) study (Annex 5) as well as for the improvement of the bulk commodity movement (Annex 2, 4 and 6). 3.19 During loan negotiations, agreement was reached with the Government that: (a) TCDD will nominate a project coordinator, in consultation with the Bank, with appropriate qualifications and experience to be responsible for the implementation of TCDD's part of the project; (b) similarly, DLH would nominate a counterpart responsible for implementation for its part of the project, who would main- tain close liaison with the Project Coordinator appointed by TCDD; and (c) appointment of TCDD's project coordinator and the DLH counterpart to plan, organize and coordinate the timely execution of project is a special condition of loan effectiveness. 3.20 A time-phased implementation schedule is shown in Table 12. This schedule, regular quarterly progress reports and preparation of a project completion report by the Government within six months of the Loan Closing Date were discussed and confirmed during negotiations. 3.21 It was agreed at negotiations that TCDD and DLH would complete all investments initiated under the Project (especially the preparation works for signalling and substructure for new line works) in a timely manner and together with Government would provide the funds, facilities and other resources required. 3.22 Allowing for some slippage, the project completion date would be December 31, 1991. The loan closing date would be December 31. 1992 allowing for about one year time for the release of security deposits on supply contracts where performance guarantees are specified. G. Procurement 3.23 All equipment and materials financed by the Bank will be procured by International Competitive Bidding (ICB) in accordance with the Bank's Guidelines, on the basis of a list of equipment and materials agreed between Government and Bank (Table 11 and para. 3.13). Financing of consultants' services and training (paras. 3.09 through 3.11 and Table 9) would be provided under the project, with selection procedures for consultant services following Bank Guidelines. An estimated schedule of procurement is shown in Table 13. 3.24 In bid evaluation, Turkish manufacturers would be allowed a preferential margin of 15S of the CIF cost of competing imports, or the applicable customs duties, whichever is lower.  - 23 - 3.25 For goods having an estimated contract value of more than US$500,000 equivalent, all draft tender documents and proposed awards would be subject to prior review by the Bank. Contracts for lesser amounts would be subject to ex-post review. 3.26 The table below provides a suimmary of the type of procurement which would apply to goods and works and services included under the project. Table 3.3: Procurement Method LCB Taxes Project Element ICB and Other!-" and Duties Total (US$ million) - _ _ Improvement of Diesel Locos 72.3 59.6 60.6 192.5 Maintenance and Operation (72.3) (-) (-) (72.3) Capital Overhaul Material and Works 57.0 67.0 41.3 165.3 (57.0) (-) (-) (57.0) Track Overhaul Machinery 15.5 1.8 4.9 22.2 (15.5) (-) {-) (15.5) Signalling and Telecom. Material and Equipment 39.6 - 18.9 58.5 (39.6) (-) (-) (39.6) Installation Works - 19.7 19.7 (-) (-) (-) (-) Total 39.6 19.7 18.9 78.2 (39.6) (-) (-) (39.6) Line Capacity Works Substructure - 72.7 18.0 90.7 (-) (-) (-) (-) Superstructure 9.1 11.6 7.1 27.8 (9.1) (-) (-) (9.1) Total 9.1 84.3 25.1 118.5 (9.1) (-) (-) (9.1) Services 1.7 3.0 0.8 5.5 (1.7) (1.8) ( (3.5) TOTAL 195.2 235.4 151.6 582.2 (195.2) (1.8) (-) (197.0) 1/ Includes indirect foreign exchange component, international shopping for some locomotive components and parts and procurement of consultants' services and overseas training components. 2/ Costs include estimated contingencies. NOTE: Figures in parentheses are amounts financed by the Bank Loan.  - 24 - H. Disbursements 3.27 For imported goods, disbursements would be made on the basis of CIF costs, and with respect to bids won by local manufacturers under ICB, disbursements would be made on the basis of 100l of the ex-factory costs. The Bank would also finance 100X of the cost of the services of inter- nationally recruited consultants and 1002 of the foreign exchange cost of overseas training programs. Withdrawals would be made against full documentation except for reimbursement or replenishment requests which would be submitted on the basis of statements of expenditure (SOEs) for contracts relating to goods and services and for training expenditures valued at US$100,000 - or less. 3.28 To maintain an adequate flow of funds available to the benefi- ciaries to finance eligible project expenditures (para. 3.15) with a minimum of administrative delays, the Borrower will establish a Special Account (revolving fund) with a balance sufficient to cover about four months of project expenditures (i.e. about US$13.0 million). Records of the Special Account proceeds and outlays would be available for review by Bank supervision missions and subject to annual audit (para. 5.04). During negotiations, confirmation was obtained of the foregoing arrangements. 3.29 A schedule of estimated disbursements has been prepared and is shown in Table 14. The disbursement profile is closely similar to those for other regional transportation projects and the estimated about seven-year disbursement period (from Board approval) corresponds to about 90% disbursement under regional sector profile and 95Z disbursement under country sector profile. The marginal improvements assumed between the project and regional country transport standard profiles are realistic in view of Turkey's increasing involvement and familiarity with Bank projects, particularly procurement procedures. Furthermore, civil works for the railways are not being financed under the project and only railway equip- ment and materials contracts for which disbursement is relatively faster are involved. The disbursement schedule was discussed with the Government and confirmed during loan negotiations. I. Environmental Impact 3.30 The project as a whole is expected to have beneficial environ- mental impact, reducing air pollution and accidents. Improvement in diesel traction will facilitate a phasing-out of steam traction, and reducing noise and air pollution in large areas of the country. Track overhaul together with modernization of signalling would reduce accidents and improve working conditions of the railway staff.  - 25 - IV. ECONOMIC EVALUATION A. General 4.01 The Fifth Five Year Development Plan (1985-89) assigns a leading role to industrial sector which is expected to grow at about 8Z per annum, as compared with an overall growth rate of about 6% per annum for the economy as a whole. Even with more conservative growth rates of 4S for the economy and 6X for the industrial sector, the requirements for movement of bulk commodities are substantially beyond the existing capacity of the transport system. In many instances heavy and bulky raw materials and semi-finished products are used in producing goods for both export and domestic markets. Such materials are often quite distant from the processing plants, although increasing efforts are being made to locate processing industries at raw material sources. The Government is also keen to increase foreign exchange earnings through transit and international trade. The railway investment programs should meet the needs of existing traffic and emergence of new transport requirements of iron ore, lignite/coal and other basic bulk commodities and respond effectively to the rapid growth of transit and international trade. 4.02 Parallel to the overall economic growth objectives, the Government is keen to improve the operational efficiency in the railways where traffic is being diverted to other modes because of limited carrying capacity and poor quality of service. During the past decade the locomotive technology, locomotive maintenance and the workshop system has received very little attention, with the result that the capacity for annual periodic overhaul has become increasingly less than what is required. The TCDD also moved from steam to diesel and electric traction during this period bringing a radical change in systems technology (para. 1.10). Considerable emphasis is, therefore, being given in the proposed project to rationalize and modernize locomotive maintenance and the TCDD workshop system with a view to immediately containing and subsequently eliminating the maiutenance backlog for motive power and to provide a better flexibility in train operation. 4.03 The backbone of TCDD's network is the line from Istanbul through the Anatolian plain, via Ankara, on to the iron ore mines near Divrigi and thence to the steel mills on the Black Sea coast. Another line serves the southern Mediterranean coast between Iskenderun and Malatya-Sivas-Divrigi region. More than two-thirds of TCDD's traffic is concentrated on these parts of the network. The proposed project aims at relieving bottlenecks on some of the most heavily trafficked railway sections by modernizing the out-moded signalling systems and track rehabilitation. It would also attempt to improve productivity, quality of service and marketing to enable the railways to realize their full potential, at an economic cost compet- itive with other modes.  - 26 - 4.04 The principal beneficiaries of the proposed project would be users of railway freight services. particularly producers, shippers and consumers of bulk freight who, due to the diversity of traffic using the rail net- works, come from a wide range of sectors and income groups. The important comodities that would be affected by the proposed railway modernization and improvements are raw and processed industrial materials including mining, iron and steel products, construction materials and agricultural comfodities. By reducing costs and improving efficiency of transport, the project will also help to make Turkish goods more competitive in the world market, with beneficial effects on employment and the balance of payments. B. Project Costs and Benefits 4.05 The economic evaluation of the different sub-projects is based on feasibility studies undertaken by TCDD and Orta Dogu Teknik Universitesi, which are in the project file (Annex 9). These studies were reviewed and discussed with the agencies concerned and a number of marginal sub-projects were reformulated or postponed while more economically viable components were included as a result of the review. 4.06 The traffic projections for the different sub-projects are based on past traffic trends, origin-destination studies of s_lected bulk commod- ities (paras. 2.13-2.16 and Annex 3) and planned increases in production and consumption in the zones of influence. For calculating the economic benefits and costs, international prices have been used for imported equip- ment, materials and other tradeable commodities. Land and other non-tradeable items like railway ballast and aggregates, skilled and un- skilled construction labor have been valued at local prices. Economic costs net of taxes were estimated for all investment costs, maintenance costs and operating costs. 4.07 The quantified economic analyses for the improvement of locomotive availability takes into consideration the savings in locomotives due to avoided increases in ineffectiveness. Expected benefits from the intro- duction of the part exchange method (paras. 2.12, 3.04 and Annex 1) and rationalization of maintenance workshops and stores management include reduction in maintenance downtime for locomotive overhaul and lower rework costs per unit compared with the present. The main benefits from track re- habilitation would accrue from decreased maintenance of track and operating costs of rolling stock due to reduced wear, increased operating speed resulting from removal of speed restrictions on poor tracks and fewer derailments and accidents. The economic benefits from modernization of main line signalling and telecomummications would result mainly from increased line capacity at a small cost, greater safety and improved utilization of traction and rollLng stock. Expected benefits for one new short link included in the project include saving due to avoidance of a considerable detour for heavy bulk traffic which otherwise has to use a circuitous rail route or use costly road transport for long hauls. An outline of approach and methodology of the economic analyses is given in Annex 7.  - 27 - 4.08 In selecting the proposed investments, several alternative solutions were evaluated, such as improving or reconstructing the existing track or constructing a new one, purchasing of new locomotives as opposed to improving availability of existing fleet, and stage construction of an improved signalling system as against straightaway adoption of a central- ized traffic control system representing the top level of sophistication. For each project alternative, the most economic solution has been adopted. C. Economic Return (ER) 4.09 Based on the most probable estimates of costs of construction, equipment, operation and maintenance, the proposed investments on the railway project components produce economic returns (ERs) ranging from 14Z to 26Z (Table 4.1). All investments would yield first-year benefits of 10l or more. The weighted average ER of all civil works and equipment compon- ents, which account for 991 of total project cost, are 22X. The above ERs understate the full benefits of the project by excluding environmental improvements, and comfort and convenience of travellers on the improved facilities. Sensitivity analyses were carried out to test the effect of variation in construction and equipment costs and users' benefits on the above estimates. Even under the unfavorable assumptions of 15Z higher construction/equipment costs combined with a 151 reduction in users' benefits, the ERs remain acceptable within the range 11X to 20X with an overall weighted ER of 17Z.  - 28 - Table 4.1: Economic Returns (ENs) and First Year Returns (FYRs) Proportion Sensitivity Analysis of Total Expected Lower I/ Higher 2/ Expected Pro1iectnCoonent arwestmnt ER Estimate Estmnate FYR _ A. Improvement of diesel locomotive maintenance and 35 26 19 33 20 operation B. Track Overhaul (740 Iam) 31 16 12 19 12 and maintenance machinery (1) Ankara - Haydarpasa (164 Iam) 7 18 14 23 13 (ii) Irmak - Kayseri (98 km) 4 17 13 21 12 (lil) Irmak - Zonguldak (137 km) 6 16 12 20 11 (iv) Samsun - Kalin (199 km) 8 14 11 17 10 (v) Bogaz Kopru Kardesgedigi 6 14 11 17 10 (142 Iam) C. Signalling and 13 20 15 25 15 teleconmunications (700 Iam) Kayas-Kayseri-Sivas-Cetinkaya U. New Works (about 65 km) 21 26 20 33 21 (Bedirli/Hanli -Bostankaya) GRAND TOTAL 100 - - - - Weighted Average - 22 17 28 17 f Assumes IS% increase in construction/equipment costs combined with 1S% decrease in benefits. 2/ Assumes 15% decrease in construction/equipment costs combined with 1S% increase in benefits. Source: Feasibility studies and mission estimates August 1985  - 29 - 4.10 Improvement of diesel locomotive maintenance and operation - Improving the availability of diesel locomotives is considered as the principal focus of the project. When the diesel locomotive (Alstohm design) was first introduced in TCDD there were numerous performance prob- lems, most of which still persist. Partly due to the relatively young age of the diesel locomotive fleet and partly due to foreign exchange con- straints, the workshop system in TCDD has received relatively little attention (para. 4.02). The proposed project component would address the much needed technological improvements to TCDD's present design locomotive and adoption of traction technology more suited to the variety of operating conditions prevailing in Turkey. The proposed component will reduce idle time of locomotives awaiting repairs, both for normal maintenance and during periodic overhaul, resulting in savings in the number of locomotives needed to carry the traffic and to replace the existing fleet. Moreover, the reliability of locomotives will substantially increase, leading to further savings in motive power because of better utilization of existing equipment. In order to enable TCDD to tap adequately the potential for savings, a part exchange system (Annex 1 para 2) would be introduced with a sizeable pool of critical parts and components. The proposed improvements would thus alleviate a serious impediment to satisfactory railway opera- tions and would yield considerable benefits and produce a high ER of about 26Z. 4.11 Track overhaul and maintenance machinery - considerable wear and tear of outer rails on curves and wear and flattening of the rail table are posing difficult maintenance problems with steadily increasing costs. Many of these lines, with an average age of super-structure from 25 to 50 years, have out lived their useful life. Furthermore, replacement and modern- ization of the low-efficiency limited capacity track machinery will upgrade TCDD's maintenance capacity and reduce track maintenance costs. The track rehabilitation program is of special significance for TCDD's main lines connected with ore and transit traffic and the proposed investments are conservatively estimated to yield ERs varying between 14Z and 18X on the five different sections. 4.12 Modernization of signalling - On the west, between Istanbul and Kayas, centralized traffic control (CTC) system is already in operation. Similarly from Cetinkaya eastward, signalling and telecommunications on the main ore line is being modernized. But the existing equipment on the proposed mainline section between Kayas and Cetinkaya is obsolete and in- adequate for the efficient operations of TCDD and the number of accidents on the proposed section due to lack of adequate signalling is high (e.g. 16 in 1983). With modernized signalling, slowdowns, locomotive and rolling stock damage would be reduced, and stops on this line and time spent in stations would be considerably reduced and additional traffic can be carried at a small cost. The proposed new investments on improved signalling would yield considerable benefits and produce a satisfactory ER of about 20Z.  - 30 - 4.13 New line construction (about 65 km) consisting of a second track on new alignment - econnmic justification of this track doubling on a short stretch, namely, Bedirli/Ranli-Bostankaya, depends on the mining/industrial ventures it serves. At present two distinct streams of iron ore traffic from Divrigi mines pass through the area, one going towards Samsun for Eregli steel plant and the other going to Karabuk steel plant. In most part either these two streams are separate or when they join, the railway track is doubled, excepting the short stretch near Sivas. which is there- fore, a bottleneck. This traffic is going to increase further during the next 5 to 10 years with the planned increase in steel production at Eregli steel plant. A short stretch of new construction on a different alignment, (reducing the travel distances by about 60km) has a definite economic ad- vantage because it avoids of a longer detour on a more circutious rail route and/or due to savings in operating costs compared to road transport for long-haul bulk movement. The proposed investments would yield a satisfactory ER of about 26Z. 4.14 Other Proiect Elements - Benefits could not be quantified for other project elements, namely technical assistance and training (about 1Z of total project costs). They are an integral part of the program to up- grade the operations and efficiency of TCDD and DLH and their benefits would permeate the entire economy and would be high. D. Project Risks 4.15 The proposed project supports high priority components of the 1985-89 Railway Investment Plan in Turkey. All project components involve proven technology. The economic justification of the project components has been well established even under unfavorable hypothesis concerning project costs and users' benefits (para. 4.09). The main area of risk for railway projects is traffic forecasting. In this case, the risk involved in making an over-optimistic assumption regarding rail-borne traffic is relatively low because in the conservative estimates of traffic made by the mission (paras. 2.13-2.16 and Annex 3), a substantial portion of the additional bulk traffic is already available to the railways but is at present moving by road for want of rail capacity. However, the traffic forecast includes an increase of 2 to 3 million tonnes of domestic iron ore that would be consumed by steel plants, which need imported iron ore to supplement the domestic production and for blending purposes (para. 2.13 and Annex 3). The proportions of domestic and imported iron ore require- ments have been estimated in consultation with the SPO taking into account the country's balance of payments outlook, the recent establishment of iron ore beneficiation plant at Demirdag, and ongoing mining development works. There appears to be little risk, particularly in view of the rolling annual plan mechanism to be followed by the Government and TCDD which will allow flexibility in progressive adjustment of investments to correspond with changes in traffic levels (para. 2.25). Assistance of technical experts is being provided under the project (para. 3.09) where this might be a problem. However, Turkish railways have a long way to go to build up competent managerial, operational and technical expertise. The Government is aware of the Bank's concern in this regard and project implementation has to be adequately monitored. Consideration of a follow-up project would be worthwhile to sustain the impact.  - 31 - V. FINANCIUL EVALUATION A. General 5.01 The Government of Turkey has recently adopted a policy of self reliance for TCDD. This replaces the practice of treating the railway as a government department with public service and social obligations which had led to substantial operating deficits and a system of compensation payments from the Treasury. These payments amounted to TL 61 billion in 1984. Under the new policy TCDD will be required to reduce its dependence on central government funds with a target of financial independence by 1991. Two measures have already been taken ti) TCDD is now free to set its own charges, (ii) the Treasury payment has been reduced to TL 50 billion for 1986, and it will stay at this level in real terms for the next few years. This amount is allocated as TL 2i billion for the cost of maintaining track and TL25 billion for capital investment. The following paragraphs describe the past financial results; the measures proposed for the future are dis- cussed under Financial Forecasts (para. 5.08). 5.02 In the past, Government compensation payments to TCDD were made under four headings for: (a) Track Maintenance and repair. This is intended to help TCDD meet the competition from road carriers and has been paid since 1971; (b) Uneconomi' Lines. This was a payment for the losses on 9 lines identified as uneconomic following a consultant's study. In 1975 the Government of the day decided not to close the lines, nor to reduce services, in the belief that the railways could become more energy efficient than road transport and in a wish to protect customers from the full effects of the catastrophic increases in the price of oil; (c) Freight Tariff Increases Refused. Compensated the railway for the difference between costs and customer contributions as a measure to combat inflation, has been paid since 1978; and (d) Suburban Passengers. Follows the same principle as (b) and worked in the same manner as (c) for the loss on commuter traffic into the major cities of Ankara, Istanbul and Izmir. From 1986 the sole payment will be for track maintenance and capital development.  - 32 - Accounting Policy and Practice 5.03 Budgets and accounts are prepared in accordance with a uniform system of accounts used by state enterprises. Annual budgets are prepared and submitted for approval to the UB, the SPO and the Undersecretariat of the Treasury, Ministry of Finance (MOF). The accounting data is also used in a costing system based on that adopted by almost all European railways (UIC 374). The accounting principles, definitions and the system of clas- sification are adequate, on the whole, for financial accounting, but they could be improved. There is a need for more timely management information and for the extension of the costing system to report on specific business activities, e.g., the costs and revenues of point-to-point container trains. A study of the accounting systems in TCDD is to be undertaken financed by the current loan for Port Investment (Loan 2535-TU). Although this is directed at the ports operations the study will cover the TCDD system generally and have as a major objective the preparation of manage- ment information. It is expected that the consultants' report will be used as a basis for improvements in financial reporting for the port and railway activities. This was confirmed at negotiations. Fixed assets were compre- hensively revalued in 1983 and are revalued annually. Audits 5.04 Annual audits are carried out by Controllers of the Under- secretariat of Treasury and Foreign Trade attached to the Treasury Department. While these audits are carried out promptly, there have been delays in submitting the auditor's reports to the Board of Directors and further delays in providing English translations for the Bank (as required under the earlier Loan 1741-TU for the Ports). These problems have been discussed with the auditors and agreement reached on format and time of submission. During negotiations agreement was reached that (a) separate accounts would be used to record all project funds and expenditures and that such accounts relating to the expenditures by TCDD, DLH and the Special Account (para. 3.28) would be audited each year by an auditor acceptable to the Baik, and (b) the report on the annual audit of these financial statements and the report on the annual audit of financial state- ments of TCDD will be sent !o the Bank within nine months of the financial year end. B. Recent Financial Results 5.0')5 Since 1959 TCDD has operated the railway service at a loss even after accounting for Government payments for its public service obli- gations. These payments have grown in significance and from 1980 to 1985 were larger than the amount paid by customers. The financial position began to deteriorate in 1973-74 and, apart from one good year in 1976, continued to decline, 1980 being a particularly bad year. However, the effect of large successive increases in rates since 1981 and an increase in the volume of freight traffic has begun a reversal of the decline (Tables 5.1 and 5.2).  - 33 - Table 5.1. TCDD Railway Operations Sunmnary: Income Statements (TL Billion) 1972 1976 1980 1984 Operating Revenues 1.24 3.84 14.58 52.52 Payments from Government 0.36 1.78 19.01 61.24 Operating Expenses 2.58 6.38 40.01 119.64 Net Operating Revenue (0.98) (0.76) (6.42) (5.87) Non-Operating Incomep' .06 .26 1.62 6.04 Interest Payments .14 .20 1.30 2.74 Net Income (deficit) (1.05) (0.70) (6.10) (2.57) Operating Ratio 161 114 119 105 Operating Ratio (excluding Government payments) 208 166 274 228 Average Customer Contribution to Operating Expenses (Freignt and Passenger combined) 48 60 36 44 1/ Includes income from the sale of scrap metal, rental of property and payments out for accidents (Annex 8, para. 3(f)). 5.06 The financial results show in money terms the operating deficiencies (para. 2.17) and the previous policy of holding down tariff and fare increases for national economic and social reasons (para. 5.02). Since 1981, sizeable increases have been made in the rates charged to customers which have accumu- latively been higher than the increase in the cost of railway operations (Table 5.2). Table 5.2: Recent Fare and Tariff Increases (X) 1981-85 Cumulative 1981 1982 1983 1984 1985 Total Freight 41 25 20 25 40 370 Passenger-Suburban 50 33 25 60 25 499 Other 50 20 20 40 40 423 Railway Unit Cost 17 29 31 21 28* 306 *estimated During this period, TCDD has carried an increased volume of freight as is shown in Table 2 of Annex 3. The increases in charges and a higher traffic volume have improved the overall financial results since 1981. This is shown in Table 5.3.  - 34 - Table 5.3: TCDD's Railway Operations Summarv Income Accounts for 1980-1A85 (TL million) inn ma naz nsa nu