India - Container Transport Logistics Project

Document of The World Bank FOR OFFICIAL USE ONLY / A 'z 7SC3 4/a Report No. 12780-IN STAF APPRAISAL REPORT IDDIA CONTAINER TRASPORT LOGISTICS PROJECT MAY 9, 1994 MICROGRAPHICS Report No: 12780 IN Type: SAR Infrastructure Operations Division Country Department II - India South Asia Regional Office This document has a restricted distribution and may be used by ripients only in the perfonnnc of their offciil dutes. Its contents may not othewis be disclosed without Wodd Bank authoriaion.  CURRENCY EOUIVALENTS Currency Unit = Rupee (Rs) I Rupee (Rs) = 100 paisa = US$ 0.0323 I Lakh 100 thousand = US$ 3,125 1 Crore = 10 million Rs = US$ 312,500 US$ 1.00 = Rs32 SYSTEM OF WEIGHTS AND MEASURES: METRIC Metric British/US system I meter (m) = 3.281 feet 1 square meter (!n2) = 10.764 square feet 1 cubic meter (m) = 35.315 cubic feet 1 kilometer (km) = 0.621 mile I metric ton = 2,205 pounds 1 tkm = ton-kilometer (0.621 ton-mile) I pkm = passenger-kilometer (0.621 passenger-mile) ACRONYMS AND ABBREVIATIONS BFK = bogie container flats BPT = Bombay Port Trust CAS = country assistance strategy CONCOR Container Corporation of India CFS container freight station DEA = Department of Economic Affairs (Ministy of Finance) DPE = Departnent of Public Enterprises EDI = eleatronic data interchange ERR = ecanomic fate of return FAK = frcight all kinds FYP = Five Year Plan GDP = gross domestic product GNP = giOss national product 001 = Government of India HDC = high density corridors HOM = Port of Madras ICB = international competitive bidding ICD = inland container depot ICR Inmplmentation of Completion Report IR = Indian Railways JNPT = Jawaharlal Nehru Port Trust MOC = Ministry of Commerce MOCA = Ministry of Civil Aviation MOR = Ministry of Railways MOST = Ministy of Surface Transport MOU memorandum of understanding MTO = multi-modal trnsport operator NVOCC = non-vessel- operating container carrier PC Planning Commission POL petroleum oil lubricants PKM = passenger-kilometers PSCT port side container terminal PSU = Public Sector Unit RDSO = Research, Design and Standards Organization RFID = radio frequency identification device RITES = Rail India Techmical and Economic Services SAL/SAC = stuctural adjustment loan/credit TA = technical assistance TEU = twenty foot equivalent units TILL = trade and investment 1beralizai loan TKD = Tughiakabad ICD TKM = ton-kilometers  I:OR OFFICIAL USE ONLY INDIA CONTAINER TRANSPORT LOGISTICS PROJECT LOAN AND PROJECT SUMMARY Borrower Container Corporation of India (CONCOR) Benefician Container Corporation of India (CONCOR) Guarantor India, acting by its President. The Government of India (GOI) would charge CONCOR a guarantee fee of 1.2 percent per annum on the principal amount of the IBRD loan withdrawn and outstanding. Loan Amount US$ 94 million equivalent Terms The loan would have a repayment period of twenmy years, including a five- year grace period, at the Bank's standard variable interest rate. Qbiecv The overall objective of the project would be to provide a suitable enabling ervironment for container transport and increase the capacity and efficiency of long haul transport of high value general cargo, particularly related to foreign trade. The project would increase the use of containers hi the transport of general cargo, and encourage and facilitate the use of the railway for such transport wherever it is economically the best option. Proiect Desridtio The proposed project would: (a) improve the institutional framework for efficient and competitive container transport through the removal of the main customs practices and procedures restricting the inland movement of containers; (b) strengthen the commercial approach and operational efficiency of CONCOR in an increasingly compeitive environment by diluting at least a 5 percent share of GOI's equity in CONCOR, broadening the composition of the Board of Directors of CONCOR, reforming CONCOR's claim policy to meet customer needs, and providing technical assistance and training; and (c) support scheduled high-quality container train services in the main corridors through the acquisition of selected rolling stock, cargo handling equipment, transponders and readers for electronic tracking of container trains, flat car and containers, and related civil works and engineering services. Benefits The proposed project would help develop container transport with particular emphasis, as a first step, on the main rail corridors of Delhi-Bombay/JNPT and Delhi-Madras. It would improve transport capacity and efficiency of long- haul high-value containerizable cargo, particularly for foreign trade shipments, through increased speed and safety, reduced losses, and overall door-to-door costs. In addition, by diverting traffic from the satrated highways, the project would help reduce congestion and pollution. This document has a resticted distnbution and may be used by recipients only in the pfomac of tbeir official duties Its content may not otherwise be discled without World Bank athorizaton.  ii Risks The main risk is that the expected improms in CONCOR's perfom1ance may not be fully achieved due to insufficient support from Indian Railways (IR) in providing needed block train paths and trAction power. Anotlier risk is that agencies, such as Customs, that derive litde direct benefit from the project may be slow to amend thir procedures. In addition if demand projections do not materialize, CONCOR would have difficulties in servicing the sharply higher level of debt generated by the project. Fially, the foreign exchange risk of the project will be borne by CONCOR even though all of its revemnes are .: Rupees. Estimated Cost US$ 151 million equivalent Fin cin. P-1 IBRD US$ 94.0 million CONCOR US$ 53.0 million Co-fimancier US$ 4.0 million Estimated Loan and Credit Disbrseents FY95 FY96 FY97 FY98 FY99 FY2000 ----(S$ million)-. Annual 12 26 28 16 8 4 Cumulative 12 38 66 82 90 94 Economic Rate of Rn 37 percent Poverty Cate2ory Not applicable  iii CONTAINER TRANSPORT LOGISTICS PROJECT TABLE OF CONTENTS I. TRANSPORT AND TRADE IN INDIA ................................. 1 A. Economy and Trade ...... .................................. I 1. Overview ........................................ 1 2. Government's Program of Econoric Reform .................. 1 3. Bank's Involvement in Economic Reform and Trade Liberaliaion in India ........................................... 2 B. The Transport Sector .............................. . 2 1. Overview ........................................ 2 2. Phnning and Coordmatin ............................. 3 3. Investmen and Policy .............. 3 4. Bank's Involvement in Transport Sector and Lessons Leared.4 C. Role of Transport in Facilitting Trade ............ .. ................ S 1. Major Transport constaints to Trade Growth ................. 5 2. Role of Contaier Transportaion ......................... 5 3. Major Issues in Developing Cont riade on .................. 6 H. CONTAINER CORPORATION OF INDIA (CONCOR) ........................ 8 A. The Company ............................................. 8 B. Business Activities. 9 C. CONCOR's Strengths and Weaknesses ......... .............. ...... 9 D. Financial Performance .................................. 10 E. Business and Finance Plan .............................. ... 12 F. Memorandum of Understanding (MOU) .............................. 12 G. Financial Projections ................................. 13 IH. THE PROJECT ................................. 14 A. Project Orgin .................................. 14 B. Rationale and Objectives .................................. 14 C. Project Description ............ ..................... 15 D. Project Cost ................................. 16 E. Project Financing ................................. 16 F. Project l aon. ......................... ............. 17 G. Procurement ................................. 17 H. Disbursement ................................. 20 I. Economric Evaluation and Risks ................................. 20 J. Environental impact ................................. 21 K. Monitoring and Auditing .................................. 21 IV. AGREEMENTS AND RECOMMENDATION ............................. 22 /  iv 1.1 Bank Loans and Credits to Transportation Sector 2.1 Summary of Draft MOU (fiscal 1994-95) 2.2 Financial Evaluation of CONCOR 3.1 Project Objectives and Development Indicators 3.2 Outline of 'The Netherlands Technical Assistance Program to CONCOR 3.3 Project Cost Summary Table 3.4 Imlemeion Schedule 3.5 Performance Targets 3.6 Cumulative Disbursement Schedule 3.7 Economic Evaluation 3.8 Outline of Content of Quarterly Progress Reports 3.9 Supervision Schedule 3.10 Documents Available in Project File TABLES 1. Container Corporation of India Ltd. Financial Statements 2. Sunmmy of Proposed Procrement Arrangements CHART 2.1 Organizational Chart of CONCOR 3.1 Procement Schedule for Equipme of Materials  1 INDIA CONTAINER TRANSPORT LOGISTICS PROJECT STAFF APPRAISAL REPORT 1. TRANSPORT AND TRADE IN INDIA A. Economy and Trade 1. Overview 1.1 Witb a per capita Gross Domestic Product (GDP) of US$ 350, india remains one of the world's poorest countries. From the time of independence in 1947 until recently, India pursued a centrally planned approach to development (combining prudent macroeconomic management; an active role for the state in key sectors such as banking, basic industries, utvlities, and infrastructure; and extensive regulation of the economy) that went beyond the import su*bstitution industrialization policies of most developing countries after World War HI. The Government regulated nearly all firms of a specified size, in such basic business decisions 3s: borrowing, investment, capacity utilization, pricing and distrbution. However, although highly regulated, the private sector has continued to be important and is present in most sectors of the economy, accountirg for two-thiirds of the country's GDP. 2. Government's Program of Economic Reform 1.2 Reform Programs Throughout the 1980s, important policy changes began to liberalize trade, industry and flun',e, while subsidies, tax concessions and depreciation of the currency improved exports. These reforms, altLough only partially addressing the country's most fundamental struural problems, did help increase GDP growth to more than 5 percent per year during the decade and help reduce the incidence of poverty. 1.3 A break with India's past development policies occurred in June 1991 when the present government came to power and began implementing a comprehensive program of stabilization and reform. The Eighth Plan for FY92/97 articulated the new government's main objectives: reducing macroeconomic imbalances, transforming India into an internationally competitive economy open to trade and foreign investment, encouraging the development ef the private sector, and improving the country's infrastructure and human resources base. The balance of payments crisis has been overcome and the current account deficit has declined from US$ 10 billion (3.5 percent of GDP) in FY90/91 to US$ 1.7 billion in PY93/1994 (0.7 percent of GDP); inflation has declined to around 8.5 percent at present, from a peak of 17 percent in August 1991; and the fiscal deficit has been reduced from 8.5 percent of GDP in FY90/91 to 7.3 percent in FY93/1994. On the structural reform front there has been rapid progress in liberalizing the trade and investment regimes, liberalizing capital markets, and strenthening the banking system. A start has also been made to restructure or privatize public sector enterprises and to reform the tax system. 1.4 Trade Liberalization The first set of trade reforms was introduced in July 1991. They eliminat a costly subsidy scheme for exports, lowered quantitative restrictions on imports, adjusted the exchange rate, and increased significantly the freely tradable import entitlement granted to exporers. Sweeping additional trade and payments reforms were introduced seven months later at the time of the PY92/93 budget, and again in April 1993. As a result, a floating exchange rate system  2 has emerged. The maximum import tariff rate has been reduced significantly, from 400 percent to 65 percent while the import -weighed tariff has been reduced from 77 percent in PY90/91 to 41 percent in PY93194. Quantitative restrictions have been eliminated for intermediates and capital goods. In the Eighth Plan, the government indicated that further measures will be taken to reach a trade regime free of quantity restrictions and an average tariff rate of 25 percent by FY96/97. 1.5 Export Promotion Export promotion is a key component of the government's program and is the main reason for devaluation and floating of the Rupee and tariff reductions. In addition, 001 has taken several steps to improve thAe administration of export promotion schemes and to remove foreign exchange controls that restricted exporters' activities. A number of schemes have been strengthened to improve exporters' access to i4puti at international prices, such as the Advance License Scheme (which allows exporters to import raw materials and intermediate goods without paying duty), the Duty Drawback Scheme, the export processing zones, and the 100 percent Export Oriented Units. Current projections suggest that imports and exports will grow in real terms at rates slighdy above 10 percent per year. 3. Bank's Jnvolve%ent in Economic Reform and Trade Liberalization in India 1.6 Policy-Based Lending In December 1991, the Bank made a US$ 500 million strucural adjustment loan and credit (SAL/SAC) to India, the first stage of Bank support for the 01rI's adjusanent program. In December 1992, the Bank made another sector adjustment credit of US$ 500 million to facilitate GOI's reform program by strengthening the social safety net during the adjustment process. Recently, the Bank has approved a US$ 300 million Trade and Investment Liberalization Loan (IUL), in support of the liberalization of India's external sector and investment regime. B. The Transport Sector I. Overview 1.7 The transport network in India is extensive and diversified: it comprises about 62,000 route kilometers (km) of railways; 1,890,000 km of roads (of which 8.5 percent of the network carries 75 percent of the road traffic); 11 major and 139 intermediate and minor ports; 14 major airports (6 handle international flights); 7,000 km of pipelines; and 14,500 km of inland waterways (5,200 km are navigable by motorized vessels). In addition to motorized transport, India las an important non-motorized transport system in the form of bullock carts and sailing boats, as well as push carts and other porterage (an estimated 15 million units, but with a freight market share of only 2 percent). 1.8 Land transport, traffic (road and rail) has been increasing rapidly since the 1950s. Road transport has grown substantially faster than rail, with an average growth rate of about 6 percent for freight and 7 percent for passenger traffic during the period 1951-81. Road traffic had an even faster growth rate during the period 1981-93 when freight traffic grew at about 7 percent and passenger traffic at 9 percent. During the same period rail freight traffic grew at about 5 percent and passengers also by about 5 percent. 1.9 Historically, India relied on its extensive raLl network for .nost of its long distance transport needs, and Indian Railways (IR) has become the world's third largest system in terms of total traffic units under one administration and employs approximately 1.7 million people. In 1992-93, it carried 268 billion ton kilometers (M) and 226 billion passenger kilometers (P"M). The current role of the railway is consistent with its comparative advantage in the Indian transport sector, except for long-distance transport of high-value goods. IR's share in the modal transport split has been declining and is presendy down to 18 percent for PKM and 40 percent for TKM. The road accounts for 55 percent of TKM and 82 percent of PKM and coastal and inland watways shipping handles  3 the remaining 5 percent of freight TKM. Today, IR has become primarily a long-distance bulk carrier of commodities, with coal, cemeit, fertilizer, grain, and iron ore accounting for 85 percent of rail freight traffic. It also plays a vital role irn the transportation of conmmuters in three major cities (Bombay, Madras, and Calcutta) and of inter-city passengers. 1.10 To serve the growing traffic requirements, both the rail and road systems nieeo major improvements. The effective functioning of IR is hampered by capacity constraints and old and worn track, signalling equipment, motive power and rolling stock, much of which needs to be repaired or r;placed. The road network is also suffering from low construction standards and increasing congestion, particularly in the high density corridors. Because of the long distances involved between the main inland production centers and the gateway ports, a properly functioning system for movement of containers by rail would have a comparative advantage and should yield significant economic benefits. It should be noted that, partly as a result of slow and unreliable inland road and rail transport, a significant part of Indian exports (approximately 35 percent by value) is currently moved by air freight. 2. Planninig and Coordination 1.11 The GOi is heavily involved in the transport sector in India, characterized by state ownership of infrastructure and most transport operators (except for road freight transport, some shipping and, since mid-1992, an increasing number of private airlines), a regime of administered prices, centrally allocated supply, and a policy of technological self-reliance. The system of administered prices for publicly provided transport services has resulted in delays in tariff adjustments and has introduced some socio-political considerations in tariff setting, particularly for passenger fares. The policy of technological self-reliance has resulted in the continued use of older and less- efficient technologies, particularly in rail aud road transport. 1.12 The sector is under the jurisdiction of various ministries: roads and road transport, major ports, and shipping are under the jurisdiction of the Ministry of Surface Transport (MOST); railways are a department of the Ministry of Railways (MOR); civil aviation is under the Ministry of Civil Aviation (MOCA); pipelines are under the Ministry of Petroleum and Natural Gas; and trade organization is under the Ministry of Commerce (MOC). Responsibility for some of these activities, particularly highways and ports, is shared by the central goverment and the states, which also have direct jurisdiction over some services (especially those provided within states). Coordination among the different modes is handled by the Coordinating Committee of the Secretaries of Surface Transport, Railways, Civil Aviation. 3. Investment and Policy 1.13 The level of investments in the transport sector has been insufficient to meet the increasing demand. Invesuments allocated in successive plans for the transport sector have been increasing in real terms; however, these increases have oeen significantly less than the growth in traffic. The share of budget allocations for transport in the five-year plans has declined from 22 percent during the First Five-Y, jr Plan (FYP) to around 13 percent during the Sixth, Seventh and Eighth FYP. This is particularly true in the road sub-sector where not only have the funds allocated been insufficient but there has been a constant bias in favor of the tertiary road network (rural roads) at the expense of the national and state road networks. Within the transport sector, modal shares in public capital expenditure have varied considerably, but the -ailways have received the largest share (about 48 percent of the Eighth FYP) followed by road construction (24 percent), road transport (7 percent), and ports and inland waterways, r-ivil aviation and shipping (the remaining 21 percent). The other transport sub-sectors, including the ra lways, have also had inadequate funding, which has led to increasing transport bottlenecks. In the future public sector funding constraints and increasing transport demand will likely necessitate increased efficiency and financial self-reliance in public  4 enterprises and more investments from, as well as a greater role for, the private sector. To date, private sector investments have been concentrated maivly in road and air transport and to a growing extent in shipping. The government is now developing policies for attracting more private investments in road infrastructure and ports, and IR is trying to attract private or public investments in rolling stock and other facilities. IR is also resorting to substantial market borrowing (Rs 10.5 billion for FY95) to augment its internal resources. 1.14 The government long -term investment objectives for the transport sector are: (a) removing bottlenecks, (b) increasing capacity, (c) conserving energy, (d) completing ongoing works, (e) maximizing asset utilization, and (f) paying special attention to rural areas. None of these objectives have been fully achieved in the past, and major shortcomings persist (for instance, infrastructure capacity lags behind demand for nmost modes). It is expected, however, that the structural reform program initiated in 1991 will result in increased private sector involvement and more liberalization in the transport sector as well as improved efficiency and performance. 4. Bank's Involvement in Transport Sector and Lessons Leamed 1.15 Bank/IDA Operations in the Transport Sector. Until recently, the Bank's involvement in the sector was predominantly in railways, due to the Indian authorities' preference for local competitive bidding in road and port projects. However, following GOI's decision in the mid-1980s to allow international competitive bidding for contracts in road and port projects, the Bank has had a more balanced lending program split between the railways and roads. Annex 1.1 provides a list of recent transport sector projects. 1.16 Current Bank Strategv in the Transport Sector. The sector strategy will complement the government's overall reform policies and focus on projects for capacity expansion and efficiency improvement at the agency and sub-sector level, including policy adjustments and institution building. More specifically the Bank strategy gives particular emphasis to improving the commercial and competitive environment in the sector and sub-sectors, improving the capacity and efficiency in the high-density corridors and strengthening project engineering, implementation and supervision. It focusses on: (a) Rationalization of container services on fixed schedules, delegation of more responsibilities to the port authorities and the promotion of private participation in areas such as terminal operations and container handling. (b) Establishment of an effective, operational National Highway Authority, privatization of highway engineering design and supervision services, rigorous prequalification of consulting engineers and contractors together with sound competitive binding procedures. (c) Significant increase in outlays for investment and maintenance on the congested road netwcrk, partly financed through user fees and charges, including vehicle and fuel taxation. (d) Adoption of measures to place the operations of Indian Railways on a sound commercial footing by giving higher priority to profitable freight operations through redluctions in subsikiies for passenger, suburban and meter gauge services and through the corporatization/privatization of its manufacturing activities. 1.17 Lessons to be Learned from Past Projects. The Bank's lending in the transport sector in India has faced a multitude of problems, especially in the area of implementation. Obstacles to satisfactory project performance have included shortage of counterpart funding, delays in decision-  5 making, and capacity constraints and quality control in the construction industry and procurement delays. These problems are not unique to the transport sector but also appear in other sectors. 1.18 Many of the problems were project-specific: lack of familiarity with Bank procedures; changes in project scope or components during implementation; inadequate engineering designs; changes in project management; low salaries; an delays in procurement start-up delays. Generally speaking, the railway projects have encountered fewer implementation problems than those in the other sub-sectors due to a well-structured administrative system familiar with Bank procurement procedures. The main problem has been procurement delays. 1.19 Because of the above, Bank-financed projects in the transport sector have in many cases encountered substantial delays in implemen'tation and, in some cases, cost overruns. However, it should be noted that the qiuality of the completed projects components have, (with some exceptions, particularly regarding road construction standards), been acceptable. To further improve implementation quality, over the last two years there has been increased use of international consultants in project design and supervision, larger contract packages, and standardization of tender documents as adopted in the Second National Highways Project. In June 1993, the government also announced the establishment of a monitoring system and a new system of releas, of counterpart funds to accelerate project implementation. In order to further improve procurement, the government and the Bank jointly prepared "standard bidding documents" to be used for all future Bank projects in India. 1.20 Drawing on past experience, considerable attention has been given to several measures to ensure efficient iniplementation of the proposed Container Transport Logistics Project. First, agreement has been reached on the key policy issues such as the Multi-modal Transport of Goods Act (para 1.27), some changes in custome procedures (para 1.28), and private sector participation (para 1.27) that will enable container transport to develop. Second, the preparation of the physical components of the project is well advanced. Equipment specifications, procurement packaging and tender documentation have been agreed before loan negotiations. Finally, in order to improve the technical, operational, financial and marketing performance of CONCOR, the Government of The Netherlands has approved a grant for a comprehensive technical assistance program, which is an integral part of the project. C. Ro1e of Transport in Facilitating Trade 1. Maior Transport Constraints to Trade Growth 1.21 The Eighth Plan stated that GOI would carry out further trade reforms to better integrate the Indian economy into world trade. However, faster growth in trade will be held back if current constraints in the transport sector are not addressed. As discussed in section B above, the transport system has not kept pace with the demand for transport services, largely because of insufficient investments, some inanpropriate policies, and less than optimal efficiency. The Indian transport sector has also been slow in upgrading technology and adapting to changing transport demands in both domestic and foreign trade. This is particularly true for containerization. 2. Role of Container Transportation 1.22 Containerization trarsport in India began only recently and has developed at a relatively slow pace. At present containerized transport of general cargo accounts for only about one-third of the total containerizable cargo, as compared with 65 to 70 percent in many other developing countries. Perhaps more importantly, fewer than 20 percent of the containers passing through Indian ports move inland, while 80 percent are stuffed or destuffed in the ports, clearly indicating the potential for substantial further growth in the inland movement of containers. The slow development  6 of inland container movements can be explained by several factors, including the organization of the trade, insufficient infrastructure and facilities for container transport and handling, and outdated regulations (see para 1.26). 1.23 The benefits of containerization are manyfold: it allows door-to-door transport, speedy intermodal transfers, low handling costs, reduced breakage and pilferage, lower insurance costs, and earlier payments to the exporter. The Indian economy would benefit substantially through improved competitiveness and higher revenues or lower costs if containerization were used as extensively as in other countries in the region. 1.24 As part of its effort to promote exports, GOI has in recent years incremed port capacity and facilitated the development of container and combined transport services. A major new port was constructed at New Bombay (JNPT), with specialized container facilities, and new container-handling facilities were added at other major ports such as Madras and Cochin. Following the estabiishment of CONCOR as a wholly owned subsidiary of IR in March 1988, considerable progress has been made in developing an initial network of inland container depots (ICDs) and a system of block container trains linking Delhi with the major ports of Bombay (JNPT and BPT), Madras (HOM), as well as between Bangalore and Madras and Cochin. New ICDs have recently been opened at Delhi and Bangalore. The private sector also owns and operates an increasing number of container freight stations (CFSs). 1.25 The development of containerization and increased use of inland rail transport of containers will also help reduce the severe bottlenecks on India's highways. According to a recent study, 46 percent of trucking hauls on India's main highway network are in excess of 500 km and 26 percent are in excess of 1,000 km. Much of this traffic could be moved by rail in containers if high- quality, long-haul container transport services were made available. 3. Major Issues in DeveloDinge Containerization 1.26 Containerization has developed slowly in India mainly because (a) customs regulations and procedures restrict movement of import/export containers by road and prolong the time containers moving inland have to spend in the country; (b) there was a shortage of ICDs and CFSs; (c) there was no appropriate legislative framework for container transport; (d) the shortage of railway fiats and the low priority given by IR to such traffic; (e) the shortage of multi-axle trucks suitable for the transport of containers; and (f) the generally poor condition of road networks that restricts road movement of containers. 1.27 Most of the above problems have been or are being addressed. The government has opened the development of ICDs and CFSs to the private sector and stablished a -one-window- approval system (b). Th-v legislative framework for combined transport has been dealt with through the recent passage of the Multi-Modal Transport of Goods Act, (1993) and various amendments that are presently being prepared (c). The proposed project would provide additional flat-wagons for railway movement of containers (d). Linked with the project. IR and CONCOR have developed a new memorandum of understanding (MOU) for 1994-95 that accords higher priority to this traffic through increasingly fixed schedule guaranteed transit time services for container trains (d). Resolution of the road network constraints and upgrading of truck technology (e and f) are longer- term measures that cannot be dealt with within the scope of the proposed project. 1.28 The customs bottleneck is one of the most difficult issues facing trade development in India. The customs system is widely regarded as one of the more cumbersome and complicated in the world. The system is based on safeguarding revenues; until recently over 50 percent of central govermment revenues were derived from customs duties and taxes. The rules and procedures used for  7 assessing and collecting duties and taxes, however, have become excessively complex and open to abuse by bureaucratic discretionary power. The 1991 Rail India Technical and Economic Services (RITES) review of customs procedures and documentation has already resulted in some simplification of procedures and alignment of export documents. A review of the recommendations made by RITES is currenly being carried out for the Ministry of Commerce to assess the extent of implementatioL. Apart from these actions, there reportedly has been a significant improvement in the attitude of Customs over the last year. Furthermore, in late-1993 the Ministry of Commerce established a committee to review all procedures relating to imports and exports with the objective of simplification; their recommendations are expected shortly. 1.29 The project addresses the specific customs procedures and practices that restrict or were perceived to restrict the inland movement of containers. These points were discussed during loan negotiations and the following Action Plan agreed between the government and the Bank: (a) Containers, whether loaded with goods or not, will be granted temporary admission for a period of six months, which may be extended by the competent Customs authorities, without any separate statutory Customs document being required to be filed for each container separately. The party concerned shall notify the Customs of the number and identification particulars of the containers to be moved outside the Customs area. Any bond required for such movement could be either for a specific individual consignment of containers or as a standing general bond covering a larger number of containers. The aimount of bond shall not exceed the Customs duty leviable on such containers in case they are not re-exported within the stipulated time. Appropriate instructions to the Customs authorities concemed will be issued before 31 May 1994. The question whether the requirement of bond can be waived will be examined in the light of recent developments, including the new UN/ECE Container Pool Convention. The Bank will be informed of the conclusion and measures to be taken by end of 1994. (b) As regards movement of goods under bond to inland destinations, Customs may require a bank guarantee for an amount not exceeding the Customs duty leviable on the goods. For the benefit of traders, Customs will clarify before 31 May 1994 any ambiguity regarding the amount of bank guarantee required for different categories of importers. (c) It is confirmed, and will be clarified to the trade before 31 May, 1994, that there is no restriction that export containers, stuffed at exporters' premises and sealed by Customs, should move to a port, an airport, an ICD or a CFS for export by (i) any particular mode of transport, or (ii) only under the custodianship of a public sector entity. (d) The relevant wording of the Import Transhipment Regulations will be reviewed with a view to be revised by 31 December 1994 in order to reflect the fact that transhipment is allowed by rail, sea, air or road. Transhipment by road, however, may be subject to conditions or may be disalowed where there are exceptional risks involved (e.g. becausu of the hazardous nature of the goods or restrictions on their import into the country). The availability or non-availability of a particular mode of transport should not be a determining factor for the choice of mode. (e) A twenty-four hour Customs examnmation and clearance facility is available for export cargo at the four major ports and airports since 1 April 1994. On request, and when warranted by the volume and nature of traffic, such a facility would be considered for introduction at ICDs/CFSs as well. Presently examination and clearance of cargo at ICDs/CFSs beyond normal working hours is available on payment of overtime charges.  8 II. CONTAINER CORPORATION OF INDIA (CONCOR) A. The Companv 2.1 CONCOR was established under the Companies Act in March 1988, at the recommendation of RITES. It is a wholly owned subsidiary of IR. In November 1989, CONCOR began operating the ICDs established earlier by IR and now operates 10 ICDs (New Delhi, Ludhiana, Abmedabad, Pune, Bangalore, Coimbatore, Hyderabad, Guntur, Anaparti and Guwahati), 3 CFSs, 3 port side container terminals (PSCTs), and 2 domestic container terminals. It has remained the only entity in the country handling container traffic at ICDs, althou6h another public sector enterprise operates a large number of CFSs, partly in competition with CONCOR. More recently, the Government has opened the establishment of ICDs as well as CFSs to the private sector (as indicated in para 1.27). Besides CONCOR, certain other state agencies as well as The private sector has responded and now own and operate a large number of CFSs. 2.2 Company Assets CONCOR has an authorized capital of Rs 1,000 million, out of which Rs 650 million has been subscribed by IR, but most of the shares are held in the name of the President of India. Until recently CONCOR owned very few physical assets and most of the land and facilities have been leased from IR at concessional rates. During the past three years, CONCOR has made substantial investments in ICDs at TUGHLAKABAD (TKD) outside New Delhi, Bangalore, Madras and elsewhere at an estimated cost of Rs 1,110 million, funded primarily through internally generated funds and capital subscriptions by IR. Handling equipment at all locations except TKD is owned and operated by private sector contractors. At TKD, CONCOR owns and operates most of the equipment; this is the only location where it intends to follow this practice. Requirements for unskilled labor at all locations have been contracted out. 2.3 Management CONCOR is managed by a managing director. It has a Board of Directors composed of ten members: the chairman, the managing director, two executive directors for marketing and operation and for finance, and six non-executive directors from IR and related ministries. Non-executive directors are nominated by relevant ministries. The Board meets at least once every quarter to decide company affairs. In order to enhance CONCOR's competitiveness and performance as well as responsiveness to user requirements, it is desirable to broaden the Board composition by bringing in members with a commercial marketing or operational background to complement the current experience mix. During loan negotiations the Indian delegation informed the Bank that the principle had been approved by both the Borrower Board and by the Railway Board and arrangements are presently underway under the guidance of DPE to identify suitable non-official part- time board members. Since this will take some time, it was agreed that the implementation in line with existing Department of Public Enterprises (DPE) guidelines which provide that one-third of PSU boards be constituted by non-official part-time directors would become a condition of Loan Effectiveness. 2.4 CONCOR's organizational structure is shown in Chart 2.1. 2.5 Staffing As a public sector unit (PSU), CONCOR's staffing policy is governed by relevant government rules, regulations and pay scales. CONCOR currently employs about 285 employees, of whom 37 are on secondment from IR. In order to minimize overheads and maximize efficiency, CONCOR utilizes another 576 employees at its ICDs and CFSs supplied by private conractors. Most of the 16 senior management officials of the company have come from IR, seconded for three to five years with the option to return to IR or to stay at CONCOR. The top management is composed of former IR officials who have severed their employment links with IR and it is expected that the number of staff on secondment will decline. External recruitment at the managerial level has been limited so far but is expected to increase, along with the need for diversified expertise as CONCOR becomes more commercially oriented.  9 B. Business Atvte 2.6 The transportation of containers by rail generates over 95 percent of CONCOR's turnover, making it a container transport operator. CONCOR operates a network of ICDs, CFSs and PSCTs that it either took over from IR or buflt during the past 3 years. Its business activities fail into three categories: conainer freight movement (74 percent of revenues), terminal handling (9 percent), and ground storage (8 percent). The remanng 9 percent is generated primarily by interest income on short-term deposits. 2.7 Clearly, container freight handling is CONCOR's main line of business, but since it currently does not own its rolling stock, it is like a non-vessel operating container carrier (NVOCC), accepting containerized cargo and afranging for its transport (primarily through IR). CONCOR also arranges transportation of contaiers by road over some selected corrdors. CONCOR pays IR haulage charges for containers on a freight all lknd (FAK) tariff basis (incidentally, other container freight operators can ship by IR under the same FAK tariff basis) and is free to set rates according to what the market can beAr. Traffic transit paths are presently provided by IR according to its own priority in scheduling, and there is no guarantee for "on-time" transit for CONCOR's container freight. This will change under the new MOU (see section F). IR has indicated that it is presently in the process of negotiating agreements for container transport with at least one private party and that it would be willing to negotiate similar arrangements with other intersted parties. 2.8 CONCOR's continer freight traffic falls into two categories: import/export traffic (the transit between ports and ICDs or CFSs) and domestic traffic (the relatively small but growing flows between Indian statinns). Over 60 percent of CONCOR's import/export traffic is concentated on the key rail transit between the Delhi and Bombay/JNPT ports. Another 20 percent is on the Delhi- Madras corridor. The remaining is found between ports and other inland destinations, including Bangalore and Guwahati in Assam. CONCOR is responsible for container handling at all of its inland locations (including PSCTs). However, the coiner handling activi at the ports is the responsibility of the respective port authorities/stevedores. During 1992-93, CONCOR handled over 155,000 twenty-foot equivalent units (TEUs) at its various terminals, including 33,000 TEUs (21 percent) of domestic traffic. For 1993-94, CONCOR is expected to handle a total of 221,000 TEUs, of which 51,000 (23 percent) are domestic-a 42 percent increase over the previous year. C. CONCOR's Smth and Weaknesses 2.9 s CONCOR's major competitive strength is that it is the leader in a rapidly expanding market. It is estimated that because of the low con ion rate of cargo and the relatively low trade orientation of the Indian economy, in ion will expand by at least 20 percent per year until the turn of the centy. The growth is partly as a result of increased foreign trade, but more importantly due to a growth in the share of continerizd traffic that moves inland in containers rather than being stffed/destuffed in the ports as is presently the case. CONCOR, in anticipation of the growth in demand, is planing to invest heavily during the next five years to increase its handlig capacity, quality of service, and operaig efficiency. 2.10 Container tranwport by rail also enjoys subsanti cost advantages over long-haul transport of freight by road. It is estimated that on the crucial TKD to Bombay corridor, CONCOR has at least a 20 percent cost advantage over the transport of freight by road in break bulk. It can be assumed that even when the regulatory framework allows free movement of containers by road, CONCOR will still enjoy a substntial cost advantage on the TED to Bombay corridor. in the short and medium term this advantage could also increase as traffic congestion increases on the main highways. In addition, when compared to road haulage, CONCOR enjoys a subtntial secuity, pilferage and damage advantage, with an accident rate of only 0.02 percent of containers carried.  10 2.11 Weaknesses Even though CONCOR enjoys substantial cost and security advantages, it falls short in meeting the demand for a faster, more frequent and reliable level of service. In addition, CONCOR lacks both the physical capacity and service facilities to capture the growing demand for container transport. This explains why such a high percentage of cargo is still moving by road in break bulk for distances of over 1,000 km and such an important share of exports are shipped by air (para 1.10). Furthermore, CONCOR's record in responding promptly to customer inquiries and requirements needed to be improved. At present it is handling the settlement of claims according to the Railway Act procedures, ieading to complaints from the customers who often get the run-around between CONCOR and IR rather than prompt setdtement of their claims. 2.12 The project, in conjunction with a five-year Business and Finance Plan for FY93194-FY97/98, addresses many of the weaknesses of CONCOR (sev section E). The FY94/95 MOU between CONCOR and IR (currently agreed but awaiting review by the Department of Public Enterprise before finalization) also begins to tackle the issue of reliability, speed and frequency of services (see section F). 2.13 In order to deal with one of the most frequent complaints of the users, the current system for settling claims should be thoroughly reformed to make CONCOR fully responsible for settling claims with its customers, by assuming liabilities comparable to those provided by multi- modal transport operators (MTO) competitors. The necessary arrangements were reviewed during loan negotiations, and implementation would be a condition of loan effectiveness. D. Financial Performance 2.14 CONCOR's business activities have grown rapidly since it began operating. The number of TEUs handled has increased by almost 500 percent, from 26,511 (FY91/92) to 155,585 (FY93/94); over the same period, turnover has increased by more than 300 percent, from Rs 210 million to around Rs 900 million. CONCOR has also been profitable since it began operations, and profits before taxes increased from Rs 48 million (FY91/92) to Rs 250 million (FY93/94), while profits after tax incrased from Rs 32 million to Rs 173 million (see Table 1). 2.15 CONCOR has enjoyed a high level of profitability, with an operating ratio of 77 percent, a gross profit margin (profit before tax divided by total income) of 28 percent, a net profit ratio of 19.2 percent and a return on equity of 27 percent during FY93/94. CONCOR has retained most of its earning to finance its capital expenditure budget, and in FY92 it declared its first dividend of Rs 5 million, which increased to Rs 17.5 million in FY93.  11 Table 1 CONCOR Financial Statements Profit and Loss Account (Rs millions as of March 31, 1993) ______________________________ FY90191 FY91/92 FY92/93 Operating Income 186.6 500.0 811.0 Other Income 23.5 44.7 88.5 Total Income 210.1 544.7 899.5 Total Expes 131.9 367.2 644.4 Profit before tax 77.9 177.0 250.0 Tax A461 77.5 Profit After Tax 31.8 110.8 172.8 Balance Sheet (Rs millions as of March 31, 1993) ______ _____________ ____________FY90/91 FY91/92 FY92/93 ASSETS Curren Assets, Loans and Advances 159.80 304.80 325.30 Investments 245.40 287.90 230.10 Fixed Assets 7.80 10.70 257.20 Less Accmulated Depreciation 0.30 0.80 5.60 Net Fixed Assets 7.50 9.90 251.60 Capital-Work in Progress 53.70 301.00 571.60 Miscellaneous 1.10 1.10 1.00 Total Assets 467.50 904.70 1379.40 LLABILITIES Current Liabilities 80.80 243.40 314.20 Loans 0.00 7.40 79.60 Reserves 56.80 183.90 335.70 Shareholders Equity 329.90 470.00 649.90 Total Liabilities and Equity 467.50 904.70 1379.40  12 E. Business and Finance Plan 2.16 CONCOR has prepared a five-year Business and Finance plan (FY93/94-FY97/98) that sets out the corporaia objectives and resource mobilization strategy needed to implement the plan. The salient features of the plan are that CONCOR plans to consolidate its market position through rapid growth and profitability, while at the same time improving the quality of its services. In the business plan, CONCOR has projected its container traffic at 470,000 TEUs by FY97198. 2.17 In order to achieve the growth targets set out in the business plan and improve its level of service, CONCOR has prepared an accompanying resource mobilization plan. The resource mobilization plan provides for investment of Rs 4,800 million over the next five years. CONCOR plans to raise Rs 600 million through leasing of containers and other equipment, Rs 1,200 million from retained earnings, and the remaining Rs 3,000 million from the proposed Bank loan. If the business should grow faster than expected, the sale of new equity would be considered during the latter years (not counting the sale of currently subscribed equity from which the revenues would not accrue to CONCOR). 2.18 The breakdown of CONCOR's resource mobilization plan shows that more than 90 percent of the funds budgeted will be used for the purchase of new flatbed wagons and the purchase and retrofit of existing flat wagons currently owned by IR, in order to ensure an adequate supply of rolling stock for the expected container traffic. The balance will be spent on additional cargo handling equipment and related infrastructure to improve both the productivity and capacity of CONCOR. 2.19 The primary aim of the resource mobilization plan is to provide CONCOR with the necessary hardware to greatly improve its service level and to increase capacity by financing modern rolling stock for regular block train operations on the gateway port corridors, while at the same time strengthening its commercial performance. The business plan together with the resource mobilization plan will be updated annually to help CONCOR meet its long-term objectives. During loan negotiations, agreement has been reached that CONCOR will make available to the Bank annually for comment its updated Business and Finance Plan. 2.20 In order to provide a sound basis for its future financial, commercial and operational performance, the Business and Finance Plan of CONCOR also provides for a gradual dilution of CONCOR's equity (by as much as 35 percent after FY97/98) through the sale of currently subscribed equity held in the name of the President of India or issuance of additional equity. An early sale of shares on the market would tend to establish CONCOR as a separate commercial venture in the mind of the public, further commercialize and institutionalize the relationship between IR and CONCOR, and at the same time attract new shareholders-all of which should improve the image and market orientadon of CONCOR. During loan negotiadons, the government anreed that a minimum of 5 percent of CONCOR's equity will be offered for sale to the public. F. Memorandum of Understanding (MOU) 2.21 In the past CONCOR and IR have jointly established guidelines for commercial, operating and general arrangements. This process has been further strengthened through the negotiation of an MOU between CONCOR and the Ministry of Railways to better define and monitor performance targets and obligations. It should be noted that in India, MOUs are presently negotiated amnually between each of the public enterprises and its parent or supervising ministry, with commitments and performance targets limited to the year in question. 2.22 More specifically, in the draft MOU for FY94/95 IR has committed itself to operatimg scheduled unit contaix -ins between TKD and JNPI/BPT and between TKD and HOM.  13 A planned 25 trains will be operated each month between BPT (average transit time of 69 hours), 22 trains per month between JNPT and TKD (85 hours), and 8 trains per month between HOM and TK) (126 hours). This schedule is compared to an average of 105, 131 and 160 hours (respectively) during the first nine months of FY93/94. Even more importantly from the users point of view is the reliability of transit times. For example, the average transit time in December 1993 varied between 52 and 235 hours on the TKD-BPT run and between 78 and 285 hours, TKD-JNPT. Substantial reductions are also expected in the turnaround times at TKD and the gateway ports. Of the planned scheduled trains, each corridor will operate a substantial number of guaranteed transit time trains. According to the MOU if the guaranteed transit time is met by IR, CONCOR will pay a 5 percent prenium to IR; conversely, if the guaranteed transit time is not met, IR will give CONCOR a 5 percent discount on its standard tariff rate. 2.23 The MOU also sets out the operational targets that CONCOR must attain. Specific profitability, traffic and turnover targets have been established for CONCOR. The performance of CONCOR and its management is then evaluated at the end of the year to how well the targets have been met (or exceeded). Annex 2.1 provides a summary of the key provisions included in the draft MOU for FY94/95. 2.24 The MOU will become the fundamental instrument for commercializing the relatronship between IR and CONCOR, and it is envisaged that, in line with current Indian procedures, it will be updated annually to reflect changes in basic elements related to productivity, quality of service and profitability of CONCOR, and the level of service provided by IR. The main features of the draft FY94/95 MQU were confirmed during loan negotiation. Agreement was also reached that satisfactory MOUs will be maintained during the implementation of the proiect. and that future draft MOUs will be furnished to the Bank by end April of each year. 2.25 To secure the third link in the performance chain, CONCOR also needs to negotiate arrangements with each of the three gateway ports (JNPT, BPT and HOM) for improving turnaround time of flat wagons at the ports. During loan negotiations CONCOR agreed to enter into an agreement with each gateway port by December 31. 1994. G. Financial Projections 2.26 For a relatively young and rapidly expanding company, CONCOR has a strong balance sheet. In FY93/94, CONCOR had an equity base of almost Rs 1,000 million and only approximately Rs 80 million in long-term debt, giving it a very low debt to equity ratio of .08:1. In addition, for the same year, CONCOR's debt service coverage ratio was around 20:1 and its current ratio was 1.7:1. The low leverage and relatively high liquidity position of CONCOR means that it will be able without any further capital increases to mobilize and service a substantially higher level of debt than at present. 2.27 According to CONCOR's projections, by FY97/98 it will be handling 470,000 TEU's representing a 25 percent annual growth in traffic. Taking into account the expected rapid growth in India's trade (over 10 percent per year in real terms) together with the still low containerization rate, this figure could tum out to be on the conservative side. If the projected growth in the market materializes and CONCOR manages to improve both the quality and cost efficiency of its services, it should be able to maintain its current high levels of profitability and a reasonably leveraged balance she!et. More importantly, it should be able to generate enough resources to service its increased debt comnitments caused by the implementation of the Rs 4,800 million capital expenditure component of the FY93/94-FY97/98 Business and Finance Plan. During loan agreements CONCOR agreed to specific financial covenants to the effect that CONCOR shall: (a) not incur any debt unless CONCOR shows that the projected mternal cash generation of CONCOR for each fiscal year during the term of the debt to be incurred shall be at least 1.7 times the estimated debt service  14 requirements of CONCOR in such year on all its debt including the debt to be incurred; (b) not incur any debt, if after the incurrence of such debt the ratio of debt to equity shall be greater than 3: 1; (c) maintain a ratio of current assets to current liabilities of not less than 1:1; (d) from time to time take all such measures within its power, as shall be required to enable CONCOR to meet as of its fiscal year beginning April 1, 1994, a working ratio of not more than 83 percent; and (e) maintain a rate of return on average current net value of fixed assets of at least 17 percent. 2.28 An element that could weaken CONCOR's continued strong financial performance and its ability to service a higher debt load is the basis on which IR land currently leased by CONCOR is valued. Originally, it was decided to determine lease charges for land leased by CONCOR from IR based, on the book value of the land. However, subsequently, IR has claimed that the basis of valuation for lease charges for land should be related to market value rather than book value. A final agreement on this subject has not yet been reached between CONCOR and IR, and it has been estimated that the fixation of lease charges on the basis of current market rather than book value of the IR land currently leased by CONCOR would have a substantial impact on the financial performance of CONCOR m. THE PROJECT A. Proiect Origin 3.1 The initial assessment for the proposed project was a sector survey (Trade Logistics, report no. 8130-IN), carried out in 1989 by the Bank, in close cooperation with relevant ministries, transport operators, and shippers. Key recommendations were that the Government should: (a) enact legislation regarding multi-modal transport; (b) relax the customs procedures and regulations that precluded the operation of private bonded warehouses and impeded container transport by road; (c) develop ICDs and improved air cargo facilities; (d) promote private sector investment in container facilities and equipment; (e) review regulations that restrict the ability of Indian ship operators to adapt to market requirements; (f) review rail tariffs that seem to discriminate against containerized cargo; and (g) improve the efficiency of container handling at Indian ports. 3.2 Since the completion of the survey, and particularly since 1991, the government has taken many important steps to deal with the weaknesses identified, for instance in adopting a Multimodal Transport of Goods Act (1993), opening ICD/CFSs to the private sector, improving port facilities, moving to greater private sector participation in port operations, and beginning to reduce some of the procedural constraints affecting container transport. However, much more needs to be done to improve the capacity and efficiency of container transport in India. B. Rationale and Objectives 3.3 Rationale The proposed project forms part of the Bank's Country Assistance Strategy (report # P-6141-IN) which focuses on supporting GOI's efforts to provide an enabling environment for broad-based efficient private sector-led growth while accelerating poverty alleviation and the development of human resources, will be discussed on May 12, 1994. It also forms part of the Bank's strategy of promoting exports, increasing efficiency, promoting institutional capacity, and building competition in the transport sector in India. In particular, the development of international container transport is higbly management-intensive and requires a commercial and institutional framework that is not yet complete in India. The Bank and the bilateral assistance from The Netherlands would assist in transferring relevant overseas experience in the technology of container handling and tiansport, which would improve the institutional capabilities of CONCOR as well as of the industry. It would also enable CONCOR to become a fully competitive and financially sound  15 enterprise, pernitting it to finance its future requirements on the lomestic capital markets through either debt or equity financing. 3.4 Project Objectives: The overall objective of the project is to establish an enabling environment for container transport and increase the capacity and efficiency of long-haul transport of high-value general cargo. More specifically, the proposed project would: (a) improve the institutional framework for efficient and comnpetitive container transport to serve both foreign and domestic trade; (b) strengthen the commercial and operational performance of CONCOR in an increasingly competitive environment; and (c) greatly improve the service level and capacity in the main corridors by providing modem technology rolling stock to permit regular block train operations on gateway port corridors. C. Project Description 3.5 The proposed project would help develop the necessary framework for container transport. The project would include three major complementary components: (a) IMnrovement of the institutional framework for efficient and competitive container transport by removing some of the restrictive customs practices and policies restricting inland movements of containers, including by road, and expanding customs working hours at TKD (see customns reform as described in para. 1.29). (b) Strengthenin2 of the commercial approach and operational capacity of CONCOR in an increasingly competitive environment by: (i) formalizing service relations with IR through a MOU relating to service levels of container trains; (ii) divesting at least 5 percent of the Government's equity in CONCOR, as a first step to diversifying the shareholder base and strengthening its commercial orientation; (iii) broadening the composition of the Board of Directors of CONCOR to introduce non-official directors to improve the skill base of the Board; (iv) reforming CONCOR's claim policy to meet customers demand and be competitive with road transport; (v) providing technical assistance and training to improve CONCOR's operational, commercial, financial and general management capabilities, with particular attention to the operations at TKD; and (vi) providing computer systems and related software to computerize accounting and inventory control and providing commercial logistic support to CONCOR. (c) Support scheduled highL-ualitv container train services in the main corridors through: (i) acquisition and retrofitting of 1,200 BFK flat cars to air brakdng systems;  16 (ii) acquisition of 1,500 new container flat cars of new design prepared by the Research, Design and Standards Organization (RDSO) that are equipped with air brakes, automatic couplers and high-speed bogies (100 KPH zapability); (iii) acquisition of 5 prototype 60-foot long platform, lightweight flat wagonblocks capable of carrying three loaded 20-foot ISO containers, which utilize automatic couplers on end units and slackness drawbars for intermediate couplings, for testing purposes in preparation for the next generation of higher capacity flatcar; (iv) acquisition of approximately 750 new flat cars of the same design as under (ii) or an equivalent capacity of the new designs under (iii) above if the design has been approved by the time of starting procurement; (v) acquisition of complementary cargo handling equipment for TKKD ICD, including I rubber-tired gantry crane (having a span of 26.5 meters to bridge four tracks and one roadway); 2 reach stackers; and 5 tractor/trailer trucks :o handle containers from trackside and serve the CFS warehouses; (vi) acquisition of an electronic tracking system for container trains, flat cars and containers on a pilot basis; (vii) construction of civil works necessary for completing development of Tughlakabad and construction of ICDs at Ludhiana and Hyderabad to better serve emerging markets; and (viii) provision of engineering services for design, inspection and testing of flat cars. D. Proiect Cost 3.6 The total cost of the project is presently estimated to be US$ 151 million, which includes US$ 19 million of price contingencies. The cost estimate includes taxes and custom duties of US$ 15 million on imported materials and equipment as well as domestic taxes. CONCOR's Business and Finance Plan currently foresees a Bank loan of approximately US$ 94 million to meet the foreign exchange costs of flat cars and cargo handling and other equipment, as well as part of the local cost thereof. The Netherlands have agreed to provide grant funding of about US$ 4 million equivalent for the technical assistance component for operational support and tmining Annex 3.2. The cost estimates are detailed in Annex 3.3. 3.7 Cost estimates are on the basis of late-1993 prices of comparable equipment. The civil work costs are based on preliminary designs. Local price contingencies are applied to the estimated base costs in the following order: 7.0 percent for 1994, 6.5 percent for 1995, 6.0 percent for 1996 and 5.5 percent for 1997. Foreign price contingencies were applied to the estimated base costs in accordance with the Bank's guidelines: 2.5 percent for 1994 through 1997. As the Bank-funded project components basically involve equipment, no physical contingencies were included. E. Proiect Financing 3.8 The total cost of the project is estimated to be about US$ 136.8 million, excluding taxes and duties. Of this total amount, US$ 34.7 million will be for foreign exchange components, and the remaining US$ 102.1 million for local currency components. The Bank would finance US$ 94 million of the foreign exchange and local component for flat cars, some other equipment and a provision for complementing technical assistance and training to the extent that this is not covered by The Netherlands assistance. The Netherlands would finance US$ 4 million of the foreign exchange  17 component of technical assistance, and the remaining US$ 53 million would be financed by CONCOR through internally generated resources or leasinig. F. Proiect Imolementation 3.9 CONCOR will implement the main components of the project, particularly the procurement of flat cars and other equipment and the related institutional components. Close coordination and cooperation with IR will be needed to cnsure the expected performance improvements as foreseen under the draft MOU for FY94/95. The broader institutional component related to customs procedures and practices will be implemented by the Ministry of Finance in consultation with the Ministry of Commerce and Ministry of Surface Transport. While CONCOR would be the recipient of the technical assistance, the Dutch government would contract with the consulting firm. Project procurement is expected to be started shortly after loan negotiations and the project should be completed by June 30, 1999. Annex 3.4 and Chart 3.1 contains the provisional Implementation Schedule for the procurement of the different project components, taking into account CONCOR's estimate of the time required for RDSO and IR approvals where necessary. In view of the rapid increase, in CONCOR's activities and the current shortage of flat cars, carefut attention should be given to measures to accelerate preparation of tender documents and the necessary. approvals before tendering and testing of the RDSO and the tri-axle prototypes. Close collaboration between CONCOR on the one hand and RDSO and IR on the other will be essential to avoid undue delays in project implementation that would have a negative impact of CONCOR's revenues and competitive situation. The schedule was reviewed and confirmed during loan negotiations. 3.10 Annex 3.5 summarizes the key performance indicators for CONCOR, drawing on the targets already established in the draft MOU for FY94/95 and in the Business and Finance Plan. These indicators were discussed and confirmed durng loan negotiations and will be reviewed and updated as appropriate during project implementation. 3.11 In line with current Bank practice, a mid-term review of the project will be carried out jointly with CONCOR and the government. During loan negotiations CONCOR and the government agreed to a mid-term review by December 31. 1995. During negotiations the Indian delegation confirmed that the bilateral agreement with The Netherlands for technical assistance for Part D of the Project is effective; and The Netherlands would be the contracting party to the consultant contract. The Netherlands Ministry of Foreign Affairs confirmed that the selection process had been completed and a firm of consultants had indeed been selected for invitation for contract negotiations and that field work started in June 1994. G. Procurement 3.12 The rolling stock, equipment and goods to be financed by the Bank and expected to cost the equivalent of US$ 200,000 or more per contract package will be procured following international competitive bidding (ICB) procedures. The Bank's standard bidding document for goods will be used. For rolling stock (flat cars) a two-stage bidding process will be adopted. Domestic bidders competing under ICB will have 15 percent preference margin or the applicable duty, whichever is lower, if they meet the domestic value-added requirements. Consultants funded with loan proceeds would be selected in accordance with principles and procedures satisfactory to the Bank. 3.13 Procurement of items required for the retrofit-braking system of 1,200 BFK flat cars, all civil works, engineering services, and computer software systems will be financed by CONCOR under their own procurement procedures. The technical assistance under the project will be funded under The Netherlands Grant using their own procurement procedures.  18 3.14 All bid documents and award decisions for the supply of goods financed by the Bank with an estimated cost of US$ 200,000 or more will be subject to prior review by the Bank. Since all contracts are expected to exceed this level, 100 percent of the contract packaging for goods/equipment will be subject to prior Bank review. 3.15 CONCOR will be using the services of officers from IR who ate fully conversant with the Bank's ICB procedures of procurement. CONCOR will use the standard Bank bidding documents for goods, adjusted as necessary, to take into account country and project conditions, along with technical specifications for rolling stock and other equipment for procurement with Bank funding. Draft bidding documents, including specifications for the first tranche of flat cars and cargo handling equipment have been received as this was a condition of loan negotiations. Specifications for the second tranche of flat cars will be prepared following the testing of the new tri-axle flat cars. 3.16 Procurement information will be collected and reported by CONCOR for the following: (a) Contract award information; (b) Comprehensive quarterly reports to the Bank, indicating (i) revised cost estimates for individual contracts and the total project, including best estimates of allowances for price contingency; (ii) revised time of procurement actions, including advertising, bidding, contract award and completion time for individual contracts; and (iii) a compietion report within three months of the loan closing date. 3.17 A summary of the procurement arrangements is indicated in Table 2. These were confirmed during loan negtiations.  19 Table 2 Sunmary of Proposed Procurement Arrangements (US$ millions equivalent) S. No. Project Element Procurement Method NBF(a) Total Cost l______________ ICB LCB Othets 1. Works 12.1(b) 12.1(b) 2. Goods and Equipment 2.1 New rolling stock 101.1 101.1 (2,250) (91.1) (91.1) 2.2 Five tri-axle flatcar for 0.6(c) 0.6 testing (0.5) (0.5) 2.3 Purchase of 1,200 used 23.1(b) 23.1(b) BFK flat cars 2.4 Retrofit braking system of 4. l(b) 4. l(b) l____ 1,200 BFK flat cars 2.5 Handling equipment 2.3 1.0(b) 3.3 (1.8) (1.8) 2.6 Trucks, chassis and other 0.2(b) 0.2(b) equipment 2.7 Computers and software 0.6(b) 0.6(b) 2.8 Transponders and related 0.5 0.5 equipment (0.4) (0.4) 3. Technical Assistance 3.1 Capacity Building and 0.2 4.0(d) 4.2(d) ______ Training ________ ________ (0.2) (0.2) 3.2 Project Preparation and 1.2(b) 1.2(b) Imnplementation Support Grand Total 103.9 0.8 46.3 151.0 (93.3) (0.7) (94.^' Note: Figures in parentheses indicate amount financed by Bank. The order of these notes are: a. Not Bank financed. b. Financed by CONCOR. c. Procurement of the prototype tn-axle flatcar for testing purposes may be acquired either through ICB or from the proprietary manufacturer. d. Financed under The Netherlands Grant.  20 H. Disbursement 3.18 The proceeds of the loan would be disbursed against 100 percent of foreign expenditures cost insurance freight (CIF) or 100 percent of local expenditure ex factory and of items procured under ICB, costs of flat wagons, cargo handling equipment, and other equipment, and 100 percent for technical assistance and training. This was confirmed durine loan negotiations. 3.19 Disbursements are projected for a period of 5.5 years from July 1, 1994 to December 1999. Project completion is expected by June 30, 1999. The proposed disbursement period of six years compares with an all-sector past profile of 8.5 years and a transportation sector profile of 9.5 years. The shorter disbursement period in this case is justified by the general progress made in improving project implementation procedures in India, including the use of agreed standard bidding documents. The project mainly finances equipment and consultant services and not civil works, which tend to have a longer implementation period, and will be implemented by a company with a more commercial approach than often found in the public sector. Also, tender documents will be prepared and part of procurement started before Board presentation. It is expected that the main project component of flat cars will be procured in two phases with a two-three years interval to allow for traffic growth. The disbursement schedule is contained in Annex 3.6. 3.20 It is expected that all disbursements would be fully documented and there would be no disbursements against statements of expenditures. The borrower has indicated that there would be no need for a special account. Expenditures incurred from January 1, 1994 to the date of loan signing for project activities would be eligible for retroactive fincing up to a maximum of US$ S million. All contracts and items to be fmanced retroactively will be procured in a manner consistent with the above arrangements and acceptable to the Bank. The closing date of the loan is December 31, 1999. I. Economic Evaluation and Risks 3.21 The economic evaluation prepared by CONCOR covered the two main project components, i.e. retrofitting of 1,200 ex-sting flat cars (to be funded by CONCOR) and the acquisition of 2,250 new flat cars to be funded with the help of the Bank loan. The economnic evaluation of the retrofitting is based primarily on the reduced operating/maintenance costs because of fewer breakdowns and the increased carrying capacity because of the higher speeds. The component yields an ERR of 33 percent as discussed further in Annex 3.7. The economic evaluation of the new flat cars takes into account the additional carrying capacity provided by these cars and the cost savings as compared with road traiisport over the three main corridors for which the weighted average distance is about 1,600 km. As discussed further in Annex 3.7, the rate of return for this component is 37 percent. In the event of a combined increase in investment costs of 10 percent and a reduction in benefits of 10 percent. the ERRs would fall to respectively 27 percent, 31 percent, indicating that the project has a high economic rate of return. Further information on the sensitivity analysis, including switching values is given in Annex 3.7. 3.22 The above returns are conservative since they do not take into account several benefits that are difficult to quantify. These include the costs of avoided accidents and pollution as compared with road transport and the fact that real vehicle operating costs can be expected to increase significantly over time as a result of increasing traffic congestion. Because of their modest costs and the problem of separating out benefits from the incremental supply of cargo handling equipment transponders to rack flat cars and technical assistance, no separate economic evaluation was carried out for these items accounting for a combined 5 percent of the project cost. CONCOR has carried out a preliminary financial evaluation of the rate of return from the additional civil works to be funded from its ovn resources. It is presently updating and completing this evaluation for the Bank.  21 3.23 The main ris related to the project is that the expected improvements in CONCOR's performance will not be achieved due to insufficient support from IR in providing needed block train paths and traction power. The recently negotiated draft MOU represents a major step forward in recognizing the importance of speedy and reliable container service and the readiness of IR to accept performance related premiums and penalties. The covenant regarding provision of annually updated MOUs is intended to further reduce this risk. A second risk concerns the commercial approach and efficiency of CONCOR in responding to market demands. The steps being taken to formalize the commercial relationship with IR, the up-front offer for sale of a share of equity to the public and the introduction of non-official Board members should jointly reinforce the commercial approach of CONCOR. The extensive Dutch technical assistance that covers both the operations at TKD and general manpower development, cost accounting and financial management as well as marketing should also contribute substantially to improving the efficiency of CONCOR and its commercial approach. A third risk concerns the rate of traffic growth and the financial implications of lower traffic growth. This risk is significantly reduced by the fact that almost 80 percent of its operating expenses are variable (mainly payments to IR) and would therefore decline or increase in line with traffic. Also, the acquisition of the second tranche of flat cars can be deferred or advanced in line with traffic growth. A fourth related and longer term financial risk concerns the foreign exchange risk of debt repayment in the event of further devaluation of the Rs. A significant devaluation would, however, also affect the cost of road transport, particularly fuel, and it can therefore be assumed that such an event should not significantly affect CONCOR's competitive position. J. Enviromental InMact 3.24 The environmental impact of most of the project components will be positive, and the proposed project as been given a category "B" environmental assessment rating. This was basically due to the inclusion of some modest civil works that will be fully fimded by CONCOR. During loan negotiations, CONCOR indicated that the civil works in question (a) were already under contract or tendering and were being funded ftilly by the Borrower and the scope of the works had been significantly reduced as compared with what was earlier foreseen; (b) they did not involve acquisition and clearing of new land; and (c) they mostly involved paving of existing unpaved areas and construction of some small building and would in themselves have positive environmental impacts. Construction activities will be monitored by CONCOR for any adverse enviromental impacts and hazards to worker safety and that the responsible contractor(s) will be directed to make immediate and effective corrective actions when the need arises. As a result of the project, substantal amounts of freight currently moved by truck in break bulk on the highly congested HDC highways will move in containers over the existing rail network, reducing road congestion, POL consumption, vehicle emissions, and accidents. In addition, the acquisition of new high-speed flat cars will permit a higher and more efficient utilizaton of the existing railway trunk network that is strained to capacity and will delay the need to construct or convert railway lines. 3.25 At present, no new land needs to be acquired by CONCOR to meet its medium-term traffic growth projections. With improved procedures and operations the existing facilities operated by CONCOR at TKD/ICD are sufficient for their projected traffic growth for at least the next three to four-years, depending on demand. Additional land is available if needed. K. Monitoring and Au&iM 3.26 CONCOR will prepare quarterly progress reparts in a fo!at acceptable to the Bank. These reports should indicate progress made in meeting performance indicators, problems encountered, remedial steps required, and proposed future actions. The last of these reports will be the implementation completion report (ICR), which would be issued no later than six months after physical completion of the works. The ICR will include, inter alia, the details of project costs and disbursements, general characteristics of project execution and benefits, the degree to which project  22 objectives were achieved, and the performance of both the Bank and CONCOR of their respective obligations. To facilitate the preparation of the ICR and to assess the actual efficiency of the new rolling stocks, CONCOR will keep separate records, as part of the progress reports, on the utilization and efficiency of these rolling stocks. 'lhe reporting requirements were confirmed during negotiadons. The sample outline of contents of the Quarterly Report was also agreed to Annex 3.8. 3.27 CONCOR shall maintain records and accounts adequate to reflect in accordance with sound accounting practices and adequate to reflect its operations and financial condition. It shall also (a) have its records, accounts and financial statements (balance sheets, statements of income and expenses, and related statements) audited by independent auditors acceptable to the Bank in accordance with appropriate auditing principles consistentlv applied; (b) furnish to the Bank as soon as available, but in any case not later than seven months after the end of each fiscal year, certified copies of its financial statements for such year as so audited and the report of such audit by said auditors; (c) furnish to the Bank such other information concerning said records, accounts and financial statements as well as the audit thereof as the Bank shall from time to time reasonably request. CONCOR agreed during negotiations to these requirements. 3.28 The plan for Bank supervision of the project is presented in Annex 3.9. An average of 14 staff weeks per year will be required with a heavier input of 21 staff weeks during the first full year, including three staff weeks for follow-up regvarding the customs procedures and one staff week for coordination with the Netherlands Government regarding the technical assistance funded by them. This would be offset by a tapering off from 12 staff weeks during the second year: 10 staff weeks for the subsequent years. IV. AGREEMENTS AND RECOMMENDATION 4.1 At loan negotiation assurances were obtained that CONCOR will: (a) Establish in consultation with IR new claims settlement arrangements to be implemented before loan effectiveness (para 2.13); (b) Submit to the Bank for comments annually (beginning in February 28., 1995) the updated Business and Finance Plan (para 2.19); (c) Maintain during the execution of the project a satisfactory MOU and to this end furmish annually revised version of the MOU to the Bank (pam 2.24); (d) Enter into agreements by December 31, 1994 with the three gateway ports to ensure expeditious loading/discharging of container flat wagons (para 2.25); (e) Take all necessary steps from FY95 onwards to achieve specific financial targets (para 2.27); (f) Conduct together with the Bank a mid-term project review by December 31, 1995 (para 3.11); (g) Implement the project in accordance with agreed procurement procedures (para 3.17); (h) Follow agreed disbursement procedures (para 3.18); (i) Comply with agreed reporting requirements (para 3.26);  23 ) Submit on an annual basis, within seven months of the end of its fiscal year, audited accounts (para 3.27); 4.2 At loan negotiations understandings was reached that CONCOR will: (a) Implement the project in accordance with the implementation schedule agreed during negotiations (para 3.9); and (b) Achieve agreed performance targets (para 3.10); 4.3 At loan negotiations assurances were obtained from the government that it will: (a) implement agreed measures concerning inland movemenits of containers in accordance with the agreed timing (para 1.29); (b) broaden the composition of the Board of Directors of CONCOR in accordance with DPE guidelines and that this will be implemented before loan effectiveness (para 2.3); (c) offer for sale to the public 5 percent of its equity in CONCOR by March 31, 1995 (para 2.20); (d) maintain during the execution of the project a satisfactory MOU (para 2.24); (e) carry out together with CONCOR and the Bank a mid-term review of the project by December 31, 1995 (para 3.11); (f) provide the nomnal loan guarantees. 4.4 The following are special conditions of loan effectiveness: (a) CONCOR's Board of Directors shall have been broadened (para 2.3); and (b) CONCOR has implemented a new claims policy (para 2.13). 4.5 Subject to the above agreements, the proposed project would be suitable for a Bank Loan of US$ 94 million equivalent to CONCOR for 20 years including a five-year grace period, at the Bank's standard variable interest rate.  24 Annex 1.1 INDIA CONTAINER TRANSPORT LOGISTICS PROJECT BANK LOANS AND CREDITS TO TRANSPORTATION SECTOR" Loan/Credit Approval Closing Loan Sector Project Name Number Date Date Amount Status RAIL Railway Ln 17 8/49 3/51 34.00 Completed Second Railway Las 167-170 7/57 12/58 90/01 Completed Third Railway Ln 207 9/58 6/59 85.00 Completed Fourth Railway Ln 233 7/59 6/60 50.00 Completed Fifth Railway Ln 262 7/60 1/62 70.00 Completed Sixth Railway Ln 298 10161 12/62 50.00 Completed Seventh Railway Eighth Railway Cr 36 3/63 8/64 t 1.43 Completed Ninth Railway Cr 67 10/64 1/66 74.79 Completed Tenth Railway Cr 88 6/66 6/68 82.03 Completed Eleventh Railway Cr 162 9/69 9/71 66.35 Competed Twelfth Railway Cr 280 1/72 9n4 79.98 Completed Railway Moder. & Maintenance Cr 448 12/73 9/75 80.00 Completed Second Railway Modem & Cr 582 8n5 9/78 110.00 Completed Main. Cr 844 8n8 9/89 190.00 Completed Cr 1299 11/82 9/89 253.63 Completed Railway Electrification Ln 2210 11/82 9/92 200.00 Completed Third Rail Modernization Ln 2417 5/84 9/92 280.70 Completed Ln 2935 5/88 2/94 390.00 Ongoing 2267.92 Subtotal PORT Calcutta Port La 198 4/58 12/65 29.00 Completed Madras Port Ln 199 4/58 6/66 14.00 Completed Second Calcutta Port Ln 294 7/61 7/68 21.00 Completed Bombay Port Cr 27 7/62 12/67 21.09 Completed India Shipping Cr 328 372 6/75 84.69 Completed Ln 2387 3/84 6/92 250.00 Completed Subtotal 419.78 ROADS Road Cr 3 6/61 6/67 72.11 Completed Bihar Rural Roads Cr 1072 11/80 6/87 36.66 Completed National Highways I La 2534 5/85 12/92 200.00 Completed Gujarat Rural Roads Cr 1757 2/86 12/94 138.69 Ongoing State Roads I Ln 2994 10/88 6/95 170.00 Ongoing Cr 1995 10/88 6/95 80.00 Ongoing National Highways ] Ln 3470 5/92 6/2001 153.00 Ongoing Cr 2365 5/92 6/2001 153.00 Ongoing 1003.46 Subtotal AIR Air India Ln 161 3/57 12/59 56 Completed PIPELiNE Petroleum Transport Project Ln 3044 4/89 6/95 340.00 Ongoing Total 4036.76 'Excluding operations for urban transport.  25 Annex 2. 1 CONTAINER TRANSPORT LOGISTICS PROIECT SUMMARY OF DRAFT FISCAL FY94/95 MOU between Container Corporation of India, Ltd. and Ministry of Railways 1. Corporate Mission: Multi-modal logistics support for international and intemal trade and commerce. 2. Corporate Objectives: Promote containerization, develop cost-effective service for containers, and provide competitive prices and reasonable return on capital. 3. CONCOR's commitments for FY94-95: (a) Throughput of 250,000 TEUs; (b) Generate internal surplus of Rs 300 million and 15 percent return on capital employed; and (c) Others (contained in Annex to MOU). 4. Assistance from Ministry of Railways: (a) Support in interface with State and Central Government; (b) Provide unit container train pathways on specified rail corridors to achieve average rail transit times of: i. TKD-BPT 69 hours; ii. TKD-JNPT 85 hours; and iii. TKD-HOM 126 hours (c) Provide a minimum number of special weekly paths with reduced transit lines: i. TKD-BPT 4 at 62 hours; ii. TIKD-JNPT 2 at 78 hours; and iii. TKD- HOM 2 at 120 hours (d) Provide at least 1,000 rail flat cars (BFKs) and/or modified unloadable BOX wagons. 5. Premium of 5 percent to be paid by CONCOR for the special paths if schedules are maintained by IR; if not, CONCOR will receive 5 percent discount.  26 Annex 2.2 Page 1 of 3 INDIA CONTAINER TRANSPORT LOGISTICS PROJECT FINANCIAL ANALYSIS OF CONCOR A. Financial Projections For Base Case Scenario 1. The key assumption of the base case scenario financial projections prepared by CONCOR is that they will be handling 470,000 TEUs by FY97/98 and 688,127 TEUs by FY2001/02 (see table 2.2.5). The average proje.Aed growth in traffic for the whole period is 19 percent and is divided into two distinct growth phases. The "high growth" phase ends in FY97/98 with the volume of TEUs handled growing at over 25 percent per year. The "market consolidation growth" phase is projected for the subsequent period (FY97/98 through FY2001/02) and will see CONCOR growing at around 10 percent per year as the market matures and competition increases. 2. The growth in traffic will lead to an even higher growth in operating revenues, as CONCOR will be able to charge higher rates as the quality of service improves. Operating expenses during the forecast period are expected to grow at a slower rate than operating revenues, leading to a slight improvement in the working ratio. The assumption behind this is that, as a result of the project, CONCOR will start to own most of its roiling stock and thereby be able to benefit from a 16 percent reduction in freight charges under IR's "own your own wagon scheme." 3. However, total expenses are expected to increase more rapidly than total revenues, leading to a modest deterioration in CONCOR's overall profitability. According to the base case scenario, this deterioration in the overall profitability of CONCOR is attributable to the sharp increase in depreciation and interest charges caused by the implementation of its capital investment program under the FY93194-FY97198 business plan. 4. More importantly, as result of implementing the capital investment program, CONCOR wMl also experience a deterioration in its debt, liquidity and leverage ratios (see table 2.2.4) as its debt service requirements increase rapidly from the current very low levels. However, in the base case scenario, CONCOR is projecting that the expected deterioration in its financial position will still leave it with a fairly strong balance sheet and an adequate level of profitability. A closer look at the prncipal ratios shows that the debt to equity ratio is expected to peak at approximately 2:1 in FY96/97, while the debt service coverage ratio will not fall below 2.3:1 and the net profit ratio should not drop below 10 percent. These are more than satisfactory for a rapidly expanding company like CONCOR. 5. Finally, part of the capital expenditure program is going to be financed by a World Bank loan in foreign exchange. CONCOR in its base case projections is forecasting a annual 5 percent depreciation in the Rs vis a vis the US dollar. This means that the foreign exchange risk of borrowing from the Bank is built into the debt repayment projections for the model. B. Financial Projectic.zs For Alternative Scenarios 6. The second scenario assumes a 10 percent decrease in the projected rate of growth of CONCOR's total revenue together with a 8 percent decrease (8 percent was used, because approximately 80 percent of CONCOR's operating expenses are variable costs) in the projected growth rate in operating expenses. The results of the first scenario (see table 2.2.4) show CONCOR's financial position deteriorating somewhat. The key debt to equity ratio increases to approximately  27 Annex 2.2 Page 2 of 3 2.2:1 in FY97 and the debt service coverage ratio falls to approximately 1.9:1 by FY95/96. The working ratio and net profit ratios are lower for the period, indicating that CONCOR still remains profitable, with a net profit ratio falling to a minimum of 7 percent. From a cash flow point of view, CONCOR's financial posidon deteriorates considerably, with negative end of,period cash balances from FY96 through FY2000/01. The deterioration in the cash flow position of CONCOR is attributable to the heavy capital investment program and the resulting increased debt service obligations. Under the first scenario, if CONCOR maintains the current planned level of capital expenditure, it would face liquidity problems especially during the FY94/95-FY96/97 period when the capital expenditure program is at its peak. To meet the obligations during this period CONCOR would probably have to arrange short-term bridge financing to bolster its liquidity position. However, as indicated in paragraph 9, CONCOR could in this case cut pari of its capital expenditure program and thus reduce its financial obligations. 7. The third scenario foresees a 20 percent decrease in the projected rate of growth in total revenues for CONCOR matched by a corresponding 16 percent fall in operating expenses. Under this scenario, CONCOR's financial position would deteriorate considerably even though the company would still remain moderately profitable. The working ratio would fall to 85 percent while the net profit ratio would drop to a little above 2 percent. Although under the second scenario CONCOR is still projected to remain profitable the cash flow and liquidity position of the company would become cntical. The workig ratio drops to zero in FY95/96 and FY96/97 as the company's cash position becomes negative. The sharp deterioration in the liquidity position would lead to difficulties in the ability of the company to meet its day-to-day operating requirements due to a lack of working capital. Under the second scenario, the debt position of CONCOR also deteriorates, but is not yet critical. The key debt to equity ratio peaks at only 2.8 in FY96/97, and the debt service coverage ratio falls to around 1.6. The consequences of the second scenario on CONCOR's cash flow position means that the company would have major difficulty meeting its financial obligations. This is because even though CONCOR would still be profitable and the debt position of the company would not be critical, the company would not generate sufficient cash from its operations to meet its increased debt service and capital investment obligations. A substantial reduction in the capital expenditure budget would enable CONCOR to remain financially viable. 8. The fourth scenario predicts a 10 percent increase in total revenues (together with a 8 percent increase in operating revenues) above what is projected in the base case scenario. With this scenario the financial position of CONCOR is strengthened substantially leaving it with enough resources to increase its capital expenditure program if demand justifies it. Its debt to equity ratio under this scenario does not exceed 1.5:1 while the average net value of fixed assets employed remains above 20 percent. The already good profitability of CONCOR would increase further with a working ratio not increasing above 75 percent and a net profit ratio substantially above 13 percent for the whole period (with increases to over 20 percent in the later part of the period). The cash flow and liquidity position of the company would be substantally reinforced, with the current ratio increasing from a low of 1.9:1 during the period. This scenario would mean that CONCOR should not have any major difficulties in meeting its fiacial obligations even during the peak period of the capital expenditure program, and the working capital position of the company would be quite strong. C. CONCLUSIONS 9. The sensitivity analysis conducted on CONCOR's strong financial base case scenario, shows a modest sensitivity to fluctuations in revenues and expenses at the 10 percent level but a much greater sensitivity at higher deviations. From the results it is fairly clear that a deviation of over 10 percent from the projected values in the base case scenario would have significant repercussions on  28 Annex 2.2 Page 3 of 3 the company's financial position. This is especially true for the company's cash flow position that would deteriorate so much that CONCOR would have difficulty meeting its financial obligations. However, what needs to be kept in mind is the flexible nature of CONCOR's capital expenditure program. The bulk of the capital expenditure program is the acquisition and retrofit in batches of rolling stock over a three to four year period. This means that if traffic projections are substantially below projections, CONCOR would not need part of the additional rolling stock, enabling it to cancel part of its acquisition of rolling stock in line with actual demand. The converse holds true, meaning that CONCOR could procure more rolling stock in the batches if traffic volumes are above the projected demand level. In addition, because around 80 percent of CONCOR's operating expenses are variable, a fall in traffic that causes a fall in operating revenues would be matched by a fall in operating expenses. What all this iniplies is that due to the cost structure of the company and the staggered nature of its capital investment program, CONCOR has substantial flexibility to adjust to lower or higher levels of revenue, decreasing its sensitivity.  CONCOR Base Case Balance Sheet (In Rs MiSons. Financia Yea Endh March 31) 1993 1994 1996 1996 1997 1998 1999 2000 2001 2002 ASSETS Cash Balances: 133.80 31.9 43.2 45.6 49.3 44.9 46.9 50.6 53.7 61.6 Invtments: 230.10 160.10 0 90 240.00 800.00 1440.00 202 2.700 3,680 Current Assets: 191.60 179 175 181 238 297 360 437 532 649 Miscellaneous: 0.9 0.7 0.5 0.3 0.1 0 0 0 0 0 Fixed Assets: 257.2 896.3 1677.4 3668.5 5123.2 5628.3 6164.7 8664.9 7161.1 7668.1 Less: Depreciation: 6.6 31.2 118.2 242.4 451.2 707.8 1013.6 1315.1 1642.1 1995 Net Fixed Assets: 251.6 865.1 1559.2 3426 4627.1 4920.5 5151.1 5349.8 5618.9 6673.1 Capital - MnP. 571.6 263.6 375.5 207.5 372.4 114.8 40.5 25.5 26.5 25.5 TotefAssets: 1379.6 1490.4 2153.2 3950.5 6571.6 6176.9 7038.2 7882.8 8830.2 10088.8 N LIABILITIES Current LiabUites: 314.2 253.9 211.4 248.8 337.8 429.3 492.2 569.5 664.7 781.3 IBRD Loan: 0 0 576.6 2150.6 3449.7 3622.2 3803.3 3727.2 3634.1 3522.3 IFCI Loan: 79.6 81.3 62.2 43.1 23.9 4.8 0 0 0 0 Domestic Loans 0 0 10 10 10 10 10 10 7.5 6 Total Loans: 79.6 81.3 648.8 2203.7 3483.6 3636.9 3813.3 3737.2 3641.5 3527.2 Shareholders Equlty: 649.9 649.9 649.9 649.9 649.9 649.9 649.9 649.9 649.9 649.9 Reserves: 335.9 505.2 643.1 848.1 1100.2 1460.8 2082.8 2926.2 3874.1 5130.4 ToteJI.JahO 1379.6 1490.4 2153.2 3950.5 6571.6 6176.9 7038.2 7882.8 8830.2 10088.8 '-3  CONCOR 8aso Case Income Statement (in Rs Lacs. Financial Yea Ending Match 311 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 !NCOME Freight: 6,635 9,108 13,077 17.596 24.132 30.584 37,679 46,421 57,191 70,459 Trans & Handling: 794 1,802 2,317 2,919 3,448 3,977 4,477 5,049 5.704 6,454 Storage Charges: 721 765 907 1.062 1.224 1,410 1,473 1,540 1.694 1,863 Miscellaneous income: 25 30 32 33 35 36 38 40 42 44 Rent: 0 70 70 70 84 84 84 101 101 101 Operatikg Income: 8,175 11,775 16.403 22,039 28,923 36,091 43,752 53.151 64,731 78.921 InterestIncome: 820 426 179 161 343 831 1,640 2,468 3,330 4,460 Total Income: 8,995 12,200 16 582 22.201 29,266 36,922 45,392 55,619 68.061 83.381 EXPENSES Freight; 5,309 7,105 9,284 12,210 15,686 20.185 24,868 30,638 37,746 46.503 Trans & Handling: 633 958 1,243 1,593 1.989 2,392 2,753 3,169 3,649 4,203 0 Salaries: 103 175 201 231 266 306 362 405 466 535 Overheads: 175 450 618 595 684 787 905 1,041 1,197 1,377 Other Expenses: 100 186 283 331 547 710 769 844 918 994 Ucense Fee: 0 337 337 340 340 340 340 340 340 340 Container Lease: 0 0 0 0 0 0 0 0 0 0 Operatin Expensos: 6,321 9,211 11,866 15,301 19,512 24,720 29,987 36,437 44,316 53.952 PBIDT: 2,675 2,990 4,716 6.900 9,753 12,202 15,405 19,182 23,745 29,429 Finance Charges: 124 209 2,047 2.953 4,166 4,728 4,828 4,861 4,786 4,696 Depreciation: 48 256 870 1,242 2.087 . '66 3,058 3,015 3,270 3,529 Profit BeforeTaxes: 2,503 2,524 1,798 2.705 3.500 4,908 7,519 9.734 10,779 13.863 Taxes: 775 566 26 0 0 0 0 1.572 4,910 7,341 ID Profit After Taxes: 1,728 1.958 1.772 2.705 3.500 4.908 7.519 9.734 10,779 13.863  CONCOR Base Case staement of Change In Fiancial Position {In Rf MMons, Financial Year Ending March 311 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 SOURCES OF FUNDS Cash Accruals: 1.668 1,952 2,250 3,295 4,610 6,173 9,278 11,450 12,749 16,092 Equityl sue: 1.800 0 0 0 0 0 0 0 0 0 Sale of Assets: 578 800 1501 0 0 0 0 0 0 0 Loans: 722 161 5766 15,452 11,915 0 0 0 0 0 IncomeinCur.Lbab.: 708 -603 -424 373 891 914 630 773 952 1,166 Total Soswces: 5.377 2,310 9.093 19,120 17.416 7.087 9.907 12,222 13,701 17,258 USES OF FUNDS CAPEX: 5,171 3,311 8,930 17,942 15,121 750 2,810 2,950 3,098 3,253 Investments: 0 0 0 900 1,500 5,600 6,400 5,800 6,800 9,800 Li Income in Cuffent Assets: -519 -126 -42 63 566 589 630 773 952 1,166 H Loan Repayments: 0 144 191 191 191 191 48 2,662 2,795 2,935 Total Uss: 4,652 3,328 9.080 19,096 17,379 7,131 9.888 12.185 13,670 17,179 Cash Balances: Opening Balance: 613 1,338 319 332 356 393 349 369 406 437 Surplusl(Deficitf: 726 -1.019 13 24 38 -44 20 37 31 79 CLOSING BALANCE: 1,338 319 332 356 393 349 369 406 437 516  CONCOR iKey Raetos Under Dnffrent Sconadool 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 BASE CASE Cunrnt Rtio: 1.8 1.A 1 1.3 1.6 2.7 3.8 4.4 4.9 5.6 DObt To Eqty Retdo: 0.08 0.07 0.5 1.5 2 1.7 1.4 1.1 0.8 0.6 Avwseg Not V@htu of Fxed Assets Emplbyedd: 138% 41% 30% 22% 18% 18% 21% 26% 32% 38% Workin Rtdo: 77.90% 80.40% 77.60% 75.10% 74.70% 76.60% 75.S0% 74.20% 73.S0% 72.80% Debt Swerce Coverege Retdo: 21.6 14.3 2.3 2.3 2.3 2.6 3.2 4 5 6.3 Net Profit Reto: 19.20% 16.10% 10.70% 12.20% 12.00% 13.30% 16.60% 17.50