Initial Project Information Document (PID) Report No: AB185

Project Name - Beira Railway Project Region Africa Regional Office Public Disclosure Authorized Sector Railways (100%) Theme Other financial and private sector development (P); Other public sector governance (S) Project P082618 Borrower(s) GOVERNMENT OF MOZAMBIQUE Implementing Agency(ies) CFM Note: Bank's support will be estimated after selection of the successful bidder. Address: Caixa Poatal 2158 Praca dos Trabalhadores, , Mozambique Contact Person: Mr. Rui Fonseca Tel: 258 (1) 431706 Fax: 258 (1) 313364 Email: [email protected]

Public Disclosure Authorized Environment Category B (Partial Assessment) Date PID Prepared November 10, 2003 Auth Appr/Negs Date March 15, 2004 Bank Approval Date July 15, 2004

1. Country and Sector Background Public Disclosure Authorized Public Disclosure Authorized 2 PID

The main sector issues are: (a) inadequate availability of transport in many areas; (b) high cost of transport; (c) poor condition of rail and road infrastructure and services; (d) high level of financial support from the Government to all transport sub-sectors including the railways; and (e) high rate of accidents and poor record of safety.

Inadequate availability of transport. The central region of Mozambique suffers from lack of adequate transport services. The rail line is not functional and there are no roads to sustain any level of traffic. The poor inhabitants are forced to walk miles and miles to reach markets and satisfy social obligations. In the absence of appropriate transport systems, development of any type of business, even agro-based business, is proving difficult.

High Cost of Transport. The overall cost of transport in Mozambique continues to be excessively high. Road tariffs average 8 US cents per net ton kilometer (ntkm). Although the average rail tariff (about US$0.05/ntkm), is much lower than the average road tariff, it is nevertheless almost twice the rate prevailing in efficiently-run railways and about three times, if purchase parity is taken into consideration. Moreover, the rail users currently have to face costs induced by the unpredictability of operations, such as delays in the allocation of wagons, delays in allocation of locomotives, improper handling and storage of goods, derailments, and accidents. The abnormally high transport costs are eroding the global competitiveness of most commodities and adversely affecting exports. Other reasons for the high cost of include the overstaffing in the railways, lower utilization of expensive assets, and constraints of managing a commercial enterprise in a public sector environment. As regards the cost of , even though the sector has been liberalized, the costs continue to be high. The reasons for the continuing high cost of road transport in Mozambique are not very clear but include poor fleet management, high cost of spare parts partly due to high import duties, and poor condition of roads leading to increased cost of vehicle operation and maintenance. GOM is in the process of undertaking an elaborate Transport Cost Study to understand more clearly the causes of high transport costs and to develop strategies for reducing them. Private participation in the operation and management of railways is expected to lead to cost reduction.

High Level of Government Financial Support to the Sector. The Government is currently forced to provide substantial financial support to all the transport sub-sectors. In the road sub-sector, in spite of GOM’s efforts to introduce measures to improve cost recovery (including the road fund), revenues continue to lag behind the road network’s capital and maintenance requirements. In the railways sector, although the CFM is not receiving a direct operating subsidy from Government anymore, it has not been able to service its loans and the Government has had to write off some of them. Even at the high rates of tariff, GOM is unable to generate enough surplus to keep the assets in a good condition. Its assets have deteriorated to such an extent that a substantial injection of private or public capital would be necessary to prevent the railways from collapsing altogether. GOM’s strategy to reduce its financial support to these sectors is to continue its focus on short-term cost recovery from road users and to open the rail sector to private sector participation.

Deteriorating Condition of Infrastructure. Despite high tariffs, and substantial investments in the past, the rail infrastructure is in a very poor condition. Among others, the following reasons account for this: (a) overall poor quality of maintenance and absence of adequate and timely allocation of funds for maintenance thus causing a relatively faster deterioration of the infrastructure; (b) concentration of huge amounts of funds on certain sections of the infrastructure and development of these sections to unnecessarily high standards while starving the others of even the basic minimum maintenance; and (c) acquiring a fleet of locomotives and wagons far in excess of the high utilization-based requirements, which is obviously difficult and expensive to maintain. The road infrastructure has similarly suffered due to 3 PID serious shortage of funds caused by the inadequate cost recovery from road users, inadequate enforcement of axle load regulations, and inefficient maintenance. With the Government having very little capacity to finance the required capital expenditure, the transport infrastructure is at considerable risk of further deterioration. The Government’s strategy is to improve the infrastructure by opening the rail sector to private participation and increasing the road user charges to cover at least the short-term marginal cost of roads and to reorganize the institutional setup for management of roads so as to make it more efficient and commercially oriented.

Inadequate Management of publicly-managed enterprises. The Bank’s experience in the railway sector points to the difficulty, if not the impossibility, of improving the railway performance within the “Parastatal” framework. Operating within this framework puts the railways to serious constraints, mainly: (a) the bureaucratic culture which tends to discourage initiative and innovation and fails to punish inaction and lethargy; (b) cumbersome rules and procedures that make the decision-making process very slow; (c) subtle and sometimes direct political interference in the working of the railways, eroding the authority and effectiveness of the railway management; (d) frequent changes of personnel in the top management of the railways and the ministries; and (e) pressure on the railways to provide loss-making services without adequate financial support that force the railways to cut back on maintenance. On the other hand, the experience with the concessioning of the railways in most Latin American countries and some African countries – Cote D’voire, Burkina Faso, Gabon, Cameroon, and – has with few exceptions been very encouraging.

High Rate of Accidents and Poor Record of Safety. The rate of accidents, both on road and railways, continues to remain very high. Inadequate safety consciousness, poor investment in safety equipment and training of staff, and inadequate enforcement of safety regulations have been the main reasons for the high rate of accidents. The Government’s strategy in this regard is to emphasize improved traffic management and make safety regulation more effective.

Slow Rate of Regional Integration. In spite of intentions to this effect, no concrete steps have been taken by the railways in the region to integrate many of their functions and activities and take advantage of the economies of scale and specialization with a view to improve efficiency and productivity. There is marked reluctance on the part of individual railways, to give up any of its facilities or functions. The concessioning of the railways could trigger regional integration, with the private sector seeking to gain from advantages of scale by entering into appropriate contractual agreements with the neighboring railways and other service providers.

Inadequate environmental management. An environmental audit of the railways has shown the absence of an environment policy and an environmental management plan as well as noncompliance with the established environmental and safety standards, even though CFM has recently taken steps to develop an environment policy and environment standards. The situation with regard to roads is almost similar. The Government’s strategy with regard to railways is to make compliance with the environmental and safety standards a part of the concession agreement as well as strengthen safety and environment-related regulation.

Government Strategy for the rail sub-sector 4 PID

Transport Costs. Government’s strategy is to reduce transport costs by creating conditions that would enhance inter and intra-modal competition within the country. Inter-modal competition is proposed to be enhanced by: (a) enabling both the railways and the road transporters to operate more efficiently, the railways through the involvement of private sector in the operation and management of key railway functions, and the road transporters through the provision of improved roads, facilities for training of entrepreneurs and staff, and easing of border crossing facilities; and (b) promoting a more even playing field for the different modes of transport (see paragraph below). Intra-rail competition is proposed to be enhanced by opening the railway infrastructure to more than one operator after an agreed period of exclusivity for the concessionaires. Competition in roads is proposed to be improved by discouraging anti-competitive behavior of the road truck operators association.

Cost Recovery. The GOM policy is now aimed at making all transport sub-sectors finance at least their short-term marginal costs. For the road sector, the policy would require the road users to fully pay for the maintenance and upkeep of all roads. For the rail sector, the concessionaires would be bound by concession agreements to maintain the infrastructure on their own for the period of the concession. There could be some risk for the concessionaires, were they to base their traffic projections and hence the concession fees on the assumption of appropriate increase in the road user charges and these failed to materialize. The risk, however, is very low. Even with the low user charges, the railways appear to have a definite comparative advantage and it would not be difficult for the railways to increase their share of traffic on the basis of increased operating efficiency and quality of service.

Privatization. GOM decided many years ago to seek private sector participation in the operation and management of the railways and . The agreed mode of private sector participation would be concessioning of infrastructure and selling/leasing of locomotives and rolling stock. Private sector participation is aimed at dealing with problems normally associated with public ownership and management, viz., inefficiency, over investment, waste, excess employment, financial losses, and at providing capital to address issues of deferred maintenance.

Staff Rationalization. With the objective to gradually reduce the number of employees in all public enterprises, staff in CFM has been gradually reduced through retrenchment and non-replacement of staff departures from 20,000 in 1996 to about 10,000 today (for details see Section A1). The ultimate target would depend upon the numbers finally accepted by the concessionaires, but is expected to be about 5,000.

Regulatory Framework. The responsibility for safety and environment-related regulation for the railways was so far exercised by CFM itself, in a rather informal and unsatisfactory manner. In recent times, CFM has established an inspection directorate to formalize the monitoring of actions for ensuring safety and preventing environment degradation. The inspection directorate has prepared policy documents and is in the process of establishing safety and environment-related procedures. GOM’s strategy is to establish an autonomous regulatory body to enforce technical and economic regulation more effectively. The regulatory body may also be expected to deal with many of the issues discussed above such as uneven playing field, inadequate competition, and unfair trade practices. 5 PID

2. Objectives The main objective of the proposed Project is to: (i) make cost effective and efficient transport available for the freight and passenger traffic in the central region of Mozambique and the neighboring countries of Malawi and ; and (ii) improve the operational and financial sustainability of the Beira railways system. An efficiently performing railway system will: (i) make Mozambican exports from the central region globally more competitive; and (ii) accelerate economic growth in the Zambezi Valley. The Project will support BOT-type concessioning of the rail system aimed at rehabilitation to standards adequate to carry the freight traffic on-offer and strengthen functioning of the regulatory body.

3. Rationale for Bank's Involvement IDA’s comparative advantage in contributing to the reform and development of the transport sector are well recognized by the stakeholders active in Mozambique, including the donor community, the private sector, and the NGO’s. Through its long-lasting association with Mozambique, IDA has developed a deep knowledge of the country’s transport sector and is, therefore, well prepared to assist in the implementation of the government transport reform program. The particular role of the Bank in this project is two fold.

First, the Bank can assist the Government in providing the necessary financial support with long maturity on concessional terms to make the concession biddable. Available analysis suggests that the project is not likely to be commercially viable in the short-to-medium term and the proposed rehabilitation of the Sena rail line would require high share of public finance/subsidy. The Bank's involvement would ensure that the required financial support is provided and offer confidence to the potential concessionaire.

Second, drawing upon its international and regional experience, the Bank is in a strong position to provide the necessary technical support. IDA has by now accumulated a substantial experience in designing successful concession arrangements, ranging from the high-trafficked Latin America railways to the relatively lower-trafficked African-ones. IDA is therefore in a position to add value in matters related to the independent financial advisory services; social protection of displaced workers; risk allocation between the conceding authority and the concessionaire; internalizing regulatory issues into the concession contracts, including environment and safety; minimizing emerging post-privatization issues through appropriate contract design; and dispute settlement.

The important involvement of IDA in Mozambique and the strategic focus provided by the Country Team are also instrumental in impact of the assistance to the transport sector, through articulation with the civil service reform program; privatization program; and decentralization strategy, as well as through several linkages, particularly in terms of growth and poverty alleviation; fiscal policy; agricultural development; public expenditure programming; and environmental mitigation.

4. Description Project Description

The rehabilitation work shall be carried out in accordance with the designs to be established by the Conceding Authority as per the Concession Agreement. This will enable the system to carry all freight traffic on-offer including coal currently produced but excluding large scale coal transport expected as a result of coal concession. The concessionaire would be responsible for handling all traffic on-offer and for establishing adequate capacity for such traffic. Once the coal concession is operational, the concessionaire would be responsible for creating capacity for the increased traffic volumes. However, if the railway concessionaire is unable to negotiate acceptable terms for upgradation of the Sena line to handle the additional coal traffic, the conceding authority shall have the right to terminate the concession as per the conditions laid out in the concession agreement 6 PID

The proposed project would comprise three components: (a) railways concessioning (TA); (b) infrastructure rehabilitation; and (c) strengthening of the regulatory framework.

In the short-to-medium term (prior to coal concessioning) athe economic benefits are expected to be substantial and justify rehabilitation of the line. In the long-term, the operation of the line would bolster investor confidence and interest to participate in the coal concessioning. However, as the project is not likely to be financially viable in the short run, the proposed rehabilitation of the Sena rail line would require high share of public finance/concessionary loans. To make the concession biddable, the Government has agreed to provide long maturity loans on concessionary terms. The Conceding Authority will award the concession to the bidder whose bid has been determined to be substantially responsive to the bidding documents and who has offered the lowest present value of support required. The Bank's financing will be estimated based on Government's assessment of the support required after selection of the successful bidder. The total project cost is estimated at US$100.00 million.

5. Financing Source (Total ( US$m)) BORROWER ($0.00) IDA ($0.00) Total Project Cost: $100.00

6. Implementation Implementation period. The proposed project would be implemented over a period of 48 months, i.e., from October 1, 2004 to September 30, 2008. Executing Agencies: (a) for the Railway Concessioning component – CFM/MTC; (b) for the Infrastructure Rehabilitation component – CFM; and (c) for the Regulatory Framework component – MTC.

7. Sustainability The long-term sustainability of the Beira rail system in Mozambique would be considerably enhanced under the Project, which aims at: (a) long-term private concessionsing of the system; (b) transparent selection of the private concessionaire in order to optimize the value of the concession; (c) addressing implementation issues in sufficient detail in the concession agreement so as to preempt any possible disputes and legal action; and (d) strengthening the regulatory framework.

8. Lessons learned from past operations in the country/sector Lesson 1: Very few Railway systems in Sub-Sharan Africa have proved financially sustainable under public management. To enable the railways to become financially viable and self-sustaining, the Project would focus on private sector involvement in the railways through long-term BOT-type concession agreements both for rehabilitation and subsequent operations and management..

Lesson 2: Massive investments in infrastructure, locomotives, rolling stock, and communication systems have generally been ineffective in improving reliability or efficiency because the investments were not always directed at removing the most critical constraints. The Project would, therefore, require that the Bank’s future financial support for railway rehabilitation and restructuring is linked to firm government plans for the concessioning of the railway system and that the selected private concessionaires share the risk in proportion to their equity. 7 PID

9. Environment Aspects (including any public consultation) Issues : The Sena line was operational until 1983. Under the proposed project, the line is only being rehabilitated and no additional line is being built. The rehabilitation work involves changing the rails and sleepers and establishing signaling and communication equipment. No major earthwork is being undertaken and there is no cutting of or filling of land. There were only two main environmental issues and both have been resolved. The first pertained to the use of wooden sleepers, which would have affected the forests. A decision has been taken to use only concrete sleepers except at a very few locations where non-standard sleepers need to be used. The second pertained to de-mining along the railway line. The area around the line along five meters on each side has been demined. However, this is not satisfactory and it would be a condition of effectiveness of the project that the area of 30 meters on either side is de-mined. A full environment assessment was made for the RPRP, which is valid for the proposed project as well. The main issues are: (a) need for de-mining within 30 meters on each side of the track. The de-mining has so far been done only to the extent of 5 meters; and (b) the line is fitted with wooden sleepers and through discussions, the design has been changed to concrete sleepers.

However, since the assessment was made a few years ago, the report will be updated through a supplemental study. The objectives of the study would be to: (i) determine the environmental baseline conditions at, and in the vicinity of the Beira rail operational site, including the Sena line; (ii) evaluate the current institutional and legal framework and propose new regulations, whenever considerednecessary; and (iii) formulate an Environmental Audit Management Plan.

10. List of factual technical documents:

11. Contact Point:

Task Manager Anil S. Bhandari The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-458-8943 Fax: 202-473-8326

12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop

Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.