World Bank Document

RETURN TO jEJjUCOPY RESTRICTED REPORTS DESK Report No. PTR-107a WITHIN ONE WEEK Public Disclosure Authorized This report is for offichl use onlyby the BankGroup and specificallyauthorized organizations or persons.It may not be published,quoted or cited without BankGroup authorization.The BankGroup does not acceptresponsibility for the accuracyor completenessof the report.

INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT INTERNATIONAL DEVELOPMENTASSOCIATION Public Disclosure Authorized

APPRAISAL OF

A SECOND RAILWAY PROJECT

MEXICO Public Disclosure Authorized

May lo, 1972 Public Disclosure Authorized

Transportation Projects Department * iY 70 HCRTS DESK ROOIM A-124 BY:,

Currency Equivalents -

Currency Unit 0 Mexican peso (Ps) = US$0.08 US$1 = Ps 12.50 Ps 1,OOO,OOO = US$80,000 US$1,000,000 = Ps 12,500,000

Fiscal Year

January 1 - December 31 weights and Measures

Metric: British/US Equivalent

1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 kilogram (kg) = 2.2 pounds (lb) 1 metric ton (m ton) 2,205 pounds

Abbreviationsand Acronyms

AAR - American Associationof Railroads ALALC - Latin America Free Trade Association CN - ConstructoraNacional N de Y, - FerrccarrilesNacionales de Mexico PENEX - PetroleosMexicanos SCT - Secretaria de Comunicacionesy Transportes SOP - Secretaria de Cbras Publicas MEXICO

APPRAISALOF A SECONDRAILWAY PROJECT

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ...... i

1. INTRODUCTION ...... 1

2. THE TRANSPORT SECTOR ...... 2

A. Operations in the Transport Sector ..... 2 B. Role of the Railways ..... * ...... 3 C. Transport Coordination ...... 4

3. THE RAILWAY SYSTEM ...... 5

A. Introduction ...... 5 B. Ferrocarriles Nacionales de Mexico ..... 6

4. THE PROJECT ...... 9

A. The Investmentand Action Plans of the Mexican Railways. 9 B. The Project ...... o ...... 10 C. The Proposed Loan ..o... 0...... 00. 14 D. Execution,Procurement and Disbursement. 15 E. Financing Plan ...... o. 16

5. ECONOMIC EVALUATION ...... o...... 17

A. General .. o ...... -...... 17 B. The 1972-1973Project of N de M ...... 17 C. Conclusion ...... o ...... 18

6. FINANCIAL EVALUATION . o...... o...... o... o.. 19

A. Costs, Rates and Fares ...... 19 B. Past and Future Earnings ...... o.... 20 C. GovernmentSupport ...... 22 D. Balance Sheets ...... o ...... o.... 23

7. AGREEMENTSREACHED AND RECOMMENDATION.. o ..... 24

This Appraisal Report has been prepared by Messrs. R.A.D. Loven (railway engineer-consultant),L. Marco (economist)and F. Sander (financialanalyst).

ANNEXES

1. Outline of Transport Policy and RecommendedPlan of Action 2. Statement of Railway Policy 3. Analysis of Railway Role through 1976 4. Terms of Reference for ConsultingServices in N de M 5. Motive Power and Rolling Stock 6. Operating Statistics 7. N de M's Plan of Action 1972-1976 8. N de M's Branch Lines of Low Traffic Density 9. Freight Traffic Forecast 10. Traffic Costs 11. 1972-1973Investment Plans for all the Railways 12. 1972-1973Investment Plan of N de M 13. Freight Car Requirements,End of 1973 14. LocomotiveRequirements, End of 1973 15. Items to be Financed by Proposed Loan 16. Estimated Schedule of Disbursements 17. Cost EffectivenessAnalysis 18. Income Account 19. Cash Flow 20. Summary Balance Sheets

MAP

Mexican Railways - IBRD 3655 (R)

- ii -

It is proposed to finance the ex-factorycost of cars for which CN is the suc- cessful bidder. This means that up to about US$21 million of the loan could finance local currency expenditures,depending upon the outcome of the com- petltive bidding. v. Procurementof another 1,400 freight cars is proposed to be reserved to CN in line with minimum utilizationof its existing capacity. It was agreed during negotiationsthat the price for the reserved procurementof freight cars would be (a) for cars to be deliveredin 1973, equal to CN 1972 prices plus inflationarycost increasesnot higher than 5% and (b) for cars to be delivered in 1974, not higher than 125% of the average of the 1973 prices as in (a) above, and the lowest qualifiedbid under internationalcompetitive bidding. vi. The economic rate of return on the project is at least 17%. The main economic benefits will be derived from the decrease of railway operating costs and the avoidance of costly diversionto road of freight traffic. The financialbenefits from the project will also be substantial,reducing a present operatingdeficit of over US$108 million a year to about US$3 million in 1976. The financialprojections assume substantialrate increasesin 1974 and 1976 to compensate for rising labor and social security costs and pro- gressive eliminationof the deficit on passenger train operation. Freight rate increasesamounting to some Ps 250 million a year are now needed to conform to the principle, agreed by Government and N de M, that all rates should cover long-runvariable cost and make some contributionto fixed cost. Because of a slowdown of economic growth,however, Government is unwilling to increase rates prior to 1974 but will pay to the railway, in the form of identifiableuser subsidies, the differencebetween existing and proposed rates. During negotiations,Government and N de M agreed to raise rates in 1974 and 1976 and, in the course of this and the next four years, to progressively eliminate the passenger deficit. vii. In addition to the operatinglosses of the railways, the Government must also meet the cost of debt service on railway borrowings and that proportion of railway investmentwhich is not financed by further borrowing. To- tal Government support of all its railwayshas increasedby more than 14% annually since 1964 and reached about US$200 million in 1971. By implementing the Plan of Action, the trend should be reversed. Governmentsupport of N de M is forecast at US$45 million in 1976 and total support of all railways should be less than US$65 million. An importantcontribution to this improvementis expected to result from borrowings for investmenton repaymentterms more closely related to the economic life of the investmentthan the short- and medium-term loans and suppliers'credits that have hitherto been traditional. viii. Although the upper level of N de M is capable, implementationof the projectwill require assistancefrom consultants. N de M has concludeda satisfactory two-year contractwith consultantsTOPS of Southern Pacific Railway (USA). The Secretaria de Comunicacionesy Transportes (SCT) will also retain consultantssatisfactory to the Bank for strengtheningtransport sector planning procedures and carrying out a study on road user charges. ix. The project is submittedas being suitable for a Bank loan of US$75 million equivalent for a term of 25 years, including a grace period of five years. MEXICO

APPRAISAL OF A SECOND RAILWAY PROJECT

SUMMARY AND CONCLUSIONS

i. This report appraises a project to modernize and renew the plant and equipment of the FerrocarrilesNacionales de Mexico (N de M), to improve operations and to reduce the financial deficits of the railway. N de M is state- owned and is by far the largest railway in Mexico, operating 70% of the route- km and carrying 80% of the total railway traffic of the country.

ii. The proposed loan of US$75 million would be the second loan to Mexico for railway purposes and the eighth in the transport sector. Loan 103-ME in 1954 (US$61 million) was for rehabilitationand modernizationof the Ferro- carril del Pacifico; six highway loans totalling US$176.8 million were for constructionof highways, toll roads and bridges. Execution of all projects has been generally satisfactory. In the case of the railway loan, however, agreed financial targets were not achieved, mainly because of increasingla- bor costs, not matched by tariff adjustments.

iii. The N de M, which plays an importantrole in the movement of freight traffic in Mexico, operates largely with new equipmentand good track but suffers an acute financialproblem which poses a heavy and increasingburden on tileGovernment budget. The losses are mainly the result of the railways performing social and economic functions through the provision of unremunerative passenger services and the carrying of minerals and agriculturalproducts at rates below long-run marginal cost. There is also waste of capital resources due to rigid labor rules imposed by a strong labor union. The project is intended to start a drive toward improved performanceand financialviability after the Government,accepting recommendationsregarding the transport sector made by the Bank, declared it national policy that the railways should be run on a commercialbasis. Implementationof the varicus measures ultimately to achieve financialviability is not going to be an easy task. Increases in rates and fares, pruning of passenger services and uneconomic lines, and changes of work rules are likely to encounter strong resistance from the groups to be affected. However, the Governmentand the management of the N de M are determined to initiate action. iv. The project combines the Plan of Action, based on the Bank's rec- ommendationson rail transport,with N de M's 1972-1973 InvestmentPlan. In- vestment will mainly be for locomotivesand rolling stock, components for local constructionof freight cars, track renewals, bridge strengthening,terminal improvements,modernization of telecommunicationsand consulting services for modernizing the railways and strengtheningtransport planning. The total estimatedcost of the project, including contingencies,is US$203 million equivalent,with a foreign exchange component of US$113 million. The proposed loan of US$75 million will finance about two-thirdsof the foreign exchange cost. Included in the foreign exchange component of the project and in the loan will be about 1,400 freight cars which will be offered to international competitivebidding with the Mexican state-ownedfirm ConstructoraNacional (CN) participatingin the biddings with the normal preferenceto local manufacturers. MEXICO

APPRAISAL OF A SECONDRAILWAY PROJECT

1. INTRODUCTION

1.01 The Government of Mexico and the FerrocarrilesNacionales de Mexico (N de M) have asked the Bank for assistance in financingN de M's investments during 1972 and 1973, estimatedat Ps 2,536 million (US$202.8million equivalent).

1.02 This will be the second railway loan to Mexico. The first loan (103-ME) of US$61 million for the rehabilitationand modernizationof the Ferro- carril del Pacifico was made in 1954 and the works were completed success- fully in the late fifties. Between 1960 and 1970, six Bank loans totalling US$176.8 million were made for constructionof highways, toll roads and bridges; physical executionof all projects has been generally satisfactory. In the case of the railway loan, however, agreed financial targets were not achieved,mainly because labor costs increased faster than revenues. The financial situation of all the Mexican railways deterioratedin the sixties despite a continuous increase in traffic and large investmentsmade for the rehabilitationand modernizationof the system. This was mainly the result of Government policy of giving priority to social objectives and using railway tariffs to subsidize passengers in general as well as important freight hauls. The Bank made an in-depth review of the railways in 1964, updated in 1966 and 1969. The deficits of the railways were increasing but public policy remained unchanged throughout the period.

1.03 Early in 1970, the Government of Mexico concluded that major efforts must be made to effect improvementsin the transportsector and that the advice and assistance of the Bank should be sought. A mission of transport special- ists from the Bank visited Mexico in April 1970 and, after extended discussions with the Mexican Government,completed its report in May 1971 (hereinaftercalled the 1971 Report). 1/ Its recommendations,encompassing all modes of transport, were well received by the Government and are reproduced as Annex 1. In April 1971, the Board of N de M, chaired by the President of Mexico, formally adopted a statement of railway policy, along the lines suggestedby the Bank. According to this document, reproduced as Annex 2, the Mexican railways are to be operated on business principles,and action has already been initiated,aiming primarily at achieving financial stability. At the same time, a National Ports CoordinatingCommission has been established,responsible for policy for- mulation, overall planning and coordinationof public and private interests related to ports.

1.U4 During 1970 and 1971, consultants from Canadian National Railways, with Mexican counterparts,studied the problems of N de M. The implementation of the consultants'recommendations has already produced satisfactoryresults and has prepared the way for detailed action plans, described in this report.

1/ IBRD, "The Transport Sector of Mexico," May 1971, PTR-88. -2-

1.05 The Mexican railway system comprises five Government-ownedrailway companies,of which N de M, with some 70% of the total route network, is by far the most important. Coordinatedinvestment plans through 1973 and action plans through 1976 have been prepared for the five railways in consultatlon with thieBank and are briefly reviewed in this report. The detailed technical, economic and financial analysis of this report concentrates,however, on N de M's Plan of Action for its operationaland financial rehabilitationand on its 1972-1973 InvestmentPlan, which forms the basis of the proposed project. The Plan involves expenditureof about Ps 2,536 million (US$203million equivalent),toward which the proposed Bank loan would contribute US$75 million.

1.06 This report is based on (a) N de M's 1972-1973 InvestmentPlan; (b) the Report on the Transport Sector of Mexico; and (c) findings of the ap- praisalmission of September 1971, consisting of Messrs. R. Loven (railway engineer-consultant),L. Marco (economist)and F. Sander (financialanalyst).

2. THE TRANSPORT SECTOR

A. Operationsin the TransportSector

2.01 The Mexican transport sector in its inceptionwas designed primarily to link by road and rail the major ports with the industrialand urban centers of the interior; secondly,an intricate network of roads and railways was con- structed within the central plateau to link Mexico City with the main surround- ing centers; and, finally, road and rail connectionswere provided for foreign trade with the USA through a dozen border points along the frontier. Most major towns and cities also have commercialairports. As a result, Mexico has a comprehensiveand strongly competitiveland transport infrastructure,with port and airport facilities to complement the other modes (see Map). The efficient operationand coordinationof the transportsector, which will receive about one-fifthof total public investmentsin the seventies, is important for a curtailmentof public deficits and for the achievementof the long-term economic goals. A detailed analysis of recent economic developmentsand prospects is given in the 1971 Economic Report on Mexico. 1/

2.02 The road transport industry is very active. In 1970, there were more than half a million heavy trucks operating over 40,000 km of paved roads, with a road carrying capacity estimatedat about 100 billion ton-km/year. Trucks have been providing efficientservice and competing effectivelyfor new traffic. Statisticsconcerning the intermodalsplit of land freight traffic are lacking but indicationsare that foreign trade tonnage is almost evenly shared by road and rail and will continue to be so through 1976. Railway freight traffic dou- bled over the last 15 years; the growth is expected to continue, but at a slower rate than in the past. Keener competitionis expected in the future as more and bigger vehicles enter the road industry.

1/ IBRD, "Current Economic Position and Prospectsof Mexico," 1971, CA-14. 2.03 Legally, although not always effectively,public roa.dtransport iin Mexico is regulatedby a system of concessions,permits and officiallypre- scribedmaximum truckingrates. The system, however, does not apply to cer- * tain trucks operating under constitutionalinjunctions against the Secreta- ria de Comunicacionesy Transportes (SCT) granted by the Courts in suspension of SCT's refusal to issue permits to the owners. These trucks stimulatekeen price competitionas they are not regulatedin any way. Governmentis already taking steps toward an abolitionof the present regulations.

2.04 A comprehensivereorganization of the ports is under way. The Gov- ernment has establisheda Ports CoordinatingCommission to improve port management and organizationand, with the help of consultants,to prepare traffic forecastsand develop a long range port developmentprogram. A first port loan was approved by the Bank's Executive Directorson May 2, 1972.

B. Role of the Railways

2.05 In the face of strong competitionfrom the roads, the railways have substantiallycontributed to economic growth by carrying an increasingvolume of goods at low, and in real terms, steadily decreasing cost. Railways have a clear cost advantage over road transport for the carriage in bulk of the products of the mining, agricultural,and heavy engineeringindustries and for most other goods over medium and long distances. (Detailsare shown in Annex 3.) However, unsound pricing policies,fully discussed in Chapter 6, have caused some distortionof freight traffic and created an artificialdemand for passenger services.

2.06 Main traffic flows follow the historicalpattern mentioned in paragraph 2.01. Grain imports arrive at the Pacific ports of Guaymas and Man- zanillo to feed the Central Plateau urban centers; raw materialsmove from all over the country to the industrialcenters, Monterrey, San Luis Potosi, Guada- lajara and Mexico City, where finished industrial products originate in turn and are destined for export to USA through Mexicali, Ciudad Juarez, Piedras Negras, Nuevo Laredo and Matamoros. Exports are also shipped from Sonora area in the northwest through Guaymas (cotton),from Veracruz in the southeast (man- ufacturing),and from Tampico in the east (petroleum). Due to the uneven quality of railway services and to the greater efficiency and flexibility of road transport,the trend of inland transportof refined oil products has been away from the railways to the roads. The railways and PEMEX, 1/ in compliancewith the transportpolicy of Government,are jointly exploringways to improve railway service and make better use of existing railway facilities.

2.07 The most importanttask in the seventieswill be the strengthening of the railways'competitive position through equipmentmodernization, operating improvementsand increasedemphasis on marketing. The most dynamic sources of foreign trade and railway traffic will continue to be exports of fruits and vegetables,fluorite and other minerals and manufacturedgoods, and imports of machineryand parts for road vehicles. In the decades ahead, Mexico will have to rely on efficientrailways to export,mainly to USA, bulky agriculturalproducts from northwesternareas and the central plateau - and

1/ PetroleosMexicanos. later from southern regions - and to channel machinery imports into industrial regions in Monterrey, Guadalajara,San Luis Potosi and the Mexico City area. Many railway interconnectionsaround Mexico City will have to be removed and the unified railway network will have to concentrateon long hauls.

C. Transport Coordination

2.08 Following the comprehensivesurvey undertaken by the transportmis- sion and the subsequent recommendationsof the 1971 Report, important steps have been taken by the Mexican Government. A national transport policy is being progressivelyimplemented in railways and ports, aiming at achieving the least economic cost for the countrywhile obtaining financialviability for the operating agencies.

2.09 Past experience brings out clearly that authority for transport investment and operationsshould be vested in the same agency, and the recommendations of the 1971 Report on transport policy aim at merging the Secretariat of Public Works (SOP) into SCT in the future. SOP still has authority to propose new investments to the Secretariatof the Presidency; these transportin- vestments are not always supported by adequate economic justificationsor always sufficientlycoordinated with alternativemodes. The objective of merging SOP into SCT involves considerableadministrative and political difficulties and its achievementis not feasible during the project period. As a first step in this direction, the Government has agreed in principle to strengthen the sectoral Planning Directoratein SCT (a) to formulate and coordinate long- range policy and (b) to introduce project evaluation procedures. The Planning Directoratewill appraise all investment proposals in the transportsector and will channel them to the Secretariatof the Presidency with its recommendations. Agreement was reached during negotiations(a) to employ consultants,acceptable to the Bank, to help SCT to strengthen the sectoral Planning Directorate and (b) to carry out a training program for staff of the sectoral Planning Directorate. Both items will be financed out of the proceeds of the loan.

2.10 A comprehensivestudy of passenger traffic has been undertaken by SCT to determine a coordinatedand efficient long-term passenger transportstrategy; this study, to be completed before mid-1972, is expected to be the first source of interagencycoordination. During negotiations,agreement was reached with the Government to submit the draft study to the Bank for review and comment by June 1972 and to consult with the Bank on the implementationof the study.

2.11 The 1971 Report recommendeda thorough examinationof the present road user charges by a joint Government committee. The Government agreed during negotiations(a) to undertake a study on this subject, to be completedno later than 1973, under terms of reference, and assisted by consultants,acceptable to the Bank; and (b) to consult with the Bank on the implementationof the conclusions of the study. Consultantsfor this study will be financed out of the proceeds of the loan.

2.12 The Government'slong-term objective is to have one single, autonomous, Government-ownedrailway system in order to achieve the benefits of (a) unified and standard train operations, (b) a common tariff and service approach, (c) sim- plified and standardizedmaintenance of railway facilities,and (d) economies - 5 - of scale in management,administration and procurement. SCT has already prepared a plan, whose objectiveswere agreed upon during negotiations,for unified operationof, among other things, yards and standard trains, and specializationof maintenanceshops. The study of a common tariff is also under way; it was agreed upon with the Governmentduring negotiationsthat the comnon railway tariff would be introducedby 1975.

3. THE RAILWAY SYSTEM

A. Introduction

3.01 The eleven separate railways existing until 1964 were consolidated in the late sixties to five Governmentrailways, offering public service over almost 20,000 km route-kmas detailed below:

Route-km

Standard Gauge Narrow Gauge Total _ (1.435m) (0.914m)

Autonomous Operation

Nacionalesde MIexico 13,492 587 14,079 71.1 del Pacifico 2,284 - 2,284 11.6

SCT Lines

Chihuaiiuaal Pacifico 1,515 1,515 7.7 Sonora-BajaCalifornia 539 - 539 2.7 Unidos del Sureste 950 420 1,370 6.9 Total 18,780 1,007 19,787 100.0

Although SCT lines are part of the formal trunk system they are, to a large extent, long branch lines to the main Nacionalesand Pacifico systems (see Map). Rolling stock and motive power are interchangedthrough five main junctions.

3.02 Substantialdevelopments took place on the Mexican railway system during the 1960's. Wlile the length of the system increasedonly marginally to 19,300 route-km,freight traffic increasedat an average rate of 5% p.a. to over 48 million tons in 1970. Passenger traffic increasedmore slowly at 1.4% p.a. Total revenues rose only about 6% in real terms over the decade and reached about Ps 2.8 billion in 1970. Steam locomotiveshave been phased out completelyin favor of diesel operations. Rail has been renewed or upgraded - over half the network now has heavy rail (100 lbs or more per yard). Telecommunicationsystems have been improved,as have freight yards and major stations. The total number of freight cars has increasedonly 11%, with most of the increase being in specializedequipment (e.g. hopper cars, gondolas, -6- refrigerator cars, etc.). Finally, there was only a small increase in the labor force from 70,000 to 72,800. To bring about these developments, large investments were made; for example, in the second half of the period (1965- 1969), investments attributable to the railways themselves averaged Ps 760 million (US$60 million) p.a. and those by the SOP on line extensions and major re- alignments of existing main lines averaged Ps 177 million (US$14 million) p.a.

3.03 N de M and del Pacifico are autonomous Government agencies. In thie conduct of operations they are managed by the same General Manager, appointed by the President of the Republic, with Boards of Directors representing various Secretariats, the Chamber of Commerce and the Syndicate of Railway Workers. The other public railways are operated as a Directorate of SCT and are run by General Managers, appointed by the Secretary of Communications and Transport, who serves as Chairman of the Board of all Government railways. Through the SCT, the Government controls safety and engineering standards and the tariffs of all railways. Railway operating and capital investment budgets have to be approved by the Secretariat of the Presidency. Although the programs of the N de M and Pacifico are made known to the SCT, they are, in effect, direct submissions to the Secretariat of the Presidency whereas those for the other railways have to go through a screening process by the SCT before final submission. The sectoral Planning Directorate in SCT (para 2.09) will in the future coordinate all railways' investments plans.

B. Ferrocarriles Nacionales de Mexico

(i) Management, Organization and Staff

3.04 In October 1970, the new Mexican Government, which will remain in office until end 1976, brought a new General Manager to N de M and, at the same time, three new posts of Assistant General Manager were created: one for Operations and Engineering; one for Finance and the third for Planning. In this manner, the number of staff reporting directly to the General Manager was substantially reduced. The persons appointed to the four managerial posts, although without previous railway experience, are men of considerable industrial, commercial and managerial capacity. They appear to have good under- standing of the problems of the railways and the actions needed to solve them.

3.05 Organization at the operational level, subdivided into 17 divisions, needs a major overhaul. The divisions are highly departmentalized, each operating virtually independently. Negotiations with the labor union will be needed to change certain of the present operational practices as these are agreed in the labor contract. Consultants will be retained under the project to assist the railway - inter alia - in projecting future organization at the field level (para 4.15).

3.06 Total staff has remained practically stable since 1966 and numbers about 59,000. As a part of N de M's Plan of Action, and with the assistance of consultants (terms of reference in Annex 4), a manpower plan is to be prepared to show how many staff and what skills are needed in each part of the railway and to set up related training programs. This is an important and urgent task as there is little doubt that a considerablenumber of men are redundant, although the productivityper man employed was 375,000 traffic units (pass-kmplus net ton-km) in 1970, which is similar to that of solne European railways (Netherlands,392,000; Switzerland,333,000; France, 319,),000). The expected traffic increase will absorb much of the redundancy. The Gov- ernment has directed that the railway should not reduce staff because of the present high unemployment,but Government and N de M have agreed not to increase the labor force through 1976. This was confirmed during negotiations and has been incorporatedin the Plan of Action (Annex 7).

(ii) Railway Property

3.07 N de M operates approximately13,900 route-km of single track railway. A short stretch of the standard gauge line (103 km) is electrified. Centralizedtraffic control has been installed over some 500 route-km of main line. Control on the remainder of the system is by train order. The tele- communicationsystem is in process of modernization.

3.08 The motive power fleet consists of 821 diesel locomotives,9 elec- tric locomotivesand 34 diesel railcars. All steam locomotiveswere phased out in 1968. Of the diesel fleet, 151 locomotivesare over 20 years old (Annex 5). It is expected that 187 will be retired during the next three years due to wrecks and obsolescence. Forty new locomotiveshave been delivered in 1971, and 90 more are contemplatedin the project (para 4.08).

3.09 There are approximately1,600 passenger cars, of which 830 are more than 30 years old and cause problems of maintenanceand unsatisfactoryserv- ice. The freight car fleet of 22,200 (end 1970) is relatively new. Only 6,660 cars (30%) are between 25 and 30 years old and still have 5 to 10 years of service life left. Most of the remainder are less than 15 years old (Annex 5).

3.10 In general, track and equipment are maintained satisfactorily.

(iii) Operations

3.11 The most important operating statistics are presented in Annex 6. Freight train loads have increasedwith dieselizationfrom 812 net tons in 1966 to 931 tons in 1970, which is satisfactoryfor a country like Mexico where grades are often severe and where there are many sections of light traffic.

3.12 Utilizationof motive power and rolling stock is poor. Diesel locomotives are used in train service less than 10 hours a day rather than, say, 18 hours, because diesels are being worked in the same way as the former steam locomotives. No records are kept of kilometrageof each individuallocomotive which prevents doing maintenanceon a kilometragebasis, as it should be done. At present, maintenanceis on a time basis at low average kilometrage,resulting in the locomotivesbeing in shops and running sheds too often. Overload- ing of locomotivesfrequently leads to failures in service but the railway is - 8 -

taking steps to improve the situation. There is no central control of locomotive and car utilization, resulting in unsatisfactory turnaround times and contributing to locomotive and car shortages and empty car runs. Consultants to be retained under the project will pay special attention, as part of the Plan of Action, to locomotive usage and availability. Physical targets in locomotive usage and availability have also been agreed upon during negotiations (Annex 7).

3.13 In addition to its own cars, N de M operated on its lines, in 1970, an average of about 1,400 cars of the other Mexican railways, 7,500 Mexican private owners' cars, 4,200 foreign private owners' cars, and 7,500 foreign railway cars (USA and Canada). The average number of N de Hf cars on otlher railways inside or outside the country was approximately 1,400. By improving car utilization, N de M will reduce by two-thirds its dependence on foreign cars and its resulting rental payments.

(iv) Uneconomic Lines

3.14 The Plan of Action for N de M contemplates the removal,of sections which prove to be uneconomic and for which alternative modes of transport exist or could be provided more economically. The 1964 Bank Transport Sector mission estimated that there were about 2,600 km of low traffic density branclh lines for which there was doubtful economic or financial justification (Annex 8>. Potential net avoidable losses in those branch lines are estimated at about Ps 90 million p.a. (US$7.2 million equivalent), a large part stemming from passenger services. During negotiations, the Government and N de Mi agreed, as part of the Plan of Action, to make a feasibility study of low traffic lines before end 1973 and, where it is not possible to establish suchl lines on a profitable basis, to make appropriate recommendations to Government and to take action to reduce the deficit (see outline Terms of Reference for the study in Annex 8). The Government also agreed, during negotiations, not to build any new railway line before the end of 1975 unless its economic and financial feasibility has been established and agreed with the Bank.

(v) Accounts and Audit

3.15 The accounts of N de M are maintained and presented in a satisfactory manner, and are audited by a well-known firm of public accountants, Roberto Casas Alatriste.

(vi) Freight Traffic

3.16 N de M's freight traffic increased from about 14.4 billion ton-km in 1965 to about 18 billion ton-km in 1970, mainly due to a substantial increase in traffic of petroleum, steel and building products. By securing new traffic of mineral and steel products, average hauls have also increased from 446 km in 1965 to 472 km in 1970. In conjunction with Bank staff, N de M has made detailed freight traffic forecasts through 1976 by major commodity groups (a summary is given in Annex 9). As a general principle, it has been assumed - 9 - that tariffs for both railway and road will be proportionalto their respec- tive operating costs and that the railwayswill secure traffic only where their operating costs and resulting tariffs for any commodityare lower than the cor- responding road operating costs and tariffs, after appropriateallowance for differencesin quality of service. Annex 3 gives a detailed test of the traffic forecast. Substantialincreases in rail traffic are expected in sugar cane, grains, fruits, fluorite,petroleum products, building materials and manufacturedgoods. An average annual growth of 3.3% is expected through 1976, compared with 4.1% p.a. obtained since 1965, and a traffic of 23.6 billion ton-km over an average haul of 498 km is expected by 1976. Based on consultants'recommendations(para 1.04), N de M is developing a new commercialstrategy to secure all traffic for which the railways are the lowest cost mode of transport.

(vii) PassengerTraffic

3.17 Passenger traffic,which grew by less than 2% p.a. between 1950 and 1965, grew by more than 2.8% p.a. between 1965 and 1970 as a result of increased economic activity and a decrease of fares in real terms (para 6.04). In 1970, N de 14moved more than 33 million passengers,and the total traffic was 3.4 billion pass-km, most of it second class; urban traffic is negligible. The losses of this service, calculated in Annex 10 as the differencebetween avoidable costs and actual revenues,are estimatedat about Ps 285 million in 1971 (about US$23 million equivalent),or one-fourthof N de M's net operating deficit in the same year. Targets for eliminationof passenger deficits are part of the Plan of Action (para. 4.03 and Annex 7). In accordancewith this Plan, N de M has already studied 20 passengerservices and submittedthe results to the Government;the methodologydeveloped will apply to the whole network. No dependable forecast of passenger traffic can be made because it is not possible at this time to forecast in what measure the loss of passenger train operationwill be reduced by curtailingor abandoningservices, increasing fares and other charges, or subsidy of the users by Government. Neverthe- less, an average rate of decrease of about 5% p.a. ,canreasonably be expected through 1976.

4. THE PROJECT

A. The Investmentand Action Plans of the Mexican Railways

4.01 The five Mexican railways have prepared coordinated1972-1973 In- vestment Plans wlhichhave been approved by the Governmentand included in the Government'sannual budgets. The Plans are consideredacceptable and are summarizedas follows: - 10 -

Chihuahua Sonora- al Baja N de M Pacifico Pacifico California Sureste Total % ------Pesos (Millions)------

Motive Power & Rolling Stock 1,160 259 136 50 30 1,635 47.6

Ways and Struc- tures 878 188 52 83 5 1,206 35.1

Terminals 189 21 26 2 1 239 6.9

Teleconmunications 189 5 3 2 3 202 5.9

Consulting Services 24 - - - - 24 0.7 Sub-Total 2,440 473 217 137 39 3,306 96.2

Contingencies 96 18 9 5 2 130 3.8

Grand Total 2,536 491 226 142 41 3,436 100.0

7% 73.7 14.3 6.6 4.2 1.2 100.0

Annex 11 contains a detail of the requirements, for all railways, of locomotives, rolling stock and workshop plants. Since all railways are interconnect- ed and rolling stock is frequently exchanged, reductions in investments by the other railways might have a negative impact on N de M's performance and carrying capacity. During negotiations, the Government undertook to implement the 1972-1973 Investment Plans for all the railways.

4.02 With the help of SCT and N de M, all the railways are to prepare Corporate Plans, similar to that of N de M, and coordinated investment plans through 1976. During negotiations, the preparation and introduction of Cor- porate Plans for all railways, under the coordination of SCT, no later than D)ecember 31, 1973, was agreed by the Government.

B. The Project

(i) The Plan of Act:Lon of N de M

4.03 As part of the project, N de M has prepared a Plan of Action for the period 1972-1976. The Plan follows the recommendations of the 1971 Report and the consultants' studies (paras. 1.03 And 1.04) and has been agreed with the Bank; its main objectives are discussed in various sections of this report and are listed in Annex 7. These are (a) to prepare before 1973 a comprehen- sive Corporate Plan designed to achieve agreed quantitative targets through 1976 aiming at improving operations and greatly reducing operating deficits by 1976; (b) to eliminate the deficit on passenger traffic by 1976; and (c) to introduce a new freight tariff system. - 11 -

(ii) The 1972-1973Investment Plan of N de M

4.04 Based on expected traffic requirements,N de M has prepared a 1972- * 1973 InvestmentPlan, which will supplementand support the Plan of Action in order to continue improvingN de M's operationalperformance and especiallyto initiate a concentratedeffort toward financialviability. Total investment is estimatedat Ps 2.5 billion (US$203million equivalent)with a maximum foreign exchange componentof US$112.8 million (paras.4.17 and 4.23).

4.05 Cost estimatesare based on mid 1971 prices. N de M's budget is expressed in monetary instead of physical terms and price increases in local cost will be dealt with through carryoversinto the 1974 budget. No price or physical contingencieshave been allowed for local costs. N de M will procure most of the local materials for the project at an early stage; since local prices have remained stable in recent years, neither significantover- runs nor imbalancebetween local and foreign componentsare expected. Total price contingenciesof about 9% have been added on items to be financed by the loan, and only 2% on items to be financed by bilateral lenders, the majority of which is already committed. The main items of N de M's 1972-1973Invest- ment Plan are summarizedin the table on page 12 and details are given in Annex 12.

4.06 A brief descriptionof the main items of the InvestmentPlan follows.

(a) Rolling stock and motive power

4.07 Freiglhtcars. An amount of Ps 625 million (US$50.0million) is allocated in the project for acquisitionof freight cars and Ps 21 million (US$1.7million), for roller bearings necessary for car rehabilitation,together representing26% of total investmentduring the project period. Annex 13 shows the calculationof freight car requirementsthrough the end of 1973. Substantialimprovements in carload and car availabilityare expected to cope with needs created by new traffic. Since appraisal,N de M has informed the Bank that, by implementingfurther operating improvements,it is believed that the number of cars to be delivered in the two years 1972-1973can be reduced by about 10%. The project has not been altered, however, since the reduced estimate may well be exceeded if the higher standardsof utilizationare not achlievedor if traffic should grow faster than estimated.

4.08 Locomotivesand spare parts. During 1972-1973,N de It will purchase or commit 90 locomotivesand spare parts for a total amount of Ps 420 million (US$33.6million), representing17% of total investmentduring the period. The number of 90 (40 ordered for 1972 and 50 about to be ordered for delivery end 1973) has been based on (a) the need to replace 187 old locomotivesand (b) the expected traffic increase (Annex 14). Account has been taken of planned reductionsin passenger services and improvementof locomotiveutilization by changing existingwork rules. Since N de M fears that the next renego- tiation of the labor contract - necessary to change the relevant work rules - would take a long time to conclude, N de M has agreed to review, assisted by - 12 -

The Project Proposed Loan Total Cost % of Foreign Cost Loan Items % of US$ million Project Cost US$ million US$ million Loan Rolling stock and motive power

Freight cars:

1,400 to be procured under ICB 25.0 12.3 25.0 25.0 33.3

1,400 reserved for local procurement 25.0 12.3 4.4 4.4 5.9

90 locomotives and spare parts 33.6 16.6 33.6 - -

64 passenger cars and 64 express cars 3.4 1.7 3.4 - -

1,000 sets of roller bearings 1.7 0.8 1.7 1.7 2.3

Workshop equipment 4.1 2.1 2.5 2.5 3.3

Ways and Structures

Rails and fastenings 18.8 9.3 15.7 15.7 21.0

Timber sleepers:

Two million to be procured under ICB 8.5 4.2 8.5 8.5 11.3

Two million reserved for local procurement 9.1 4.5 - - -

Maintenance equipment 3.3 1.6 2.6 2.6 3.5

Other 31.5 15.5 - - -

Terminals 15.1 7.4 - - -

Telecommunications 15.1 7.4 7.0 7.0 9.3

Consulting Services 1.4 0.8 1.2 1.2 1.6

Sub-Total 195.6 96.5 105.6 68.6 91.5

Price Contingencies 7.2 3.5 7.2 6.4 8.5

Total 202.8 100.0 112.8 75.0 100.0 - 13 - consultantsand in consultationwith the Bank, the appropriate timing for the procurementof the 50 locomotives,before placing any contract.

4.09 N de Di's locomotive fleet is composed of about equal quantities of only two makes, General Motors of USA (GM) and Alco of Canada. The locomotives included in the project are to be procured from these two manufacturers to maintain locomotive standardization.

4.10 Passenger cars. N de M proposes to purchase 64 second hand passenger cars in the USA or Canada and to rehabilitatethem for service as first class coaches. In addition, 64 mail and express cars are to be acquired, also second hand. In general, investments in passenger cars would not be justified in view of financiallosses now incurred by railways in passenger traffic. Nevertheless,by partially renewing the obsolete stock of first class coaches (Annex 6), and by improving the first class service, all rates can be substantially raised, and losses can be mitigated.

4.11 Workshop equipment. In line with the general concept of modernizing the entire railroad, it is planned to rationalize the number of maintenance facilities for cars and locomotivesand possibly reduce their number. The shops to remain in service require upgrading to enable them to handle increasing work loads as other shops are phased out. The project contemplates tlheacquisition of workshop machinery up to a total of Ps 72 million (US$5.8 million equivalent).

(b) Ways and Structures

4.12 A total of Ps 890 million (US$71.2million equivalent)is included, representing34.2% of the total investment. Among the main items are:

(i) 690 km of new rails, amounting to 9.3% of total project investment, to replace used rails in six high traffic density sections; ballasting of certain sections (1% of total investment)and easing of extreme gradients and curvature on the main lines (1.2% of total investment);

(ii) four million timber sleepers,amounting to 8.7% of total project investment,for normal replacementsand to over- take arrears in replacing sleepers in medium to low density sections of the railway and particularlyin dry areas of the country;

(iii) bridge renewal and strengthening,amounting to 7.2% of total project investment,to cope with the heavier axle- loads demanded by the operation of heavier locomotives and cars; and

(iv) way maintenancemachinery, welding equipment, track workshops, small tools and engineeringequipment, amounting to 2.7% of total project investment,to be used over the whole network. - 14 -

4.13 An investmentamount of Ps 189 million (US$15.1milllon equivalent), or 7.4% of total investment,will help (a) to increase the efficiencyof the remainingworkshops; (b) to introduce track revisions and extensions at the terminalsof Guadalajara,Monterrey, San Luis Potosi and Veracruz,whichl are presentlyhandling the highest car volumes; and (c) to carry out minimum in- provements of freiglitsheds and stations.

(d) Telecommunications

4.14 Investmentunder this heading will amount to Ps 189 million (US$15 million equivalent)or 7.4% of total investments. The bulk of it will be in line construction,installation of carriers,dispatch circuitry, highway crossing protections,and train control, resulting in improved turnaroundof rolling stock and safety standards.

(e) Consultants

4.15 As a part of the project, N de M will be assisted by consultants over the project period in the followingfields: corporate planning, including manpower planning; line and yard operations;locomotive and car control; locomotive and car maintenance;telecommunications; costing, accounting principles and financial forecastsand control. N de M has concludeda satisfactory two-year contract,under terms of reference agreed with the Banlk(Annex 4), with consultantsTOPS of Southern Pacific Railway (USA). The expected foreign exchange componentof US$0.7 million has been included in the loan.

4.16 Strengthieningintermodal coordination in the Mexican transportsector is one of the main objectives of the Government and the Bank. Also as part of the project, consultantssatisfactory to the Bank will be appointed 1bySCT for strengtheningits Sectoral Planning Directorate,introducing transport sector planning proceduresand assisting the Govertment in carryin- out, under terms of referenceacceptable to the Bank, a study on road user charges. The expected foreign exchange component of US$0.5 million is included in the loaui(paras. 2.09 and 2.11).

C. The Proposed Loan

4.17 A loan of US$75 million is proposed to finance the foreign excliange componentof the project except for diesel locomotivesand passenger and express cars which are to be financed on a bilateral basis. Some local currency financingmay be involved,depending on success of local industry in winning bids for procurementof freight cars under internationalcompetitive bidding (para 4.23). The possibilityexists of a small retroactive financingof consultant service for N de M if a contract for the provision of such service is signed in May 1972. Loan items are described in Annex 15 and have been summarized in the table on page 12. - 1 5 -

D. Execution, Procurementand Disbursement

4.18 N de M, assisted by consultants,is capable of carrying out the project. All goods financed by the loan would be procured through international competitivebidding.

4.19 The Mexican Governmenthas requested that part of the freight cars included in the project be supplied by the only domestic freight car manufac- turer, the state-owned firm ConstructoraNacional (CN), which operates effi- ciently on a commercial basis, producinghigh-quality cars. The prices quoted by CN are competitiveand have, in recent years, attracted orders from railways in the USA, Panama and Colombia. N de M has already ordered about 1,000 freight cars from CN for delivery in 1972. All further tenders for freight cars to be invited prior to the end of 1973 will be called simultaneouslyfor two groups of cars of similar types: 50% (Group A) to be acquired under internationalcompetitive bidding in which CN would participateand 50% (Group B) to be reserved for CN. The number of cars to be ordered under this arrangement,covering N de M's needs up to the end of 1974, is estimated at about 2,800. In the Group A bidding, CN should enjoy a margin of prefer- ence of 15% on CIF prices, or the prevailing custom duty, whichever is lower.

4.20 In Group B, CN will supply freight cars at an average per unit price not exceeding, in cars of comparablespecifications: (a) for cars to be delivered in 1973, the 1972 CN average price plus inflationarycost increases of less than 5% and (b) for cars to be delivered in 1974, 125% of the average of 1973 CN prices described in (a) and the price under the lowest qualified CIF bid of cars in Group A. This procedure ensures a double objective: it puts a ceil- ing on prices paid by N de M and it forestalls the possibilitythat CN could charge unduly high prices for the cars in Group B to enable it to quote unduly low prices for the cars in Group A. The number of freight cars reserved for CN, togetherwith other cars to be supplied by CN to the other Mexican railways, is sufficient to ensure minimum occupation of CN's existing capacity.

4.21 The landed cost of cars in Group A (ex-factory,if bids are won by CN), has been included in the proposed loan, and it is recommended that the Bank finance it whether the contractsare won by foreign firms or by CN. While the Bank will not finance the cars to be ordered from CN in Group B, it is proposed that the Bank should finance the cost of imported components for such cars. These components,comprising mainly roller bearings, steel wheels and axles and heavy underframe members, are to be procured under internationalbidding and on a worldwide basis, in full conformitywith Bank guidelines. The sum involved, Ps 55 million (US$4.4million) is included in the proposed loan.

4.22 There are four million timber sleepers in the project, of which two million (50%) hard wood sleepers are included in the proposed loan and will be procured through internationalcompetitive bidding. The other two million, soft wood sleepers, not proposed for Bank financing, are reserved for the large number of Mexican manufacturerswhose productive capacity and competition the Covernmentwishes to support.

4.23 The proposed loan would involve local financing up to a maximum of US$21 million, depending on the outcome of the competitivebidding for freight cars. This is considered reasonablein view of the fact that it assures internationalcompetitive bidding for substantialitems in N de M's investment program which, so far, have been procured exclusivelyon the local market. - 16 -

4.24 N de M is subject to import duties. At the same time,Mexico is a member of the Latin America Free Trade Association (ALALC) and has nego- tiated preferences for the importation of lists of products originating in member countries of ALALC. As of now,this will apply only to hardwood timber sleepers and axles for freight cars. Should offers be submitted in international tenders from suppliers located in ALALC countries, N de M proposes to evaluate bids on the basis of CIF landed price plus import duties.

4.25 Any savings in the loan account resulting from prices lower than estimated would be used to finance similar project items in the ongoing program subject to agreement with the Bank. Disbursements would be made on the basis of CIF costs of US$67.4 million imported goods (or ex-factory costs, excluding identifiable taxes, of locally procured goods), and of thie foreign costs of consulting services (US$1.2 million). The balance of the loan funds (US$6.4 million) is unallocated. Annex 16 shows estimated quarterly disbursements assuming the proposed loan becomes effective in the third quarter of 1972.

E. Financing Plan

4.26 Throughout the project period, N de M will be unable to provide from earnings any finance for investment, which will consequently have to be found entirely from borrowing and from Government resources, in the following manner:

Local Foreign Total %

…-TJUS$ million------

IBRD loan - 75.0 75.0 37.0 Government resources 48.0 48.0 23.7 Supplier's credit: 40 locomotives, already committed - 15.2 15.2 7.5 50 locomotives to be committed - 19.2 19.2 9.4 passenger and express cars already committed - 3.4 3.4 1.7 Short and medium-term loans of local banks (Nacional Financiera) and local suppliers 42.0 - 42.0 20.7

Total 90.0 112.8 202.8 100.0

4.27 No difficulties are expected in securing finance at reasonable terms for the 50 locomotives. For other items, short and medium-term loans will be secured from traditional local sources. During negotiations, the Government undertook to provide the balance of any funds required, now estimated at about US$48 million equivalent. - 17 -

5. ECONOMIICEVALUATION

A. General

5.01 The railways move about 40 million passengers and 48 million tons of freight per year, and are an essential part of the Mexican economy. Freight traffic on all railways,which has been increasing at 6% p.a. for the last seven years, is now moving at costs substantiallylower than those of road, over hauls from 150 up to 2,000 km, averaging 458 km. As explained in Annex 3, it is economicallysound to carry this traffic, which is paying for the marginal cost of moving it in most cases and is expected to cover all long- run marginal costs after the new tariff adjustmentsare introduced (para 6.03). The benefits of the 1972-1973 InvestmentPlan and coordinatedaction for all the railways are (a) the reductions of railway operating costs obtained by increasedworkshop efficiency and better utilizationof rolling stock and (b) the savings in road operating costs and road constructionobtained by avoiding freight traffic diversion to road. A cost effectivenessanalysis is given in Annex 17.

B. The 1972-1973Project of N de M

(i) The Plan of Action

5.02 Independentlyfrom the capital investments,important savings are to be obtained from the Plan of Action. First, the diversion to road of passenger traffic by reduction of services and tariff increaseswill save transportoperating costs, including foreign exchange cost of locomotives, and associated workshop investments,which will be released for freight traffic. Second, the unificationof railway operations will improve turnaround time of rolling stock and utilization in workshops. Third, the Corporate Plan, and especially the manpower plan, will reduce the need for capital investments. Finally, a new comercial approach will help N de M to capture new traffic and, by improving service, to pass on to users the benefits of the project.

(ii) The Investment Plan

5.03 The benefits attributableto the components of the InvestmentPlan have been evaluated by assigning incrementalbenefits to successive incremental investmentsin four major groups. Sensitivityanalyses have been carried out, assuming (a) variations of unit operating costs and/or overruns in investment cost and (b) different levels of benefits arising from the four groups of items. Possible labor savings have not been considered;the returns would be higher with a reduction of N de M's staff.

(a) Ways and Structures

5.r04 The maiinbenefits are (a) higher speeds, greater safety and improved turnaroundof rolling stock; (b) savings in materials resulting from mechan- ized and improved trackcmaintenance and from use of new rail; and (c) savings - 18 - in operating costs per traffic unit stemming from heavier train loads. Minor savings are also to be obtained from lower inventory cost and easier maintenance due to standardization of type of rail. The weighted internal economic return (IER) of investments included under this heading is 14%.

(b) Telecommunications

5.05 The benefits of line construction, carriers and dispatclh circuitry will be improvement of train selection and control, better turnaround of motive power and cars and better service to users. First year benefits of this investment are estimated at 20%, excluding benefits to be expected only from improved operations according to the Plan of Action. Telecommunication investments are expected to yield an IER higher than 20%.

5.06 For evaluating purposes, two-thirds of the investments in maintenance shops and shop machinery have been included in this item (I'S$2.74mil- lion). Freight car requirements have been calculated through the end of 1973, making allowance for the planned reduction of two-thirds in the number of freight cars to be held and operated by N de M (para 3.13) and for withdrawal of 900 cars due to wrecks, obsolescence and conversion to work equipment. Sub- stantial improvements in carload turnaround time and car availability were assumed as a result of the Plan of Action and investments in telecommunications and workshops. The benefits come mainly from avoiding traffic diversion to road. An IER of at least 21% is expected from this investment.

(d) Locomotives atid Spare Parts

5.07 For evaluating purposes, one-third of investments in maintenance shops and shop machinery have been included in this item (US$1.37 million). The benefits due to the new locomotives required to move the traffic forecast tlhroughthe end of 1973 take account of potential improvements in average net freight train load, locomotive utilization, locomotive availability, and investment in telecommunications and workshops. Under these assumptions, substantial savings will accrue by reducing operating and maintenance costs of the over-aged locomotives to be scrapped during the project period. It is assumed that N de M will have a sufficient number of freight wagons during the project period, either owned or rented. A return, ranging between 14, and 21%, has been obtained; the most probable IER is 17%.

C. Conclusion

5.08 On the basis of the above estimation, the weighted IER of the four major investment items, representing about 83% of the total project investments, is at least 17.6%, which is satisfactory. The rest of the investments consist of improvements to yards and consultants' services whichi are,necessary for the project as a wqhole and whose benefits will spill over the whole project. The overall IER of the combined Investment Plan and Plan of Action is at least 17% (Annex 17). All returns calculated assume parallel implementation - 19 - of the Investment Plan and the Plan of Action. The whole project has a sound rationale and deserves early implementation.

6. FINANCIAL EVALUATION

A. Costs, Rates and Fares

6.01 The 1971 Report presented an in-depth study of railway costs and the relationship between costs and revenues by individual service and commodity, appended as Annex 10. A summary of the conclusions follows.

(i) Costs

6.02 There is excess employment in railway service but this is not a major cause of the financial problem (para 3.06). While real wages have increased substantially over the years, the rate of such increase has been exceeded by productivity. In real terms, unit costs have tended downward. In 1969, at current prices, freight long-run variable costs were equivalent to UStO.6 per ton-km and, on a fully-allocated cost basis, to US41.04 per ton-km, both of which may be considered reasonable. At present, the figures will be only marginally higher, most of the price increases having been offset by improved productivity.

(ii) Freight Rates

6.03 N de M's long-term objectives in setting freight rates are that: (a) rates shall not fail to cover long-run variable cost and shall make some contribution to fixed cost and overhead; (b) they shall not be set so high that they divert to, or fail to attract from, competing modes of transport any traffic which the railways can carry at lesser economic cost; and (c) they shall not be set so high as to dampen demand. Average freight revenue per net ton-km is presently equivalent to USJ0.8, which more than covers long-run variable costs but falls below fully-allocated cost by a substantial margin. Only a small number of freight rates (which, however, apply to large tonnages of traffic) fall below long-run variable cost. The above- mentioned objectives would require that revenue be increased by about Ps 250 million annually. Government accepts the principle that tariffs should be adjusted in line with costs but is not prepared to contemplate a railway tariff increase prior to 1974 because of a slowdown of economic growth and the higher priority given to rate increases in power and petroleum sectors. Instead, in 1972 and 1973, Government will pay the required sum into railway revenue in the form of a user subsidy identifiable by commodity and user. In 1974 and 1976, rates to the public will be increased to the extent necessary to meet the pricing principle defined above and to partly compensate for increasing costs. The amounts of the increases have been estimated at about Ps 325 million in each of the years involved - a cumulative increase of Ps 650 million in 1976. - 20 -

(iii) Passenger Fares

6.04 Passenger fares were increased in 1970 for the first time since 1959. The increases amounted to 30% for first-class and 20% for second-class travel. The overall effect was to increase the average revenue per passenger-km from the equivalent of USJ0.35 to USJ0.37. The increase in fares has apparently discouraged short-distance travel, and thereby increased the average length of journey. The level of passenger fares in Mexico is still extremely low - the lowest in the world relative to per capita GNP and in absolute terms second only to Brazil. Total passenger revenue at present fails by a substantial margin to cover even the immediately avoidable cost of providing the service. There is ample room for fare increases but, in view of the high elasticity of demand for rail passenger service in Mexico, it is almost certain that where alternative services exist, greater financial benefits to the railways will accrue from elimination of trains and curtailment of services than from raising fares. It is on this basis that management is approachlingthe problem. Tar- gets for eliminating the passenger train deficits are outlined in the Plan of Action which was agreed upon by the Government and N de WIduring negotiations (Annex 7). A tentative assessment of the effects of implementing this action is included in Annex 18.

B. Past and Future Earnings

6.05 Annex 18 presents the income account of N de N for the years 1964- 1976, supported by statistics, financial data and explanatory notes. Provi- sion is made for all foreseeable increases in costs of labor and material. Wages, salaries and other staff costs are expected to continue their upward trend, at current prices and in real terms. Government and the railways have agreed that no increase in the labor force will be allowed through 1976 (para 3.06).

6.06 It is crucial to the attainment of financial viability that the large losses from passenger travel should cease. If the present situationis allowed to persist, total revenue from existing passengerservices will fall short of the immediately"avoidable cost" of providingthese services by at least Ps 400 million by 1976.

6.07 The financialprojections assume that freight revenue will be increased in 1972 by Ps 250 million a year through the medium of a Government subsidy to railway users and by a further Ps 650 million in 1974 and 1976 through increasesin rates to the public (para 6.03); that the railwayswill be able to equate passengertrain revenues to the avoidable passenger train costs by 1976 (para 6.04); and that, in accordancewith Government'srailway policy statement (Annex 2), the railways will be called upon to pay social security costs no greater than those paid by private inldustry.Other assump- tAons, which were confirmed and agreed upon during negotiations, are that:

(a) the tax of 12.2% of gross freight revenue, which has hitherto been levied on rail transport but not on competing modes, will be retained as revenue by the railways, with retroactive effect to January 1, 1972 (Annex 18); and - 21 -

(b) the railways,which in the past have been called upon to carry mail for a token fee, will be paid for the cost of this service, beginningnot later than July 31, 1972 (Annex 7).

6.08 On the basis of expected traffic growth and the agreed actions, freiglhtrevenue is forecast to increase from Ps 1,775 million in 1970 to Ps 3,497 in 1976. N de M's average revenue per net ton-km in 1976 will be 14.8 centavos (USd1.18)as compared with 11.2 centavos (USiO.90)in 1964 and 11.0 centavos (USd0.88)in 1970, both the latter figures inclusiveof Govern- ment tax. At current prices, this represents an increase of 34.5% over 1970; at constant prices, and on the assumptionsof further price level changes made in Annex 18, the average freight rate in 1976 would be only 2% higher than in 1970.

6.09 Includinguser subsidiesand compensationfor social security costs in excess of those borne by private industry,N de M's operating deficit of Ps 38 million forecast for 1976 is in sharp contrast to the operatingdeficit of Ps 1,357 million recorded in 1971. If user subsidiesand compensationfor social security costs are excluded, the deficit will be reduced from Ps 1,357 to Ps 620 million. The improvementin the operating results may be summarized as follows:

Inclusiveof user subsidies and Exclusive of user subsidies reimbursementof social and reimbursementof social security costs security costs Oper- Oper- Expend- ating Expend- ating Revenue iture Deficit Ratio Revenue iture Deficit Ratio ------(Pesosmillion)------

1971 2,036 3,393 1,357 166 2,036 3,393 1,357 166 1972 2,635 3,587 952 137 2,510 3,587 1,077 143 1 973 2,963 3,682 719 125 2,643 3,781 1,138 143 1974 3,474 3,804 330 110 3,094 3,930 836 127 1975 3,632 4,036 404 112 3,202 4,161 959 130 1976 4,119 4,157 38 101 3,696 4,316 620 117

Th' operating, ratios shown in the last column above were agreed during negotiations to be the targets to be achieved by Government and N de M. The achiievemerlt of those targets will require, inter alia, increases in freight rates, as shown in paragraph 6.03. Operating ratios exclusive of subsidies were adonted as targets, rather than those inclusive thereof, because they providp the ultimate test of Government and N de M performance in passing on to the user the cost of providing railway service.

6.10 The improvementin the operatingratio is gradual, declining from 106 in 1971 and 143 in 1972 to 117 in 1976. The Bank pressed during negotiations for an early increase in those tariffs which are currently below mar- ginLal costs, whichn would have made possible a more rapid improvement in the operating ratio. While the Government accepted the principle that tariffs should be adjusted in line with costs, it was not prepared to contemplate a - 22 - tariff increase prior to 1974 because of the current slowdown of economic growth. Under the circumstances, the operating ratio targets shown above are the best that can be achieved through increases in operating efficiency, curtailment of passenger services and other economy measures, combined with some adjustments in tariffs beginning in 1974.

6.11 The achievement of financial viability, defined as the ability to service debt and make a substantial contribution (say 40%) to investment in a normal year, including timely renewal of all its assets, would in 1976 require N de M to earn net operating revenue of at least Ps 1,000 million a year, equivalent to a return of 6% on the value of net fixed assets in service; from a present deficit base of Ps 1,357 million, this is scarcely possible within the coming five years. In a second plan period of the same duration, the objective might be attainable. Agreement was reached during negotiations that the ultimate aim of N de M should be to achieve financial viability and that the financial projections and associated actions will be reviewed and adjusted periodically in agreement with the Bank according to the progress made during the 1972-1976 period (Annex 7).

C. Government Support

6.12 Government financial support of N de M has increased over thie past six years at an average rate of about 14% p.a.:

Funds provided by:

Cash Total deficiency Debt funds Government on operation Service Investment required Borrowing Subventions ------(Pesos mil]lion) ------

1967 631 752 420 1,803 419 1,384 1968 14 709 1,225 1,948 558 1,390 1969 761 715 558 2,034 535 1,499 1970 897 745 429 2,071 638 1,433 1971 1,178 798 520 2,496 490 2,006

/1 Including working capital requirements

The figures shown above for the N de M should be increased by about Ps 600 million per year to cover support of the other four Government railways and the railway investment expenditure incurred by SOP. In 1971, Government support of all its railways is estimated at about Ps 2,600 million (US$208 million). The effective implementation of the Plans of Action, applicable over the entire railway sector, would result in a dramatic improvement in the financial situation, the relevant comparative figures for N de M being as follows: - 23 -

Compositionof N de M's FinancialNeeds by Sources of Funds in %

Railway Government Revenues Borrowing Subventions Total

1964 55 17 28 100 1971 45 11 44 100 1976 74 16 10 100

In absolute terms, Government'ssupport of N de M is expected to decrease from its present level of about Ps 2,000 million (US$160million) in 1971 to about Ps 563 million (US$45 million) in 1976, exclusiveof any subsidy to users of railway services which Government may decide to be necessary (estimated at Ps 423 million in Annex 18) and reimbursement of excess social security costs (estimated at Ps 159 million).

6.13 The cash flow of N de 1l, which is submitted as Annex 19 and summarized below, indicatesthe extent to which Governmenthas had to provide funds in support of railway operations,debt service and investment.

1970 1971 1972 1974 1976 …Pesos million------

Governument subventions 1,433 2,006 1,597 1,129 563 Compensation from Government for unprofitable services maintained in the public interest - - 125 380 423 Reimbursementby Government of social security costs - - - 126 159 Borrowing- short and medium term 638 490 900 500 400 Borrowing - long term - - 216 624 475 2,071 2,496 2,838 2,759 2,020

Net cash deficit on operations 822 1,128 825 560 320 Increase in working capital 75 50 50 50 50 Interest charges 145 156 186 239 250 Debt redemption 600 642 699 760 650 Capital investment 429 520 1,078 1,150 750 2,071 2,496 2,838 2,759 2,020

A grace period of five years is recommendedfor the repaymentof the proposed Bank loan, to help to reduce the burden of N de M's debt service during a period of continued financialdifficulty.

D. Balance Sheets

6.14 The balance sheets of N de M are reproduced in summary form in Annex 20. Outstandingdebt was reduced by Ps 322 million between 1964 and 1970. Borrowingtraditionally took the form of short to medium-termloans - 24 - and suppliers'credits, the average repaymentperiod being of the order of six years. At the end of 1964, total outstandingdebt amounted to Ps 2,478 million; in the ensuing six years, debt repayments totalled Ps 3,481 million; new borrowing in the same period was Ps 3,159 million. As railway revenues have been inadequate to meet even the costs of operation, interest charges and debt repayment have been financed entirely by Government,as part of the Gov- ernment subventionswhich have been treated as non-interest-bearingcontribu- tions to railway equity. The improvementin the debt-equityratio from 20:80 in 1964 to 15:85 in 1970 has thereforebeen achieved at the expense of an ever- increasing burden on the Government budget. Moreover, the trend followed by capital investmentin the past six years has not been commensuratewith traffic growth, the shortfallhaving been met by increased productivity. In the six years from 1971 to 1976, capital investment is forecast at Ps 5,480 million, compared with Ps 3,639 million in the previous six years. This higher level of investmentwill result in a 27% increase in the net value of assets in service during the period. As freight traffic is expected to grow by 31%, a further improvementin productivitywill be needed and may, with confidence, be expected.

6.15 If such a higher level of investmentwere to be financed on the same terms and conditionsas in the past, the burden on Governmentwould be considerablygreater than is shown in the projections. As will be seen from the balance sheet for 1976, the projectionsassume that a substantialportion of new borrowingwill be either on Bank terms, or terms comparable thereto, in the latter case particularlywhere purchases of locomotivesare concerned. The relief to Government provided by borrowing on repayment terms more closely related to the economic life of the related equipment, rather than on traditional terms, is estimatedat Ps 860 million (US$69 million) in the next five years.

6.16 In 1976, N de M should be able to provide a debt service coverage of about 0.3 from operations. The goal of financialviability will not have been attained,but at least a base will have been establishedfrom which the final assault can be made, provided that N de M's future borrowings are on reasonable terms. During negotiations,agreement was obtained that N de M would not incur any short- or medium-termdebts, expressed as loans having a maturity of less than five years, if after December 31, 1973, the total of such debts outstandingat any time, including the debts to be incurred,would exceed 10% of total capitalization,represented by total debt plus Government capital contribution,subsidies and grants, less accumulateddeficits on operation.

7. AGREEMENTSREACHED AND RECOMMENDATION

7.01 During loan negotiations, agreement was reached on the following principal points:

(a) implementation of 1972-73 Investment Plans for all the railways (para 4.01); - 25 -

(b) preparationof CorporatePlans for all the railways (para 4.02);

(d) strengtheningof, and provisionof consultantsfor, the sectoral Planning Directoratein SCT (para. 2.09);

(e) review by the Bank, and subsequent implementation,in consultationwith the Bank, of the study of passenger transport in Mexico now being undertaken by SCT (para 2.10);

(f) completion of a study on road user charges no later than 1973, and consultationwith the Bank on its implementation (para 2.11);

(g) objectivesand timing of the plan for unified operation of all Government railways (para 2.12);

(h) date of introductionof a common tariff for all railways (para 2.12);

(i) no new railway line constructionto be undertaken prior to December 31, 1975 unless its economic and financial feasibility has been satisfactorilyestablished and agreed with the Bank (para 3.14);

(j) tax of 12.2% of gross freight revenue to be retained as revenue by the railways (para 6.07(a));

(k) debt limitationcovenant (para 6.16).

7.02 The project provides a suitable basis for a Bank loan of US$75 million equivalent to the Nacional Financiera,with the FerrocarrilesNacionales de Mexico as joint-borrower. The loan should be extended over a period of 25 years, includinga grace period of five years.

May 10, 1972

ANNEX 1 Page 1

MEXICO

APPRAISAL OF A SECOND RAILWAYPROJECT

Outline of TransportPolicy and RecommendedPlan of Action

Based on Transport Sector Report No PTR-88 of May 1971 1/

A. Introduction

The national transportnetwork has made a very significant contributionto the economic and social developmentof the country. The Government and the private sector have in the past done all they could to prevent transportfrom holding back developmentin any way)but fundamental deficienciesare now beginning to come to light and must be corrected. The only way to solve the problems of an economic,social and other nature now facing the transportsector is by adopting definite guidelineson transport policy and this calls for important politicaldecisions, administrative changes, studies and other measures. The followingproblems can be given as cases in point:

(1) Despite traffic growth, higher returns and higher levels of productivityand efficiency,the financialsituation of the railways has been registeringa rapid decline. They have a serious financial deficit which now amounts to more than Ps 11 billion accumulatedsince 1959 and in the course of this year this figure is likely to go up by Ps 2.5 billion, with an approximateannual increase of 12% to be expected in future if the present trend continues. This would mean an additional burden on the order of Ps 20 billion on the federal budget, between 1971 and 1976, without this money benefiting any specific economic and social group.

(2) Highway improvementdoes not sufficientlyreflect the economic and social priorities of the nation, particularlyas regards pioneer roads. As far as motor transportis concerned,thereare legislative and administrativedeficiencies (especially concerning freight),considerable limitationson the power of the Executive Branch to introducethe necessary measures and a lack of coordinationbetween state, municipal and federal transportnetworks. The absence of a single central authorityresponsible for policy-makingand planning has had the effect of causing over-investment in trucking equipment,under-utilization of available capacity and operational deficiencies.

1/ Translationof a document prepared and made public by the Mexican Governmentbut not yet adopted as an official statement. ANNEX 1 Page 2

(3) The system of toll roads and bridges suffers from high construction and maintenance costs and deficienciesin connectionwith tariffs and expansion plans.

(4) The seaports are generally inefficientlyoperated, their economic and financial viability is shaky and some investmentsare neither well placed nor coordinatedwith other modes of transport.

(5) PEMEX's strategy toward investing in pipe lines, tankers and port improvementsis not closely coordinatedwith efforts being made in other areas of the transport sector. Consequentlyit is possible that some oil products are not being transportedby the most economic means. The present price policy and the tax system that applies to PEMEX probablv amounts to a subsidy on diesel used by trucks and it is not clear to what extent this affects the amount and applicationof the tax on gasoline consumption; no studies have been made to prove the need or advisabilityof this situation.

(6) With regard to air transport,the planning and construction of infrastructurehas been partially separated from its use and operation. The financial position of the airline companies has improved during the last few years but still remains in the balance as concerns the future. Aeronaves de Mexico, S.A. in particular has excessive liabilitieswhich ought to be refinanced. The reason for this is that the company absorbed the routes and debts of private companies that had gone out of business after being set up without proper planning.

(7) As regards urban transport,greater effort is needed, especiallyin Mexico City, in planning to overcome congestion,fight pollution and meet the needs of a city whose population is expected to reach the 20 million mark by the turn of the century.

(8) The proliferationof Governmentdepartments that have legal or de facto authority in the establishmentof general communications systems and in the operationof the transport systems is a well-known fact. Decentralizedagencies are known to authorize,plan and constructgeneral communicationlines that are not within their scope of authority.

(9) The autonomy of decentralizedadministrative service agencies with independentmanagement of their budgets makes it impossible,as things now stand, to establish a general transport policy, and even if one were established,it would be inoperative.

(10) There is no central planning and policy-makingbody in the general transport sector to provide coordinationwith national planning, with the result that decisions regarding investments,prices and operations in the sector are made on the basis of partial programs which do not tie up with a ANNEX 1 Page 3 comprehensiveplan. In many cases investmentsare made on the basis of technical plans that satisfy partial specificationsbut lack the necessary pre- investmentstudies, financial studies of recovery of and return on investment and, generallyspeaking, without establishingthe socioeconomicgoals that are sought. Furthermore,there is no schedulingto coordinatetransport in- vestmentswith those made in other sectors.

B. General Objectives

In order to attain the general objectives of a transportpolicy designed to overcome the problems mentioned above, account must be taken of the rapid technologicalchanges that are taking place in that sector and the fact that transportoperations are effected in a complex and highly competitiveambience.

These general objectivescan be outlined as follows:

(1) To create a transportsystem that makes the best possible use of the human resources and capital available and which:

(a) Is integrated,efficient and safe;

(b) Considersthe needs of all users at national, regional and local level; and

(2) To ensure that investmentsreflect national, economic and social priorities.

(3) To ensure that tariffs or prices are such that they make it possible to operate the system at least on an economicallyself-supporting basis and for additionalfunds to be generatedwherever possible so that the operatorswill have funds available to plow back into their own investment programs, thus reducing the burden on the National Treasury.

(4) To do away with the practice of using transport as a means of subsidizing Government and private users. When it is necessary to promote the developmentand welfare of private groups, the provisionof subsidiesmust be clearly defined and paid by the Government to the in- terested groups direct.

(5) To eliminateall discriminationbetween the differentmodes of transport,resulting from regulations,tax systems or financialmeasures. ANNEX 1 Page 4

C. AdministrativeStructure

The formulationand applicationof the new transport policy along the lines of the general objectives listed above and those referred to in each subsector must be supported by an administrativestructure capable of providing unity of action, efficiency and continuity. Many years' experience, and the findings of the studies made, show the need for making substantialchanges in the present administrativestructure. The reorgani- zation proposed is based on criteria of efficiency that tie up with those followed by the Government in its AdministrativeReform of the Federal Public Sector. Responsibilitymust be integratedboth vertically and horizontally.

(1) Vertical integration

This concerns general policy, planning, promotion, research, pre- investment studies, preparationof projects and investment programs, construction, upkeep and operation and liaison with state and municipal authoritiesand also with the private sector. To achieve this integration, it is proposed to merge the Secretariatof Public Works with the new administrative structure of the transportsector. This merger is justified in that the Secretariatin question deals almost exclusivelywith transport works, as other public works are generally executed by the bodies responsible for policy in each branch (irrigationdams are built by the Secretariat of Water Resources, electricalworks by the Federal Electricity Commission, pipelinesby PetroleosMexicanos (PEMEX) etc.). The proposed merger would enable the new transport administrativestructure to assume responsibility for constructionand, depending on individual cases, possible upkeep.

(2) Horizontal integration

This concerns all three transport systems: land, ocean and air. To achieve this integration,the new administrativestructure in the transport sector would also be made responsible for ports and ocean transport. The Secretariatof Communicationsand Transport would revert to the role it played until 1940 and the Navy Departmentwould continue to be responsible for the other functions assigned to it. The new administrativestructure, which could continue to be called the Secretariatof Communicationsand Transport,would be organized on the transport side as follows.

(a) Under Secretary of Transport.

(b) Directors in Chief of Land Transport,Ocean Transport, Air Transport and Planning,Pre-Investment Studies and Research.

(c) Directors General, directly responsible to the Directors in Chief in each branch. For example, the Directors General of Road, Transport and Railroads would work directly under the Director in Chief of Land Transport. ANNEX 1 Page 5

The Directorsin Chief in the transport sector would be responsible to the Under Secretaryof Transport. The Director in Chief of Planning and Pre-lnvestmentStudies, however, would be directly responsibleto the Secretaryso that the matter of planning is directly linked with the administrative system to ensure its unity and coherence, in kQeping with the new policy directives. The administrativestructure proposed has the added advantage that the Chief Clerk and the Directors in Chief of Construction, Tariffs, Informationand Legal Affairs would serve both the transport sector and the communicationssector.

It would be advisable to set up a decentralizedagency to take charge of port administrationand operation, similar to other agencies already established, such as Ferrocarriles Nacionales de Mexico (National Railroadsof Mexico), Caminos y Puentes Federales de Ingresos y Servicios Conexos (FederalToll Roads and Bridges and Related Services) and Aeropuertos y Servicios Auxiliares (Airports and Auxiliary Services). Liaison between the proposed Secretariatof Communicationsand Transportwith decentralized agencies in the transportsector will be organized to suit each situation as it arises, but in all cases designationswould be announced through the Secretariatof Communicationsand Transport so as to guarantee the unity of action required for effective implementationof the new transport policy.

The proposed administrativestructure would enable the Secretariat of Communicationsand Transport to submit through the proper channels current expense budgets and draft investmentprograms for the transport sector as a whole for the considerationof the President of the Republic. If experience should advocate such a move, it would be possible at a later date to form two Secretariats,one for Communicationsand the other for Transport, in which case it would be necessary to establish in each a Chief Clerk's Office and the departments that provide joint services,i.e., Departmentsof Tariffs, Information,Legal Affairs and Construction,which would call for considerable additional funds.

D. Objectives of the Subsectors

(1) Railroads

In accordancewith the general objectives mentioned above, the basic policy decided upon concentrateson a determined effort to ensure that the management of the railroadsmeets business standards. The Secretariat of Communicationsand Transportwill, accordingly,formulate fundamental directives to be used as terms of reference and to assess performance. These directives will include the following: ANNEX 1 Page 6

(a) The preparationof a plan establishingquantitative targets for traffic growth, operationalefficiency, employment,financial results, investments,etc. The actual progress of the undertakingwill be assessed on the basis of these targets.

(b) The introductionof an effective cost-accountingsystem in order to:

(i) provide bases on which to establish tariffs that will reflect costs entailed at different levels and in different types of demand; and

(ii) be able to assess the net economic return of investmentprojects.

(d) The study of passenger and local services with a view to identifyingthose that are uneconomicaland programming their withdrawal wherever possible.

(a) The immediate increase of cargo and passenger tariffs on a selectivebasis and the setting up of a permanentsystem of reviewingtariffs to ensure that earnings for each service cover at least the cost of that service so as to break even.

(f) The preparationof a detailed employment plan, the minimum aim of which should be not to increase the number of jobs for the next six years at least. This plan will establish reassignmentand retrainingprograms for senior personnel and specializedtraining both in Mexico and abroad. When- ever necessary, use will be made of Mexican and foreign consultants, who will be engaged for specific tasks for limited periods of time and who will undertake to train Mexican executivesand personnel.

(g) The programmingof the diversificationof railroad activities to ensure that they provide an integrated transport service.

(h) The setting up of an analysis unit to examine the economic feasibilityof projects for investmentin railroad infrastructure,works, equipmentand material. ANNEX1 Page 7

The efficiency of the measures mentioned above will be reinforced if the following measures are also taken:

(a) The speedy completion of the amalgamationof the railroad systems.

(b) The elimination of the 12.2% tax on gross earnings with respect to freight.

(d) The eliminationof practices that are no longer justified whereby the railroadsprovide various services to the Governmentwithout covering their cost (for example, mail carrying, reduction on passenger fares, etc.).

(e) The making of arrangementsfor the appropriatespecialized agency to attend to administration,provision of medical services, payment of pensions and all the other social security allowances rather than having the railroads pay these costs directly.

If these measures are adopted and if the directives outlined are vigorously followed, it is reasonable to expect that the operationaldeficit of the railroads can be written off within the next six years. The financial backing that has to be given them by the Federal Government (at the moment Ps 2,500 million per year) could then be cut substantially.

(2) Highways and Road Transport

(a) Highways

Thanks to the volume of investmentsmade in highways in the past, the primary highway network is now reasonably complete. Efforts should now be directed toward improving it to meet traffic demands. This will require constant improvementsin the collection and processing of traffic data, in surveys and in project appraisalmethods so that extensionsor improvements to the primary network are effected in accordance with adequate specifications and in a rational order of priority. The emphasis of highway development strategy should now shift to secondary and local roads. This is essential in order to bring the large rural population into the economic life of the country and in order to curb the trend toward urbanizationas far as possible by making it attractive to remain in the country. This will require certain measures, including the following: ANNEX 1 Page 8

(i) The decisions that there must be less centralization and more participation of the States and local communities, accompanied by improved highway planning, design, construction and maintenance. The federal authorities should play an active role in providing advice to state councils and to local communities.

(ii) The introduction of directives designed to ensure that the transport situation is viewed as an inter- sectoral whole, which will make it possible to ensure that potential benefits from investments in highways are realized to the greatest possible extent by means of coordinated action with other Secretariats; this can be achieved by setting up a high-level Intersecretariat Planning Committee, composed of representatives of the Secretariats of Communications and Transport, Agriculture, Water Resources, Public Health and Welfare, Education, Finance and Public Credit, the state Governors, the agricultural credit institutions, etc.

(iii) The carrying out of a study to reclassify roads and highways according to their economic and social functions.

(iv) The making of a study aimed toward revising present bipartite and tripartite financing systems to ensure that there are sufficient funds available for the development of secondary and local roads.

(b) Road Transport

There is some evidence that the present system of route concessions and of rate fixing is not only ineffective but might also have con- tributed to a certain extent to the excess capacity and under-utilization of truck fleets and to operational defects. A thorough survey is called for to assess the economic and social cost of the present system and to outline the bases for a new policy for road transport regulations to foster its development on a nmore rational basis.

It appears that diesel road transport does not contribute sufficiently to the cost of the highways. It is also probable that diesel road transport is subsidized. Therefore an investigation is called for with a view to establishing the bases for an efficient policy as regards payment for the use of highways which will foster competition between road and rail transport on a sound basis and will recognize the need to be able to obtain funds on a fair basis in order to make it possible to shoulder the cost of highway development. ANNEX 1 Page 9

(3) Ports

Given effective planning and efficient operation,the ports of Mexico would be able to meet the growing needs of internationaltrade and at the same time generate much higher earnings than at present, including foreign exchange. To achieve these results, new policies, organizational reform and political measures will be needed in order to:

(a) Set the ports on a commercialfooting and under the managementof specializedpersonnel.

(b) Limit the role of the Customs Authoritiesto their basic function,transferring responsibility for warehouse supervisionto the port authorities.

(c) Implement a developmentstrategy concentratingon upgrading a limited number of ports, such as Veracruz, Tampico, Salina Cruz, Coatzacoalcos,Guayamas, Manzanillo and Mazatlan.

(d) Refrain from constructingany new ports until the existing ones have been improved substantially, unless the constructionof a new port is an intrinsic part of an important industrialor mining project.

(e) Organize handling companies and other companies performing port services so that they are run on efficient and profitable lines.

Measures required to increase the efficiencyof the planning and operation of the ports include the following:

(a) A recruitmentand training program with a view to enaging the services of top quality technicians(engineers, economists,analysts, financialexperts, etc.) to work on the staff of the agency responsible for port operations. In order to be able to introduce a modern system of port operationsin the short term, it will be necessary to establish systems of supervisionand accountingso that traffic studies and other specializedwork can be carried out in conjunctionwith Mexican and foreign advisers and also a trainingprogram for Mexican personnel to be conducted in Mexico and elsewhere.

(b) The abolition of the restrictionscurrently in force that prohibit freight trucks from entering port areas. ANNEXI Page 10

(i) The economic growth potential of transportand transport requirements,including port requirements - for the followingcorridors:

Mexico City - Veracruz Guadalajara - Manzanillo Coatzacoalcos - Salina Cruz Monterrey - Tampico

(ii) The potentiality and feasibility of river transport (preliminarystudies).

(iii) The problem of cargo transfer from one mode of transport to another. In some ports it seems that the cost of transferringcargo from the time it enters the port until it comes alongside ship sometimes exceeds the total cost of transporting the goods from their point of origin until entering port, and vice versa.

(iv) The feasibilityof using lighters to improve coast- wise trade, in view of the capacity of Mexican shipyards to produce lighters and tugs of high quality.

(v) The economic feasibilityof a port and industrial area in the Matamoros region and the possibility of integratingit with Brownsville (IJSA).

(4) Civil Aviation

This subsector is technicallyin a good position to play an importantrole in the future economic developmentof Mexico, especially in the field of tourism and the transportof export goods by air. For this potential capacity to be realized, the public, semi-publicand private organizationswhich now have a say in aviation policy, and which number more than twenty, must be grouped together under the supervision of one unit. This unit would be ultimatelyresponsible for bringing civil aviation policy in line with Governmentobjectives. As regards the coordinationof civil aviation with the rest of the transport sector, this is obviously the re- sponsibilityof the Secretariatof Communicationsand Transport (SCT). Major objectiveswill be:

(a) To revise the present national airport plan in the light of past developmentand future demand, establishing priority needs that require minimum further investment. ANNEX 1 Page 11

(b) To assist Aeronavesde Mexico and Compania Mexicana de Aviacion to improve their operatingefficiency and their financialperformance.

The measures proposed to accomplishthese objectivesare:

(a) The reorganizationof the SCT.

(b) The re-establishmentof the Airport Planning Committeewithin the SCT.

(i) The air traffic market inside and to and from Mexico, including charter flight operations.

(ii) The location and appropriatescheduling for the expansionand improvementof airports.

(iii) The present system of routes and tariffs.

(iv) Investments,organization and other operations needed to develop the transportof exportsby air.

(v) The feasibilityof and the benefits to be gained from the joint use by Aeronavesand Mexicana of ground facilitiesfor passengerhandling, aircraft maintenance facilities,etc.

(vi) The implicationsof having only one international airline.

(vii) The setting up of a system for the better utilization of the official air fleet for civil air service.

In view of the fact that Aeronaves is in financialdifficulties due to an excessive debt, a decisionwill have to be taken as to whether this company should be refinanced.

It will also be necessary for Aeropuertosy ServiciosAuxiliares (Airportsand Auxiliary Services) to pay the Federal Governmentreturns on the capital that the former has invested up until now in airports and also on capital it invests in the future which could easily amount to about Ps 2 million in the course of the next six years. AiNEX 1 Page 12

(5) PEMEX Transport

The volume of oil products transported is extremely great and therefore calls for considerable investments. In 1969 the traffic of oil products amounted to 19 billion ton-km whereas total traffic by rail amounted to 21.5 billion ton-km. During the last five years PEMEX's investments in transport and storage amounted on average to more than Ps 600 million, i.e., two-thirds of the average investment made by the railroads. PEMEX's decision to invest in pipe lines, port installations and tankers is having serious repercussions on other forms of transport and on the railroads in particular. To avert this situation, SCT will take the initiative and will encourage PEMEX and the railroads to cooperate to ensure that the most economic solutions are adopted to solve PEMEX's transport problems.

(6) Urban Transport

Although many of the problems afflicting the urban transport do not fall within the jurisdiction of SCT, their economic and social effect is a matter of national concern. The study of the transport problems of Mexico City prepared by the World Bank Mission recommends that no major investments be made until studies and surveys have been carried out. SCT will have to help with this task. ANNEX 2 Page 1

MEXICO

APPRAISAL OF A SECOND RAILWAY PROJECT

SECRETARIATOF COMMUNICATIONS AND TRANSPORTATION: RAILWAYS POLICY -

After a number of meetings between representativesof various public entities connectedwith transportationin this country, held at the Secretariatof Communicationsand Transportation(SCT) with the main object of devising a general concept or policy for transportation,we have arrived at one for the railways which, of course, represents a general consensusof the participants. It is as follows:

"The basic policy decided upon in line with overall objectives is to ensure that railway administrationis guided by business management criteria, not only operational and social criteria.

The SCT and the railway companies,in collaborationwith the Sec- retariat of the Presidency and the Secretariatof the Treasury and Public Credit, will lay down the basic guidelines that will serve as a frame of reference and a yardstick for evaluating results. These guidelineswill include the following:

(a) Preparationof a plan establishingquantitative targets for traffic growth, operational efficiency,employment, earnings, investments,etc. These targets will be the yardstick for evaluating the companies'real progress.

(b) Introductionof an effective cost accounting system in order to:

(i) provide a basis for fixing tariffs that reflect the costs entailed at different levels and for different types of demand; and

(ii) to be able to evaluate the net rate of return on investment projects.

1/ Bank translationof a resolutionapproved at the meeting of the Board of Directorsof the Mexican Railways held on April 12, 1971 under the chairmanshipof the President of the Republic. ANNEX 2 Page 2

(d) Upgrading of railway marketing and market research activities.

(e) A study of passenger and branch-line services to determine which of them are uneconomic and, where possible, phase them out.

(f) Selective increases in freight and passenger tariffs, combined with a system of continuing review of tariffs, to ensure that the revenue from each service covers at least the costs that would be saved if that service were not provided.

(g) Preparationof a detailed employmentplan, the minimum aim of which should be not to increase the number of jobs for the next 6 years. This plan should establish programs for reassigningand retraining senior staff under a special training program both in Mexico and abroad.

(h) Programming the diversificationof railway activities to ensure that they provide an integrated transportationservice.

(i) The setting up of an analysis unit to examine the economic feasibilityof projects for investment in railway infrastructure, works, equipment and material.

(j) If necessary, the hiring of domestic and foreign consultants, for specific assignmentsto be carried out in a set period of time, who will undertake to train Mexican executives and personnel.

The efficiency of the measures mentioned above will be reinforced if the followingmeasures are also adopted:

(a) Speedy completionof the amalgamationof the railway systems.

(b) Eliminationof the 12.2 percent tax on gross earnings with respect to freight.

(c) Assistance to the railroadsin obtaining foreign loans on more favorableterms than those obtained recently. ANNEX 2 Page 3

(d) Eliminationof practices that are no longer justifiedwhereby the railways provide various services to the governmentwithout recovering their cost (e.g., mail carrying,reductions on passenger fares, etc.).

(e) Making arrangementsfor the appropriatespecialized agency to attend to administrationand provision of medical services and payment of pensions and all other social security allowances, rather than having the railways pay these costs directly.

(f) A decision not to constructany new lines until progress has been made with implementationof the new coordinatedtrans- portation policy, except in the case where the new investments form part of an industrialor mining project with blanket authorization."

After this general policy had been establishedthe attached action list was drawn up.

Mexico, D.F., March 19, 1971 ANNEX 2 Page 4

LIST OF ACTIONS TO BE TAKEN BY THE MEXICAN RAILWAYS SECTOR TO IMPROVE THE INDUSTRY

This plan was the outcome of several meetings held between the main bodies active in the railways sector: the SCT, the Secretariatof the Presidency, the Secretariatof Public Works, the Secretariatof the Treasury and Public Credit and Mexican Railways. These meetings, held in the confer- ence room of the Undersecretariatof Communicationsand Transport,were also attended on occasion by representativesof CONASUPO, PEMEX, the Secretariat of the Navy and Almacenes Nacionales de Deposito, S.A., who were invited to state their views and report on problems connectedwith rail services. The relevant files contain summaries of all the meetings, at which the following plan of work was outlined. This plan will also form the basis of the agenda for discussionswith World Bank staff during their visit scheduled to begin on March 15 this year.

1. OPERATIONS:

AREASFOR IMPROVEMENT:

1.1 Traffic movements 1.2 Terminals 1.3 Workshops 1.4 Movement or repair of equipments* 1.5 Telecommunications and signalling systems 1.6 Track and structures 1.7 Automatic data processing

2. TRAINING:

2.1 Technical staff 2.2 Administrativestaff 2.3 Workmen

3. MARKETING TECHNIQUES:

RECRUITMENTOF NECESSARY STAFF.

* T.N.: "Shunting and repair of rolling stock: - the Spanish is not clear. ANNEX2 Page 5

4. ACQUISITIONOF EQUIPMENT:

TRACTIVE UNITS.

4.1 Investmentprograms

5. GENERAL INVESTiMENTPROGRAMS, BY RAILWAY:

5.1 Over two years 5.2 Over a minimum of 6 years

6. CONASUPO,PEMEX and ANDSA WILL SUBMIT THEIR PROGRAMS OF REQUIREMENTS AND INVESTMENTSAS OFFERED.

7. CONSTRUCTIONOF NEW RAILWAY LINES:

7.1 All participantsrecommended and in the event agreed that no new lines should be constructeduntil a coordinatedplan has been worked out that will make it possible to justify not only the investmentbut also operation of the line, i.e. until operations are proved justifiableby technical,manpower and financial criteria.

7.2 The Secretariatof Public Works and the Railways Directorateof the SCT, as well as the general management of all the railway undertakingsin the country,will put forward a general program for 1971/1976for new railway lines, without prejudice to the agreementmentioned in 7.1 above.

8. COST ACCOUNTING AND TARIFFS:

8.1 As shown in the attached program, the tariffs division of the SCT is working on cost studies and analyses and proposals for restructuringtariffs, in cooperationwith Mexican Railways and the Railways Directorateof the SCT.

ANNEX 3 Page 1

MEXICO

APPRAISALOF A SECOND RAILWAY PROJECT

Analysis of Railway Role Through 1976

Introduction

1. To test the viability of financialprojections and related action programs as described in this Report, this Annex studies the past and future evolutionof main indicators of N de M actively,namely freight and passenger trafficin a strongly competitiveenvironment and its relationshipto GDP and tariff level. All the data have been taken from Annex 18, the main source being N de M and SCT statistics. Money amounts are at constant prices. The result of the exercise is summarizedbelow. The last paragraphsof the Annex compare rail and road operating costs in Mexico.

Conclusions

Total % Growth Actual Forecast 1964/ 1967/ 1964/ 1970/ 1973/ 1970/ 1967 1970 1970 1973 1976 1976

1. GDP 21 23 49 19 21 44 2. GDP/capita 9.3 11.2 22 8 9 18 N de M 3. Freight tariffs -9 -9 -17 -12 14 - 4. Freight traffic 21 14 38 12 12 25 5. Freight revenues 10 3.4 14 12 30 46 6. Passenger tariffs -9 -7.5 -16 9 9 19 7. Passenger traffic 3.8 10.8 15 -6 -6 -12 8. Passenger revenues -5.7 2 -3.5 2.5 2.5 5 9. Total traffic revenues 6.8 3 9 12 25 40 10. Net assets 7.5 -1.5 6.0 2 2 4.5 11. Productivityof capital (revenue per asset unit) -7 4.5 -3 10 22 34 12. Men employed -3 1 2 - - - 13. Labor payroll 14 12 28 14 8 23 14. Productivityof labor (traffic units) 23 12 38 14.5 11 27 15. Revenue per wage unit -6.5 -8 -15 -2 16 14 ANNEX 3 Page 2

2. The critical targets which must be achieved in order to reach financial viability over the 1971-1976 period are:

(i) increase of freight (14% over 1973-1976) and passenger (19%) tariffs;

(ii) substantial increase of labor productivity (27% in traffic units; 14% in revenues per wage unit); and

(iii) moderate increase of net assets (4.5%).

The feasibility of passenger and freight tariff increases is described below. The actions tending to higher labor productivity are described in paragraphs 3.06 and 3.12 of the text. All tariff and labor programs are incorporated in N de M's Plan of Action.

3. A conclusion of the above table is that the additional revenues generated under the plan will go

(i) to the staff (23% payroll increase);

(ii) to the railways (14% revenue increase over payroll), and from there, to users, by means of the commercial action.

Traffic and Tariffs

4. To test the aggregate traffic forecasts and the market reaction to an increase of railway tariffs, the elasticities of freight and passenger traffic to economic activity and tariff level have been measured using the model

log traffic = AO + AI log GDP + A2 log average revenue

In the case of passenger traffic, GDP per capita has been used. Constant prices have been used, deflating the freight revenues by the wholesale price index, and passenger revenues by consumer price index. The result, and its projections, through 1976, are as shown on page 3.

5. The projections of revenue increase in real terms through 1976 appear to be statistically consistent with: (a) the existing trend of economic growth; and (b) the market reactions in a competitive environment.

Railway Costs

6. The following paragraphs describe the test carried out to check the feasibility and economic rationale of the new system for railway rates devised by the Secretaria de Comunicaciones y Transportes (SCT).

7. SCT has calculated a new railway freight rate system based on the following principles, in each length of haul and commodity: GDP Annual Elas- Annual Elas- ticity Tariff ticity % Growth to % Increase % Annual Traffic to GDP Confi- Peal Tariff Confi- Real _2 d-w Growth in Real Terms Growth dence Terms Increase dence Terms R Test Calculated Actual A2 (1) (2) (3) (Li) (1)x(2) +(3)x(4X) FREIGHT

195 -lo99 (actual) 9979 7.0 -o.60 95 .45 .67 inconclusive 6.50 5.37

1958-1964 (actual) .99 97 7.2 -0.90 97 3.06 .67 inconclusive 4.37 7.50

1964-1970 (actual) .91 75 7.0 0.80 50 -3.25 .94 satisfactory 3.77 2.28

1970-1973 (estimated) .90 - 6.o -0.40 - -3.87 - 3.85 -

1973-1976 (estimated) .90 - 6.5 -o.go - 4.o - 3.85 -

PASSENGER

1958-1969 .73 99.9 3.4 -0.65 75 -0.55 .97 satisfactory 2.84 2.4 (actual) 1958-1964 .65 99.5 3.6 -o.65 75 1.h2 .97 satisfactory 1.63 h.o (actual) 1964-1970 2.20 80 3.4 3.00 50 -2.38 .84 satisfactory nil nil (actual)

1970-1973 1.20 - 2.6 -0.80 - 3.0 - - 0.70 - (estimated) 1973-1976 .80 - 3.0 -0.20 - 3.0 - - 1.80 - (estimated)

CDI Ua07Jb ANNEX 3 Page 4

(a) it will cover railway long run variable costs, including vehicle depreciationand way maintenance;

(b) it will be below road rates;

At the average length of haul of carrying the commodity by railway, the new tariff system follows the proportion:

Highway rates = Highway transport cost (includingroad maintenance) Rail rates Railway operating cost + estimation of difference of railway/roadservice quality

This proportionality,however, has been adjusted by SCT in short hauls (a) by reducing somewhat the theoreticalrailway tariff to give the railway a chance for competition,or otherwise (b) by increasing the tariff, discourag- ing the use of railway in short hauls, when the theoretical railway tariff could not be reduced furtherwithout falling below marginal cost. In long hauls, the adjustmenthas always been downwards to pass on to users any possible surplus.

8. Out of 116 commoditiesrecorded in the SCT tariff study, Table A at end of Annex studies 28, representingabout two-thirdsof N de M traffic, and lists them by decreasingorder of ton-km as given in 1970 N de M statistics. Using the SCT charts which plot rail and road operating costs and rates for each commodity in function of the length of haul, column (6) represents the new railway rates, column (7) representsroad rates, and column (8) is the ratio road/railwayrates. The adjustmentsreferred to above in paragraph 6, as they have been made in hauls other than average, do not apply to the table, which is a cross section of railway and road rates at the railway average length of haul. Column (5) lists railway long run variable costs by commodity, at the average length of haul, before making allowance for differ- ences in the quality of service.

9. First, the conclusions to extract from Table A are:

(i) Substantial rate increases are necessary in iron ore, crude petroleum,sugar cane, coal, maize, and sorghum seed. These commoditiesaccount for about 30% of N de M's freight traffic but generate 60% of freight traffic deficit;

(ii) Rate increases are also necessary in coke, cattle, wheat, fluorite, asphalt, fertilizers,baryta, sulphur, animal feed, and sawn timber,which, accountingfor about 20% of N de M's freight traffic, generate 18% of freight traffic deficit; ANNEX3 Page 5

(iii) Rate increases are also granted in commodities, such as gas for fuel, cellulose, mineral of zinc, lime and many others where the railway can offer an adequate service and still have rates well below road rates.

10. Second, the railway and road costs obtained will be used as proxies for the calculation of economic benefits carried out in Annex 17. Next paragraph tests the appropriateness of the road operating costs as obtained in Table A.

Road Costs

11. The average road operating cost obtained from the sample of 28 commodities, 1.84 x I 10.3/tkm = j 18.9 tkm, can be calculated as follows (data from SCT and SOP; taxes excluded):

Type of Truck 2 axle 3-4 axle 5 axle

Average capacity, ton 10 17 22.5 Speed of minimum cost km/h 60 50 50

Operating Costs, #/km

Crew 35.0 40.0 45.0 Fuel 17.1 29.8 8.8 Oil 0.8 1.4 2.8 Tires 5.5 17.7 23.8 Repairs, materials 11.6 18.3 14.9 Repairs, labor 8.3 12.0 11.2 Depreciation /1 12.6 22.2 32.8 Insurance 4.2 16.2 13.7 Road maintenance 1.7 /2 3.4 /3 0.4 14 Total Mkm 96.8 159.2 154.4 Load factor (incl. empty haul) 50% 50% 50% i/net tkm 19.6 18.8 13.7 Distribution of Mexican truck fleet 74% 18% 8%

Weighted average, t/tkm 18.9

/I DlepreciationMkm 100 nepreciation Ikm ' 1,600 + 0.029 x speed

/2 10% of cost of fuel ) /3 11.4% of cost of fuel ) see next paragraph /4 16% of cost of fuel )

12. In the light of the scant available information on road user charges, road maintenance costs have been related to the size of the truck and to consumed fuel. The data have been taken from Chapter VI, part B, Volume II, IBRD-PTR 88 (1971 Report). Taxes are excluded. First, the ANNEX 3 Page 6 volumes of gasoline and diesel consumed as percentagesof total motor vehicle consumptionhave been calculated;gasoline represents, since 1966, about 68% of motor vehicle consumption,and diesel represents 32%. Second, cost of motor vehicle consumptionof gasoline and diesel has been estimated. Tile road maintenance expendituresdivided by the cost of fuel consumed and multiplied by the percentagesmentioned above give the ratios (a) road maintenance expendituresattributable to gasoline/gasolinecost, and (b) road maintenance expendituresattributable to diesel/dieselcost. The ratios are about 10% for gasoline and about 16% for diesel. The proportion of gasoline attrihut- able to trucks should be higher than 10%, as this 10% is the average between trucks and private automobiles,which are assumed to cause lower maintenance expenditures;further refinement is not justified, however, for purposes of calculatingthe average road transport cost of paragraph 11.

April 1972 NEXICO

APPRAISALOF A SECONDRAILWAY PROJECT

Freight Operating Costs and Rates by Road and Rail

N de N actual data Estimated Cosmmodity Average length tkm, % of total Average long-run 31, Ratio road rate of haul, km million freight traffic rate variable cost SCTts new rail rate 3/ Road rate new rail rate

(1) 11.8- _2,13 /---__ _-_---(--tkm-)2------(6 ------(7) (8) = (7) : (6) Iron Ore 572 2,132 11.86 5.4 8.9 Y/ 8.9 20.5 §.31 Maize 673 1,146 6.38 7.6 9-4 1/ 10.4 23.1 2.22 Crude Petroleum 396 1,005 5.59 9.2 i4.6 1/ 11.6 23.5 2.02 Wheat 610 901 5.01 7.8 9.6 T/ 10.8 20.2 1.87 Sorghum seed 842 866 14.82 6.6 8.8 9.8 19.5 1.99 Fertilizers 502 73) 4.09 10.1 11.4 12.5 21.7 1.73 Scrap iron 684 635 3.53 10.1 7.4 / 1)4.0 20.5 1.46 Steel products 698 584 3.25 11.4 7.0 2, 14.5 26.2 1.80 Fluorite 699 583 3.25 7.0 9.3 -/ 9.8 26.6 2.70 Zinc (mineral) 896 429 2.38 7.7 7.7 21 15.3 19.5 1.27 Gas for fuel 1,344 419 2.33 13.2 13.0 2/ 17.5 23.6 1.34 Coke )416 360 2.00 12.0 13.1 1/ 13.1 23.2 1.77 Sugar 415 308 1.71 10.7 10.7 v/ 12.4 22.6 1.82 Cement 119 303 1.68 14.0 15.5 2/ 19.7 25.8 1.31 Baryta 842 259 1.44 5.6 8.3 V/ 8.3 19.0 2.29 Sulphur 276 217 1.21 10.1 12I4 1/ 15.1 25.2 1.67 Cellulose 908 180 1.00 9.0 9.02/ 12.0 19.2 1.60 Asphalt 73)4 172 o.96 8.6 12.2 TI 12.2 19.4- 1.58 Animal feed 48 152 0.8)4 11.8 1)4.21/ 15.3 23.1 1.51 Components for vehicles 959 1uS5 0.80 19.9 20.0 2/ 22.1 25.5 1.15 Sodium products 638 123 0.68 10.1 10.5 2/ 11.7 20.0 1.71 Construction steel work 773 118 o.66 12.4 12.5 2 16.0 25.8 1.61 Timber, sawn 743 104 0.58 10.8 12. V 12.6 19.9 1.58 Cattle 607 95 0.53 12.8 23.5 1/ 23.5 23.9 1.01 Sugar cane L)6 8)4 0.)7 9.6 27.4 l/ 27.4 41.2 1.50 Lime 90 39 0.16 13.5 20.2 2/ 20.2 31.0 1.53 Hides and skins 1,240 32 0.17 15.0 8:05T/ 12.4. 18.7 1.50 Charcoal 1,018 20 0.11 8.3 13.5 V 13.4 19.0 1.42

Average (Total) 472 12,145 67.49 11.0 10.3 12.11 22.22 1.84

1/ Based on N de M's most recent cost calculation

2/ Costs taken from Appendix 1, Part A, Vol. II, IBRD - PTR-88 (1971 Report), and updated to 1970

3/ From SCT draft study of tariffs

ANNEX Page 1

MEXICO

APPRAISALOF A SECONDRAILWAY PROJECT

Outline Terms of Reference for Consulting Services in N de M

Objective

1. The objective of the Consultants' services is to assist the FerrocarrilesNacionales de Mexico (N de M) in its policy of operatingon sound business principles so that it may play its proper role in the transport sector of the countrywith maximum efficiency,and to train Mexican national personnel in modern railroad techniques, taking into account the rapid technologicalchanges in the industry.

2. As a start toward this goal, the Consultants'services will provide assistancein the implementationof a Program of Action and trainingpersonnel in the followingareas:

(a) Electronicprocessing;

(b) Telecommunications;

(d) Line and terminal operations,including locomotiveand car control;

(e) Preparationof a Corporate Plan including manpower planning; and

(f) Locomotiveand car maintenance.

The specific sub-areas are detailedin paragraph 8.

Scope of ConsultingServices

3. In the conduct of this work, the Consultantsshall cooperate fully with N de M, which will assign counterpartpersonnel to work with the Consultants. ANNEX 4 Page 2

4. The studies of the World Bank in 1963 and 1970, as well as the report of Tecsult InteramericanaS.A./Canadian National Railways and the reports on the 1972-1973 InvestmentPlan, will forn the basis of assistancein the fields mentioned in paragraph 2.

5. It is intended that the work shall be divided into two stages, extended over 24 months. The first stage is not expected to require more than three months' work for a team of seven highly qualified experts who will define objectivesin writing and establish written programs of action to achieve maximum efficiency in each of the six mentioned fields. The team shall have a coordinatorand a deputy coordinatorwho shall be of different disciplines (e.g., engineer and economist/financialexpert) and shall remain in Mexico over the 24-month period of Consultants'assistance. The second stage of implementation will begin immediatelyupon completionof the first stage. In the first two months of the second stage, the recommendationsof the Consultants will be reviewed by N de M and the recommendationsresulting thereof will be sent to the Bank for comments. Upon receptionof Bank's comments, N de M's management will decide with the Consultantswhich parts of the Program of Action are to be implementedby N de M's staff and which parts will require further Consultants'assistance. The five Consultantsnot staying permanentlyin Mexico will make periodic visits to N de M during the second stage to observe the progress that has been made in their respectivefield of action and to offer further advice as may be necessary.

6. The total work load of the Consultantswill cover at least 72 man-months,but this may be increased to a maximum of 98 man-monthsif and when the Bank, with the agreementof N de M, considersthat work in all or any of the fields of action shall so require. The experienceand qualificationof the individualexperts proposed by the Consultingfirm will be subject to Bank approval.

7. The Consultantsshall make progress reports available to N de M at about three monthly intervals. N de M will make availableto the Bank a copy of these reports as soon as possible.

8. The specific sub-areas of Consultants'assistance are: ANNEX 4 Page 3

A. Electronic Processing

(a) Propose teleprocessingnorms for:

(i) Car control;

(ii) Locomotive control;

(iii) Inventory control;

(iv) Revenue control;

(b) Study suitability of existing management information systems on:

(i) Train operation;

(ii) Freight and passenger traffic;

(iii) Operating revenues and expenditures;

(iv) Freight car supply to users.

B. Telecommunications

Analyze traffic flows and project them for the next five years; and determine time-phased needs in telecommunications and signalling for the next five years.

C. Costing, Financial Targets and Budgeting

(a) A costing system and cost control system;

(b) A budgetary control system;

(c) Norms for analysis of market and railway services at present and for the next five years, to determine the necessary adjustment of existing services;

(d) Norms for the analysis of competitive services for the next five years.

D. Line and Terminal Operations, including Locomotive and Car Control

(a) Determine present flows of freight, passenger and express traffic; analyze market and competitive services, and project traffic flows for the next five years;

(b) Study and project train flows to determine the needs for construction of sidings, installation of signalling and other facilities to ensure safety and easy traffic flowing; ANNEX 4 Page 4

(c) Analyze present capacity and operating procedures of major and minor yard systems. Prepare a staged program for the next five years modifying or increasing capacity of yards, and establish yard and controlling handling procedures;

(d) Determine number and types of locomotivesrequired for the next five years to handle traffic as projected in (a);

(e) Determine types of cars to be purchased as derived fram freight traffic projection for the next five years;

(f) Establish proper methods and control to improve safety of train operations;

(g) Set up a group for preparingmethods to control day-to-day operation.

E. Corporate Plan, including Manpower Elan

(a) Establish N de M's Corporate Plan in the next five years and staged plan for implementation;

(b) Establish evaluating procedures and railway investment programs for the next five years;

(d) Establish job training programs.

F. Locomotive and Car Maintenance

(a) Analyze present situationof motive power and, consideringmaintenance costs and service needs, prepare a program for modernizing,repairing and, where necessary, scrapping of locomotives;

(b) Analyze the installationof main workshops to determine, taking account of operational needs, the workload and work standard in each workshop;

(c) Prepare a staged program for maintaining and repairing locomotives and cars; (d) Establish methods and standards of protection and quality control for maintaining and repairing locomotives and cars;

(e) Determine maximum locomotive kilometrage between inspections.

February 7, 1972 CA '0 - 4 '0 ~~~~~~~~~~~~~~~~X~~~~ 'NNX0

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CC iN 8 8 8 8 8 c ocAH =

o H H N H N 84 XL 0 8a. Ot

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NEXCO ge APPRAISALOF A SECONDRAILh?Ar PhO3ECT

0P-ratirw btti.tic. (N M1)

1966 1967 1969 1969 1970

R..tou-k opre-ted _ ,t.,d.Md gaog. 13,248 13,260 13,261 13,305 13,412

- narrom geoge 505 526 526 504 L,18 T ote1 13,753 13,786 13,795 13,809 13,910

Tr-in-km (in thoes.d,,)

Oa.se..er 16,290 16,305 16,234 15,909 16,033 'tD:ed 3,933 3,953 3,973 3,877 3,8094

Freigbt 17,875 17,158 16,92b 17,276 19,023

Ser-ice 127 115 141 176 ILL

Potal 38,225 37,531 37,272 37,238 39,094

Sail-oar lao (in thorsands) 292 338 753 953 993

Locomotive-lo (in thouna-de)

Posne-ger 16,564 16,597 19,048 19,070 19,369

Cixed 4,080 4,093 4,176 1,296 .,21bI

Freight 25,266 24,699 25,347 28,820 31,593

Ser.olo 307 285 347 327 306

Tard 6,187 6,367 7,609 6,012 ., 58

Total 52,404 52,0141 55,527 60,155 62,572

toober of looo,otlve,

lteae,, In.stok 1435 354 140 -

Under or awaiting re-air 98 56 a -1

In traffij 337 295 99 -

2isol: In stock 759 733 971 815 91

Under or .waiti.g re-par 56 76 33 61 41

In trafflo 703 687 907 '515

3l1ectric: In etook 9 9 9 0 Q

3nder or- .,iting repair 4 4 5

In tr-ffic S 5 4

, diesel locomotives under or -ooloing re-aIr Inohop- 7.1 10.2 11.6 7.5 7.5

Di-se loooa-ti-oe in troffro:

Pa-senger seroice 135 135 It, S 146 1S2

0ioed sererion 52 12 52 S7 52

Freight -1r-loe 306 300 3- '36 I1'l

lYrd, -gi-neering bll0t, et-. 121 120 111 120 132

Locomotiroe-km Ir diesel lonorot,"e i1 traffIc:

P.ssenger 121,5C0 121,610 130,30C1 136,100 130,7CO

Vi30d 75,600 ',,1o0 80,300 80,700 01,211

Fre.ght 6,1 c63,010 6Z,5006, 66,01 0 2

A-erogo, all p22b10 tra-ffo nrvice- 6,316 P,,6o0,770 p 83,40G0 0,f

Lo2oootIve-km >00 diesel lgoomotive - stook,

111 public tr-Mlc servioes 71,600c1,7,73 1,100 03,170 '3,1CC

Paooeocere,no. (million) 33.7 34.8 3S.1 35.3 33.1

laa,eocer-loe (mOllloo) 3,121 3,263 3,4'$ 3,090 ;i3

P..,e..er train ehile-lo, (milliol)

Pass-c r-oarrving-- 1O6.0 01.0. 01o.. 113.0 111.'

Baggage 6.2 6.1, 0.2 '.3 3

Mail 13.0 13.5 13.3 1.1 Ib.,

b:preo.- 19.5 1F. 19.3 10.5 1P.2

TOto ll,b.7 11.-.9 100.0 157.5 001.0 LI I [I I a q H

- ,''1 - 0 N

8 t0. H- H 0 H- H- H-

- - ad - - H- - * * * *tt a. 00 0 H- H-

HH' 00.H-1-IJH H- - - 00 H- H-l0.H0H-3HO 3< -

H-ta 31000 -d NINXICO

APPRAISALOF A SECONDhAILWAY P283 Cl Operat og Statistics (Concluded) (N de M)

1966 1q67 1969 1969 1970

Freslht-crr ton (thoioc-0os'

Loadei 1.12,476 4c:7,238 405,172 461,268 473,8f5

252,279 247,259 2h5,612 283,411 289,773

Tot:l] 665,205 655,),49 650,7Al 741l,679 763,628

% loaded car-km of total car-k, 62.1 62.2 62.3 61.9 62.1 ',au,berof freirht caro:

Tn traffic on N de M lines:

N de. cars 16,427 16,°3Q 17,259 16,935 18,062

Other Mexican reilway cars 1,201 1,392 8,657 0,347 8,187 Mexiran p,i-ete-ow7nersl cars) 7,679 7,510

Foreicn ori vate-oerI 'ero) 3,,05 4,216 j7,029 7,205 8,3Q2 Foreirn rI 11y cIrs 7,09 7 4,115 7,497

Total care in I de M traffic 32,113 33,491 33,831, 33,335 38,677 1 l nder or awaiting repairs;

N is N sass 1,180 1,871, 1,832 2,179 2,052

Other c-rs 110 1J7 2146 250 2)13

Total cars on line 33,442 35,252 35,512 35,764 40,972

N de r cars qmother I,-., 1,20c) 1,?7) 1,629 1,800 1,370

7qti 1 li de I -rl in stock 1, n07 10, '13 20, 716 20,914 ?1,484

nof 1N de wown cirs under or awaiting repair 6 7 s.6 11.1 10.2

varviceible car-days tho-onds 1],721 12,22L 1?,3P4 12,16' 14,11P Aser ,'e car-lod, loade1 cor- only 'tons) 7, 30.6 142.0 3.3 30.3

Ton-Is, er service,ble car-day 1,310 7 71' 1,375 1,4h5 1,31k

'O r-va Eer sesoisrable co r_day 02.8 1. 52.' 61.7 54.1

N'Is-r of cars Inaded (ttlous.sd) 927 16 30' 1,0'8 1,013 Oar t. rO-aroost 1lo~,' ' 12. 17. 13.' 17.7 11.7 13.Q Average number ar oars per freligt troins-

Loaded 22.1 22.8 77.4 25.5 24.n

;hpty 39 13.' i5.13.51S." 11.6

l'otel 35.2 36(.' 4.p11 . 38 n

Jtob-ic 1c 1

ANNEX 7 Page 1

MEXICO

APPRAISAL OF A SECOND RAILWAY PROJECT

N de M's Plan of Action 1972 - 1976

1. N de M shall (i) prepare; (ii) introduce, no later than December 31, 1972, or such other date as shall be agreed with the Bank; and (iii) carry out a corporate plan designed to achieve the targets set forth below:

1972 1973 1974 1975 1976

Number of staff 59,000 59,000 59,000 59,000 59,000

Net operating ratio /1 1.43 1.43 1.27 1.30 1.17

Net ton-km per freight train-hour 20,000 20,000 20,000 20,000 20,000

Locomotive-km per annum per main line locomotive in use 90,000 92,000 95,000 97,500 100,000

Locomotives under or awaiting repair in workshops and running sheds as a % of total fleet 15% 15% 15% 15% 15%

Ton-km per serviceable car-day 1,450 1,560 1,650 1,700 1,750

Freight cars under or awaiting repair as a % of total fleet 9% 8% 7% 6% 5%

/1 Net operating ratio shall mean the ratio of total operating expenses to total operating revenue, excluding any subsidies paid by Government to N de M and the amounts payable under paragraphs 4 (iii) and 5 (c) of the Plan.

2. N de M shall establish, no later than December 31, 1972 or such other date as shall be agreed with the Bank, a traffic costing system allowing the determination of: ANNEX 7 Page 2

(a) the avoidable cost of passenger train operation (shown separatelyfor first and second class passenger transport) and of mail and express services;and

(b) the long-run variable cost of freight transportby commodity.

3. In order to achieve the operating ratios set forth in the table included in paragraph 1 of the Plan, N de M shall, inter alia, recommend to Governmentand take all action necessary for the implementationof such recommendations:

(a) the amount to be paid by Government,starting no later than July 31, 1972 or such other date as shall be agreed with the Bank, for the carriage of mail by N de M;

(b) not later than December 31, 1972, a program for the curtailment or abandonmentof, and/or increase of fares for}passenger transportand express services with deficits, such program to be designed in such a way as to eliminate said deficits; and

4. N de M shall from time to time, beginning not later than July 31, 1972, recommend to Government (i) such adjustmentsof its freight rate as shall be necessary to cover at least long-run variable costs: (ii) a procedure for the identificationin N de M's accounts of the subsidiesgiven to users of N de M's services in case Government should not authorize the said adjustments in freight rates; and (iii) the amount to be paid by Governmentto N de M as compensationof losses if Governmentshould not authorize the curtailmentor abandonmentof services or the increasesof fares referred to in paragraph 3 (b) of the Plan.

5. To eliminate deficits on low density branch lines, N de M shall:

(a) carry out a cost study of branch lines with low density traffic, to be completednot later than December 31, 1973 or such other date as shall be agreed between the Bank and N de M ( outline terms of reference in Annex 8);

(b) taking into account, inter alia, the recommendationsof the studying referred to in the preceding paragraph 5 (a), take all action, including the request of all necessary authority from Government,to reduce operating costs; and

(c) recommend to Governmentthe amount to be paid by Governmentto N de M as compensationof losses if Governmentshould not permit N de M to take the actions for which authority has ANNEX 7 Page 3

been requestedpursuant to the precedingparagraph 5 (b), such compensationto be paid within six months after the referred to authorityhas been requested.

.6. It is recognized that N de M should achieve by no later than 1981 a financialposition permitting it to pay all operating expenses, service all its debt and make a contributionequal to at least 40% to its investmentsthereafter, and to this end the financialprojections and associatedactions of N de M shall be reviewed and adjusted periodicallywith the Bank according to the progress made in the 1972-1976period.

April 1972

ANNEX 8 Page 1

MEXICO

APPRAISAL OF A SECOND RAILWAY PROJECT

A. N de M's branichlines of low traffic density

(Based on IBRD, "An Appraisal of the DevelopmentProgram of Mexico", WH - 137 a, July 13, 1964; volume V, Annex IV, Transportation; Part I, Railway Revenues and Accounts,Viability of Light Traffic and Lines (page 83)).

1. On the basis of net avoidableexpenses, or differencebetween avoidablecosts and revenues to be lost if the lines are closed, 4,150 route-km of N de M were studied in 1964. Avoidable costs comprise track maintenance,maintenance of line-sidebuildings, station staff, train running costs and direct supervision. Revenues to be lost apply to all traffic using the lines, whether originatingand terminatingon it or not; this may be an overestimationof revenues and, therefore,the avoidable losses given by this calculationare, if any, a conservativelower floor. Freight operating revenues were calculatedfrom an analysis of freight traffic distributionby remitting and receiving stations. Passengerre- venues were based on the average revenue per train-km for the whole railway, that is, passenger trains at Ps 11.66/train-kmand mixed trains at Ps 3.04/train-km. As mixed trains are confined generally to sections of low traffic density, and passenger trains are not run unless they carry a minimum number of passengers,the use of average revenues per train-km in those branch lines is not expected to introduce distortions.

2. Since 1964, very few changes in traffic have taken place on the passengerside and costs may have increasedby about 20% after making allowancefor economiesof operations. The 1971 report estimated (Volume II Part A - Railways,para 3.40) that the possible excess of direct operating cost over revenues in 1970, to be avoided by closure of the lines, ANNEX 8 Page 2 was about Ps 90 million (US$7.2million). The excess of revenue over out- of-pocket cost is estimatedat about Ps 36 million in 1970 (US$2.9million). The list of these lines, which showed in 1964 an excess of direct operating cost over revenues, is as follows:

Section Route/km

1. Paso del Toro-Alvarado 51.1 2. Oriental-Teziutlan 88.6 3. Tehuacan-Oaxaco-Taviche-Tlacolula 325.7 4. Cuautlixco-Puentede Ixtla 76.5 5. Emp. Los Arcos-Atecingo 97.4 6. Atecingo-Tlancualpican 18.5 7. La Soledad-Tepa 15.0 8. Ventoquina-Beristain 33.9 9. Emp. Sototlan-Honey 22.0 10. Tula-Pachuca 70.4 11. Salamanca-Jaralde Progreso 35.3 12. Silao-Guanajuato 23.7 13. Acambaro-Apatzingan 350.4 14. Rio Laja-San Luis de la Paz 40.5 15. Durango-Tepehuanes 216.7 16. Durango-Aserraderos 140.2 17. Purisima-Regocijo 55.2 18. Durango-FelipePescador 265.9 19. Torreon-Encantada 283.7 20. Emp. Tamos-Magosal 80.8 21. Torreon-Tlahualilo 92.3 22. Allende-CiudadAcuna 117.9 23. Maravatio-Zitacuaro 92.2

Total 2,593.9

3. An assessmentwas also made in the 1964 Report of further 1,547 km of N de M lines, showing losses on direct working expenses that are roughly estimated at about Ps 35 million (US$2.8million) in 1970. In the case of these lines, however, the surplus of revenue over out-of-pocketexpenses on traffic hauled to and from the sections over the remainderof the system amounts to a figure that is estimatedat about Ps 47 million in 1970 (US$3.8 million). If the whole of this traffic were to be lost as a result of closing these branches, a net loss estimated at about Ps 12 million would result to the railways. If only 50% of the traffic were to be lost, the closure of the ANNEX 8 Page 3 lines would result in no saving to the railways. This group of lines should be studied separatelvand in more detail, and the present profitabilityas- sessed. The lines are:

24. Ixtepec-CiudadHidalgo 25. Rodriguez Clara-San Andres Tuxtla 26. Julia-Balsas 27. Los Reyes-Cuautla-Atecingo 28. El Rey Pachuca 29. San Agustin-Apulco 30. Vanegas-Yatehuala 31. San Bartolo-RioVerde 32. Adrian-Rosario 33. Yurecuaro-Los Reyes 34. Penjamo-Ajuno

B. Outline of Terms of Reference for a Study of Low Density Lines in the Government'sRailways

4. The avoidable costs and revenues of the 34 lines listed in paragraphs 2 and 3, plus the lines that the railways and the Governmentdeem necessary to study, will be calculatedas outlined in paragraph 1 above. The lines will he ranked by decreasingorder of net avoidable expenses (excess of direct costs over revenues to be lost if the line is to be closed). The study will,comprise two phases. In Phase I a comparisonwill be made for each line of the annual avoidableexpenses with the annual incrementalcost of road transnort to haul the traffic now being carried by the line. If the road incrementnlcost is not more than 50% of the avoidable railway expenses, the study will conclude at that point with the recommendationthat railway service should be discontinued. If incremental road cost is more than 50% of the railwav cost, the study of the line will continue to Phase II.

5. In Phase II of the study, a forecast will be made of total transport demand on the existing and potential transportservices for 15 years, taking into account planned development likely to generate additionaltraf- fic. The economicallyappropriate division of total traffic between existing or potential alternativemodes of transport and the railway line in question will he estimated on the basis of (a) the short-runmarginal costs (i.e. avoidable costs) of each alternativeand of the railway line, and (b) the costs of distributionthat are related to the particular mode, includingwarehousing, inventoriesloss and damage, etc. The effects of any planned or potential cost-reducinginvestments or operational improvements in the railways - as contemplatedin the Program of Action or Corpor- ate Plan - and competingmodes of transportwill be taken into account. ANNEX 8 Page 4

6. A comparison to obtain the least cost solution will be made between (a) the present value of the total investment and operating cost streams on the assumption that an alternative (or group of alternatives)must carry the total estimated transportvolume, and (b) the present value of the total investment and operating cost streams on the assumption that railway services would carry any part of the total volume and the remainderwould be carried by the alternativetransport modes. A discount rate of 15% will be used.

7. If it were found that the least cost solution over the 15-year period would involve discontinuanceof particular railway services, the year for the discontinuancewould be that in which the savings in avoidable costs to be made by discontinuingrailway services are larger than the increasing costs in that year involved in carrying the total traffic by the alternative transportmode plus the discount rate (15%) multiplied by the value of any investmentsrequired immediatelyupon discontinuanceof railway services in order to handle the forecast railway traffic by the alternativetransport mode.

8. The annual net avoidableexpenses obtained by the studies of the lines will be reimbursed by the Government to the railways as provided in the undertakingsof the Government.

April 1972 AP10Ala4L CF A 000314 04103A1 31790CT

F-itght Traffi in 19Ye, 1969,19m0 and forecas.t for 139. 1"I and 1076

1,6, 1172 19, Il1 1976~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 o an d tik are Oropa of Product ton vo A1.I sI, oen, ton IcnLI tIny nor - sotoc AIR os ntk,nt ton ALI tLI an. re t son- - AtH tics Aos- 0) 1X wagon kI,c nolion J/tla. (000) wagon Ins illon. K/loa (000) wagon kns million `tk (Coo waoDs011, /w CO)cgn Is nlic tk ane o 0 jjn 'tkcs

'33 31', 13.0 4310 30 732 313 13.0 Forest 4'0 31 012 "0 1 02 . 3' 1 5 ' fj73 410< 303' 307 13 129 IC' 11.1 0,31,9 96 460 4,207 ni. AgrioItora1 7, 203 39 42 o, ' > 31 6.9l 1,10 1 0,2> ' 4 50 I10 18,311' ~ 3,1 11.1 8.730 389 I150 4,001 16.2 Livestock and d-i-od 15L 1. 39 11. 0, 1 5 IL, 1 1 34 11' Iv' 14o0o. It. i90 22 I3L1- Iv-? 212 23 737 196 16.2 220 24, 727 161 91 697 10.9 Mineral 2,200 53 9" ,58 F 2,282 9.. 11 1, It~ 0 25,19 01 25 17'~ 0.34, ` I-! 53 -'t 1,7o2 10.5 2,808 53 660 1,852 00.8 2,94)6 1,931 2,387 1 3.4 9,697 34, 324 2,902 11.9 Fst-oie- 1,915 31 siCD 1,9.j 12 L,2-3 32 .22 1,011 12 1. '35-, 3' 1.91 2.00C 12.2 0.3'n 20 1.9 2.312 12.1. 1,597 33 626 7,181 1.013 16.6 7.541 19 190 1,131 16.6 B.tldto,g 4.404. ,0 1$o 12 3, ,,I' 9' 159 86' 11 5.q50 I'11, 07 IL.- ',-22 30 ])~19' 50P 11,.1 1.0 10. 31.3 532 14.1 2,870 4.0 34.5 024 11.0 2,630 IsO 354 988 16,.2 Iaorganlo7 ~~~~~ '' 2,313~~.J) 52 25/ 5"J, 1C, 2,215 , 121 '1I 101 2,1 0 31>2 812 11.0 2,505 1 .0 620 3,463 15.0 9,070 44. 639 3,817 19.0 Iaduatrlal~~~~~~~~~~~~,1,02 .2 5 '1 3,>, 11 1, 15 L9 0,2 2.5 j10 ,03 1. 790 2001l 1 3.0 5, / ('2 002 3,710 15.1 5,588 43 0 90 5,946 10.1 10,686 47S 722 7.501 12.1 steal 05,,3 91 59, 3,00' .R0 ') f' c L0_ 11 ' 0,03P iC I93 197 0.1l 4' 1.' 981l 5.100 10 1 10,076 Ii" 887 1,155 19.9 1,673 25 6913 1,100 19.9 Other 1,20e 2' .; > 10 i,2I9 3' '0 t'-1 1: 1,253 20 lo0 053 1i,.5 1,50194 25 684 1,086 10.5 1,892' 25

7 12.0 61,308 12 198 23,600 13.2 Tonal, -rice freight 32,1.9, 61 .51 14,681 7.0p 70.111. L0 50 1- 310 9.6 30,321. ).2 3-2 1H0.00" 9.8 01.290 6 461 89,601 12.5 44,977 il 673 21,26

t 1/forret pIoo ols'~ f' -o

Source N de M,nltu' foeas

Noveber 10 1.

ANNEX 10 Page 1

MEXICO

APPRAISAL OF A SECOND RAILWAY PROJECT

Traffic Costs Extracts from Report No. PTR-88, Volume II, of May 13, 1971

B. Passenger Train Services

3.11 The revenue earned by passenger trains (i.e. passengers,baggage, express and mails) falls far below the costs that would be immediately avoided if the services were not to be provided. It makes no contribution to joint passenger and freight costs or to fixed costs. On the basis of a "fully allocated cost," passenger train services are responsiblefor over 80% of the railway operating deficit. Recognizingthat it would be unreal- istic to expect within the foreseeablefuture that fares and other charges could be raised to the extent needed to recoup all the costs incurred in providing the services, the mission has fixed upon immediately"avoidable cost" as a measure by which the adequacy of fares and other charges, or the justificationfor continuinga service, may be judged.

3.12 In determiningavoidable cost the most generous assumptionshave been made. For example, in the case of engine-housemaintenance for locomotives only the cost of materials used for the repair and maintenance of passenger locomotiveshas been consideredto be an avoidable passenger cost. Labor costs have been excluded on the assumptionthat should passenger services be discontinuedthe same number of men would continue to be employed, although less intensively for the maintenance of freight locomotivesonly. Similarly,in marshallingyards which handle both freight and passenger trains no part of the cost has been classifiedas avoidable passenger cost. This is on the assumption that the same number of yard locomotiveshifts and yard gangs would be employed if passenger trains were to be discontinued and only freight trains remained to be marshalled. Such assumptionspossi- bly understatethe avoidable passenger cost, but even so the position in 1968 was calculatedas follows:

Passenger Train Services 1968 Avoidable Passenger Excess of avoidable passenger train costs over revenues train costs revenues

...... Pesos million..

Nacionales 563 252 311 Pacifico 96 53 43 C al P 18 14 4 SBC 12 12 - Sureste 31 13 18 TOTAL 720 344 376 ANNEX 10 Page 2

C. Freight Rates

3.27 The cost study indicates that freight rates for the majority of commoditiesare sufficient to cover long-run variable cost and make a contributionto fixed costs. The rates which fail to meet this test are for the most part those on minerals (iron-ore,coal, coke, manganese,baryta and fluorspar),although sugar cane - on short hauls - some minor agricultural and industrialproducts, turpentine, charcoal and livestock fall into the same category. While there are indicationsthat the "value of service" principle has influencedrate-fixing, the average rate charged for each commodity (as reflected by the average revenue per ton-km) generally bears some relevance to factors which influence costs, e.g. loadabilityand length of haul, even though the actual costs themselvesare not known. The mission was informed that a study to determine traffic costs was well advanced on the Pacifico and was about to be started on the Nacionales. Such studies are long overdue. The proposal for unificationof all the railways will ne- cessitate the design of a new and comprehensivetariff structure. This is a task which, if it is to achieve its purpose of encouragingoptimum use of the railways' economic resources,will require a thorough knowledge of costs.

3.28 In Mexico much has been said in support of the concept of the railways as a public service rather than a profit-earningenterprise and "the greatest contributionto public service which the railways can make is to ensure they carry all the traffic for which they are most economically suited". Such generalizationsdo not provide any criteria of success or failure. The fact that a railway carries increasingvolumes of traffic is not evidence that it is operating in the national interest. To achieve the latter goal means that the economic and social costs of the resources consumed in the provisionsof each service and movement should be known. Once this informationis available,the tariff or pricing principlesfor a railway are (a) no rate should be below the marginal cost of providing the service, (b) no rate should be set so high that it diverts to or fails to attract from competitivemodes of transportany traffic which the railways can carry at a lesser economic cost, and (c) in the case of "captive" traffic, it is not set so high as to inhibit the demand for the goods involved by excessive monopoly pricing.

3.29 Increasedattention and emphasis should be placed on a determination of the appropriaterate for each commodity. This means increasedre- search and market analysis by the railway, including informationabout com- petitors'activities. For many of the high rated goods which produce a high multiple of long-run variable cost coverage,a trend has appeared which shows a reduction in the railway haulage relative to nationwidepro- duction. While this situationhas occurred to a much greater degree in other railways of the world, the Mexican railways may be unconsciously contributingto this loss of profitabletraffic because of rates which ANNEX 10 Page 3

are higher than those which would maximize the use of the railway as the most economic mode of transport. Truck competitionhas already captured a significantportion of high rated traffic, and for each commodityin which serious inroads seem to have been made the railway rate at the average length of haul is considerablyhigher than the long-run variable cost at this distance. Consequently,rate studies of high value commodities should be made to evaluate the overall financialeffect of bringing them closer to long run variable cost. The railway must attempt to forecast the impact of technologicalchange in the trucking industry,as well as follow road development,to assess the ability of truckers to make further inroads into the traffic still carried by rail. To determine the optimum rate for low value commodities,studies should be undertaken to assess the effect on the demand for rail transportof higher final prices to consumerswhen transportrates increase.

3.30 Even though reducing rates on certain high rated goods would increase the return to the railways in the long run, the short run effect may be to reduce revenues. To compensatefor this, the railways should test the demand elasticityfor low rated traffic also. The effect of raising rates on low rated commoditieswith inelastic demand for rail transportwould result in an increasednet return which could be sus- tained, since the increasewould still not be sufficientto attract truck competition. Governmentmay, however, decide that it is not in the public interest for the railways to raise rates on those low rated commodities which produce revenues sufficientto cover long-runvariable cost and make some contribution,however small, to fixed cost. In the case of rates which fail to cover long-run variable cost, however, they must obviouslybe raised to a level sufficientto cover such cost and, where the state of competitionallows it, by a further amount to make a contribution to administrativeand other overheads. If subsidies are essential to sustain the productionof, for example, iron-ore and baryta at Alzada this can in no way be considereda proper function of the railways. In examininga number of commoditiesthe mission assumed a minimum acceptable railway rate to be that which covers long-run variable cost plus 25%. This contribution to fixed cost is less than half the average con- tributionthat must be made by all freight traffic if the railways are to attain financial viability. The analysis was applied to: (a) commodities the revenue from which on the Nacionalesnow falls to cover long- run variable costs, and (b) those which now fail to cover the costs plus 25%. The results which are summarizedbelow indicate that on this basis additionalrevenues of Pesos 128 million might accrue. In practice,however, there is an elasticityof demand effect to be considered. ANNEX 10 Page 4

Estimated 1968 revenues Possible extra long-run (excluding revenue from variable 12.2% tax) rate increases costs ...... Pesos million.

(a) Commodities,revenues from which now fail to cover variable cost:

Sugar cane 12.91 8.79 7.35 Other agricultural products 8.31 6.92 3.47 Iron ore 108.88 76.79 59.31 Coal and coke 4.42 3.73 1.80 MAanganese 6.88 6.58 2.02 Baryta 16.56 12.00 8.70 Fluorspar 13.04 11.58 4.72 Sundry industrial products 25.31 23.58 8.06 Turpentineand charcoal 3.48 2.51 1.84 Livestock 14.37 8.59 9.37

Total (a) 214.16 161.07 106.64

(b) Commodities,revenues from which now fail to cover variable costs plus 25%

Total (b) 193.16 220.34 21.11

Total (a) and (b) 407.32 381.41 127.75

3.32 For the remainder of the rates little comment is necessary. The spread between the highest and lowest suggests that "value of service" pricing still has some influence in rate-fixing. By comparisonwith most other railways,however, the influence of this factor in Mexico is rather limited. The two commoditieswhich provide the highest multiple of long-run variable cost coverage are illustrativeof the continuationof "value of service" pricing: Average Long-run % coverage of revenue variable cost long-run Commodity per ton-km per ton-km variable cost (centavos) (centavos) (centavos) Paints 15.94 7.08 226 Lubricatingoils 16.65 6.54 255 ANNEX 1 0 Page 5

3.33 Translated into US standards these commoditiesproduce an average revenue of 1.86 and 1.94 US4 per US ton-mile;in many countries, these figureswould be considered not only as reasonablebut also, when considered against the costs of other transport modes, would be thought to be reasonably safe from competitionon the basis of transport price only. Road transportprices in Mexico, however, are very low; so low, as suggested elsewhere in the mission's report, as to raise doubts that road transportoperators pay the economic costs of providing and maintaining roads. Taking this factor of low competitiveprices into consideration and the higher quality of service which the road transportercan often give, the price-fixingflexibility available to the railways is more than usually limited. As a result, the railways must increase their service competitionto attract traffic.

3.34 The present railway tariffs and the related class rate structures- there is a separate one for each railway - are in need of complete revision. The unificationof the railways under one management that is under discussion would offer an ideal opportunityfor this to be done. At present, each railway has its own system of class and special or commodity rates. On the Nac- ionales only 5% of its traffic moves under class rates; on the other railways class rates account for 30% to 75% of total traffic. There are no through rates and traffic moving over more than one railway is charged separately for the distance it is carried on each railway. The number of special, or commodity rates, under which most traffic now moves are innumerable. Be- cause costs are unknown, it is probable that many rates are set in an arbi- trary or discriminatorymanner. Experience in other countrieshas shown that there is no greater deterrent to railway traffic than a multiplicity of over-elaboratetariffs. The same situationmust exist in Mexico where railway tariffs are probably comprehensibleonly to a tariff expert.

3.35 In revising the tariff structure, care should be taken to avoid the excessive taper on the class-rate curve which has been a feature of earlier tariffs. At very short distances the class rates have been too low to cover terminal costs; at medium distances they have been too high and have encouraged road competition,and at long distances have again been too low to cover variable line-haul costs. The mission suggests that an intensivestudy of freight traffic costs should be undertaken and, on the basis of its findings,a unified tariff should be designed in accordance with the principle laid down in paragraph 3.28.

MEXIGO

APPRAISAL CF A SEOND RAILWAYPROJECT 1972_1973 Investment Plans for all the Railways

Pesos Millions

Nacionales de Mexico Pacifico Chihuahua al Pacifico Sonora-Baja Californla Sureste Total

Ways and Structures

Bridges and Thnnels 150 40 13 37 - 240 Rails and Fastenings 236 60 8 - - 304 Extension of Crossing Loops 24 4 - - 28 Timber Sleepers 220 4 7 115 2 248 Track Maintenance Equipment 28 5 1 8 - 42 Staff Housing and Medical Services 80 26 9 11 - 126 Ballast 43 12 11 6 3 75 Line Revision 26 20 3 2 - 51 Tools, Switches and Welding Equipment 29 4 - 1 - 34 Miscellaneous 42 13 _ 3 -5

Subtotal 878 188 52 83 5 1,206

Terminals

Maintenance Shops 57 7 _ - 1 65 Yards 100 7 - 107 Stations and Freight Sheds 14 7 12 - - 33 Miscellaneous 18 114 2 - 34

Subtotal 189 21 26 2 1 239

Motive Power and Rolling Stock

Locomotives and Spare Parts 420 91 37 18 17 583 Freight Cars and Containers 625 140 96 13 13 887 Roller Bearings 21 - - 21 Passenger Cars 43 18 3 15 - 79 Workshop Machinery 51 10 L4 - 65

Subtotal l,160 259 136 50 30 1,635

Telecommunications 189 5 3 2 3 202

Consulting Services 244

Total 2,4C40 73 217 137 39 3,306

Price Contingencies 96 18 9 t 2 130

Grand Total 7,636 491 226 1L42 41 t .6t

November 1-1 '4!XItO AINEX 12

APPRAISAL OF A 8EODM iFAIWOAYPROJECIT 1972-1973 Ioosot-ot Plan f N de M

1922 l2o73 11 de M Prograi 1972-2Z973

(Peo8s Milliono) . (Pasos lmillions) (Psos MIllioms) (U% millon) 5

Local Foreign Total 1oeal Froegn Total toed toreign Total Loeal Foreign Total

Ways and Strmctree -

Bridge. 65 - 65 a5 - s5 150 - 150 12.0 - 12.0

Rails and F-toningo 20 100 120 19 9'! 11; 39 1"n 236 3.1 15.7 le.8

E.t.nimn e Co...ig Loops 14 - 3] 10 - 1Q 24 - 24 1.9 - 1.9

Timbor Sleepero 51 28 79 63 78 Ihl 16 1C6 220 9.1 e.5 17.6 26oek inte-nce EquiApent 4 22 26 4 13 i4 8 '2 Lo C.7 2.6 3-. StaT! No-sng 40 - 40 40 - 40 80 - 80 6.1 _.1

H.ellat 21_ 21 22 - 22 h 3 - 43 3.1.h

Li". 3evcisio- a 8 18 - 10 26 - 26 2.1 - 2.1

2ool_ S.ithcs and JelMccg Equdet 16 _ 16 13 - 13 29 - 29 2.3 - 2.3

Slscsllaneous 21 1 | 21 _ 21 12 - 62 3.4 - 3.1, Subtotal 125012 411 295 1A5 VIO 555 335 591 61.4 26.1 71.2 36.5 1 ,r,, lalc

Malintcconcn Shops 31 - 31 26 25 57 - 57 4.6 -

'loria 205 50 5C - 50 100 _ 10 9.0 - e.

3tati-n nd F.reight Sheds 7 ' I 7 - lb I3.l 1.1 - Slsaoiselar:eouc 9 _5 ,9 1 9 - 9 19 - 13 .h - 1.:

Sutobtal 97 92 92 _ 92 189 _ 19 15.1 _ lf. 2.2 P-7P, s -d Rolling St-c

Diosel -ocm,ti- cr p- ats - 05' 197 1233 2 33 - L21 .622 - 33.6

-rc1ght Zars 129 161 312 127 lS 313 2Se 367 !`25 2C.6 22.- 52 .-

Follcr Xoarings - 5 5| - 16 16 - 21 21 _ 1.7 17

!_25 - 14 1 _

"-r-sh1p 2quip-ent 11 11 22 9 22 27 70 ?1 51 1.6, . L.1

Sobt.tal 17% !.11 555 158 162 6C5 276 a.2 1,160 22.2 -6 92.7 JZ.6

eogmmur,anIcatgloas 45 SO 126 655 63 101 19 1 2.1 7. 1S2.1 ,c-sultice Se-7i-es 1 4 S 2 S 7 3 9 12 C.2 C.57 O.9

Total S.1 5i6 1,173 252 665 1,217 1.126 1,314 2,112 | . 106.2 195.1 _-q '~2

1re~and S.otl fLt 6S2 1,226 562 728 1,310 2,126 1,115 2,536 90.0 113.8 2z2.

N'-vccb- 1971 APPRAISAL OF A SEO03D RAIIWAY PROJECT

Freight Car Requiremente., end f 1973 (N de M)

Actual Projected Situation at December 31, 1969 1970 1973 19' 1973

1. Freight traff:c in net ton-kI p.a. (million) 17,671 i8,605 20,170 21,267 20.718

2. Average traffic in net ton-lo per day (thousand) 48,437 50,973 55,26o 58,266 56,763

3. Average car-iced, loaded cars only (tons) 38.3 39.3 40.0 41.1G 40.5

4. % loaded to total car-ho 61.9 62.1 62.o 62.3 62.0

5. Car-lotper serviceable oar-day 61.7 54.1 63.0 65.o 3b.c

6. Dbn-Innsper serviceable car-day;(3x/aS) 1,452 1,318 1,565 1,652 l,6c7

7. Tftal serviceable 00r0 requirad ;(2-6) 33,335 38,677 35,380 35,200 35,290 Distributed as belo,:-

(a) N de M cars 16,935 iS,062 19,700 20,100 10,,00

(b) Othes Meoioan rail-oy cars 1,201 1,392 2,241) 1,400 1.1-7

Ic) Mexican prOvote-ooners' cars 7,679 73,10 37,00 7.037 7,700

(d) F-reig private 0aflero cars 3,405 4,216 4,O0 3,650 3,825

(e) Foeign riway 4/,115 7,497 J7460 2,450 2,595

Total 33,335 38,677 35,390 35,200 35,290

8. % f N do M ocar uindr cc casitirg grpair 11.6 10.2 7.0 0.3

9. Total N de '5 cars n N de M! linee; 7 (a): [1-(i)" 19,114 20,'11 21,oS0 73< (-75

1l. N de N core on li-ns of other railways 1,800 1,370 1,000Bn

11. Total N de M cars in stock ;() and (10) 20,9__ 211_4 21,46Q 23,l 2',5S

New cars requiced 1971-1973 (23,550 - 21,434) *,3

Lees, Cace on order for delisey in 1971 "-o

Care requiced due to -rkso aid obooleo1ens. to December 31, l473 25Q3

Oars being consigned to work eqsipnent, 1971 350 7

Additional car requirsen-ts in 1972/73 . ,insum 2,

lcr-tia'g-oi-, S9 To tal

I/Ta eliminate risk sf sodden shcrtages of foreign freight cars, N de 5 has prepared a ta.to cedocs-d bv c-tvlrds by tle erd of 1973 the s-obe- sf foreign freight sees bOing osed in 1970. 2/Figare established by Con-ultants.

Source, N de M and Mission's estimat-s, Septesber 1571

Novenber 1971 APPRAISAL (F A SREX)NDRAIIlWA PRO.0JFT

Locomotive Requirements, end of 1973 (N de M)

Actual Projectedl/ Situation at December 31, 1969 19!0 1973 1974 1973

1. Freight net ton-Ikn, freight trains only (million) 15,700 11,711 13,260 20,100 19,680

2. Average net freight train load (tons) 967 931 950 950 950

3. Freight train-les (thousand); (1):(2) 17,276 19,023 20,275 21,160 20,718

4. Freight locomotive-Ian (thousand) 31,599 33,616 35,o63 34,350

5. Locomotives per train;(4):(3) 1.77 1.658 i.658 1.658

6. tocomotive-kis per locomotive in use 75,600 90,000 95,000 92,250

7. Freight locomotives in use ;(4):(6) 418 374 370 372

8. Total locomotives in use:

Main-line: Passenger '-40 125 11 120

Mixed 49 49 49 49

Freight 418 374 370 372

Yard locomotives and service 120 126 126 126

Under or awaiting repair (10% of total fleet) 78 77 76 76

tlarrow-gauge 16 16 16 16

Contingencies on freight traffic '1% in 1'7 3 and

1 F5 in 1 -1 ) 4 6 S

Total 821 771 758 764

To be withdrawn before 12/31/71 - 187

Fleet existing in 1974 , 634

To be purchased through 1973 IJO in 1X7. 140 in l',2/1973 and 50 in 1973 130

Total on 12/31/73 = 764

I/ To be revie-ed by N de M a,,d t.he Bank in 1-2

Scurce: N de M and mission's estimates, September 1971

November 1971 MEXICO

APPRAISAL OF A SECONDRAIIWAY PROJECT

Items to be Financed by the Proposed Loan

Pesos millions US$ millions

1972 1973 Total 19i2 1973 Total ,

A. Permanent Way

Rails and Fastenings 100 97 197 8.0 7.7 15.7 23.0

Timber Sleepers 38 68 106 3.0 5.5 8.5 12.5

Maintenance Equipment 22 10 32 0.8 0.8 2.6 3.8

B. Rolling Stock

Freight Carm - 313 313 - 25.0 25.0 36.7

Components for Freight Care lb 41 55 1.1 3.3 4s.4 6.5

Roller Bearings 9 16 21 0.4 1.3 1.7 2.5

C. Telecommunications

Telephone, Telegraph, CTC and other Eouipment 80 8 88 6.4 o.6 7.0 10.3

D. Workshops

Cranes, Machine Pools and Control Equipment 11 20 91 0.9 1. 2.5 3.7

E. Consulting Services 4 5 9 0.3 0.9 0.7 1.0

Subtotal 279 578 852 21.9 46.2 6B.1 100.0

F. Price Contingencies 1l 68 86 1.4 5.5 6.9 10.1

Total 292 646 938 23.3 51.7 75.0 110.1

Foreigii cost estimates, not based on present US prices, have been increased by the percentage of effective OIS dollar devaluatiorn against the currency of the possible supplier country as of October 4, 1971.

Jctober 1°l ANNEX 16

MEXICO

APPRAISAL OF A SECOND RAILWAY PROJECT (N de M)

Estimated Schedule of Disbursements

IBRD Fiscal Year CumulativeDisbursement at and Quarter end of Quarter (US$ Million)

FY 1973 September 30, 1972 4.0 December 31, 1972 16.0 March 31, 1973 24.0 June 30, 1973 32.0

FY 1974 September 30, 1973 41.0 December 31, 1973 49.0 March 31, 1974 55.0 June 30, 1974 62.0

FY 1975 September 30, 1974 67.0 December 31, 1974 73.0 March 31, 1975 74.0 June 30, 1975 75.0

Assumptions

1. Loan to be effective by August 1972.

2. Bidding for procurement: Early 1972 for all telecommunicationequipment and for rails and other equipment for 1972 program: late 1972 for rails, freight cars and other equipment for 1973 program.

3. Delivery of telecommunicationequipment for 1972 and 1973 in first quarter of fiscal 1973; other procurementto be phased over whole period, with some deliveriesrunning into fiscal 1975.

4. Retentionmoney on contracts for heavy equipment to be refunded in late fiscal 1975.

April 1972 ANNEX 17 Page 1

MFXICO

APPRAISAL OF A SECOND RAILWAY PROJECT

Cost EffectivenessAnalysis

1. This Annex presents an analysis of the followingpoints:

(i) What are the benefits of N de M's project, its likely internal economic rate of return, and the most sensitive variables which should be acted upon to obtain a higher return;

(li) What are the benefits attributableto every major investment item in the 1972-1973 InvestmentPlan and the returns obtained.

A. The Whole Project (N de M's 1972-1973 InvestmentPlan and 1972-1976Plan of Action)

2. Investmentcosts used in the computationof the internal economic return (IER) have been taken from Annex 12. Additional operating costs due to the Plan of Action are accounted for in the "with" column of N de M's operating cost, Table A. Benefits streams, summarizedwith explanatory notes in Table A of this Annex, come from avoiding freight traffic diversion to road and from reducing N de M's operating costs. Negative benefits come from retaining some passenger traffic. All computationsare at 1971 prices.

3. In the sensitivityanalysis, overruns of +8% in investmentand up to 100% in additional costs of uneconomicpassenger traffic have been tested. The eliminationof passenger deficits after 1976 has also been analyzed. On the side of the benefits, percentage changes of +10% and -25% have been tested in road operating costs, correspondingto either (a) best estimate traffic diversion to road, and road transport costs between ].ex0 18.9 and Max 0 12.9/ton-km,or (b) best estimate road transport cost, and "with" freight traffic growth of 5.2% p.a. and -2.5% p.a. respectively,compared with the best estimates of 3.3% p.a. (para. 3.16 of report). Percentagesof +25% have been tested in benefits coming from reducing railway operating costs. The variations of the variables used here appear reasonable in view of road transportcosts calculated in Annex 3, paragraph 11, the traffic forecast worked out by N de M and summarized in Annex 9, and railway operating costs summarized in Annex 18.

4. Out of the total number of IER obtained with various combinations of costs and benefits, the extreme, most unlikely cases have been disregarded. Among the likely IER values obtained and ranked between the extremes according to their probability,the minimum and most probable IER are: ANNEX 17 Page 2

(M) 17%, obtained with 8% investment overrun, 25% overrun in uneconomic passenger traffic and 25% underrun of benefits coming from avoiding traffic diversion to road; and

(ii) 22.5%, obtained with the best estimates of costs and benefits of Table A.

An IER equal to 22.5% has been used for the cross-checking of benefits of paragraph 18 below. The returns obtained are satisfactory when compared with the opportunity cost of capital in Mexico.

5. To obtain a higher IER, the most sensitive factors under control of N de M and Government are, in this order: (a) early implementation of the project, (b) implementation of the commercial action contemplated in the Plan of Action of secure new traffic, (c) reduction of N de M's operating costs, and (d) elimination of uneconomic passenger deficits after 1976.

B. Evaluation of Main Items of N de M's Investment Plan

(a) Ways and Structures

6. Investments of Ps 328 million in 1972 and Ps 397 million in 1973 have been evaluated under this heading. Main items are:

(i) Ps 150 million for bridges, mainly in the lines Tampico- Monterrey-Veracruz. Benefits will come from allowing locomotives in excess of 30 ton-axle loading and, therefore, heavier trains. Benefits will reach Ps 7 million in 1974 and 1975 and will increase with traffic thereafter by improving axle load by 50% and reducing accordingly the number of locomotives and rolling stock operating in the lines for a certain traffic level;

(ii) Ps 236 million for rehabilitation of 690 km of high traffic densitv lines. The new track rehabilitation plan will continue the program of "cascading" rail to upgrade secondary and branch lines and reducing the rail classifications, which are 25 at present. Gross traffic in the lines to be rehabilitated varies between three and nine million gross ton/year, and traffic between 63 and 215 million gross ton has been carried on these lines over the last 20 years. Higher speed and about 25% improvement in turnaround for rolling stock and motive power will result in savings of at least Ps 30 million in 1974, calculated as savings in depreciation of rolling stock and motive power used to carry about 31 million gross ton over the rehabilitated lines. Benefits will increase in following years.

(iii) Ps 220 million for timber sleepers. Out of 2,390 reportable train accidents (most of them minor) for the period 1967-1970, 902 were attributable to defective aleeDer condition. The 1972 and ANNEX 17 Page 3

1973 program for replacementof four million sleepers will catch up some of the deferred maintenanceand will save at least Ps 26 million in 1974 by avoiding accidents. In the "without" section it is assumed that, if there were no replacementof sleepers in 1974 in the sections needing it, and accidents increased, traffic would decrease substantiallyin 1975; therefore, there would be in 1975 a lower level of traffic and accidents than in 1974. The savings of avoided accidents have been estimated at Ps 6 million in 1975. Ps 21 million could be saved in 1974 by improving turnaroundof rolling stock and motive power.

(iv) Ps 40 million for train maintenance equipment, including (a) a wrecking crane and 40 new longitudinalballast hoppers to carry out the ballast program for 1972 and 1973, (b) a new 250 ton capacity diesel crane, and (c) replacementof wornout train machinery (about 10% of existing stock). The "without" alternativeselected for the evaluation of benefits is the ballastingand maintenance of track by using more labor and wornout equipment;and the benefits to be obtained are about Ps 17 million, evaluating labor savings at shadow wages half of actual ones;

(v) Ps 50 million for line revision and extension of crossing loops. Line revision (Ps 25 million) will take place in Cuichapa-Xuchilea,and the eliminationof extreme gradient and curvaturewill allow saving of at least half of direct operating costs in light traffic density sections over a distance of 35 km; this represents savings of about Ps 3 million p.a. Extension of 40 km in 48 crossing loops (Ps 25 million) will allow longer trains to be accommodatedin high traffic density lines (Guadalajara-Irapuato-MexicoCity-Nuevo Laredo) and will save direct costs of train operationwhich are estimated at about Ps 7 million p.a. in 1974.

7. The IEP obtained by addition of all costs and benefits is 14%.

(b) Telecommunications

8. Investmentsof Ps 126 million in 1972 and Ps 63 million in 1973 have been evaluated to calculate the benefits attributableto investmentin telecommunications.The followingassumptions have been retained:

Costs

(i) Investmentsto be carried out in 1972 and 1973 will start to produce benefits only in 1974;

(il) Although labor savings have not been accounted for in the benefits, skilled labor has been incorporatedinto operating costs. ANNEX 17 Page 4

Benefits

(iii) Since usage of locomotivesis already being improved by better working rules, no benefits coming from improvementin locomotive usage have been attributed to telecommunications.The same applies to freight car usage to a certain extent: improvement of car usage from present 60.0 car-km/serviceablecar-day to 60.6 in 1975 is attributableto investment in telecommunications, but further improvementsare attributableto the Program of Action, and so are accounted for in paragraph 15.

(iv) Better service to users is implicit in the freight traffic forecast of Annex 9. For a given level of freight car usage, benefits as described in (iii) would increase as fast as freight traffic increases. To avoid an overestimationof benefits, freight traffic and benefits have been assumed constant after 1975; in other words, the first year benefits (FYB), or benefits in 1975 have been taken as a best estimate of the internal economic return. The "without" situation in this investment is equivalent to the "with" situationused in evaluating investments in ways and structures;

(v) The main benefits are a reduction in the number of freight cars necessary to move a certain traffic, by improvingof the turnaround time and the number of car km per serviceable car day. The number of cars saved by an improvementof usage has been calculatedfollowing the same procedure as in Annex 13. The cars have been valued at US$15,500 each, which is a shadow value (80%) of the average market value (US$19,500)estimated in the project for new cars to be purchased by N de M.

9. An IER of 20% has been obtained for this investment. It corresponds to benefits of about Ps 244 million in 1974 and Ps 13 million in following years, equivalent to savings of 1,260 and 67 freight cars, respectively.

10. Benefits of acquisitionof locomotivesand spare parts and one- third of shop machinery have been calculated,assuming that all other investments have taken place. Investmentsevaluated are Ps 194 million in 1972 and Ps 243 million in 1973. Using N de M data, locomotive running costs (line and yard) ranged in the last five years between Ps 9 and Ps 14 per km of a 25 year-old locomotive,excluding depreciation and at usage levels of about 60,000 locomotive-kmper locomotive in traffic. Ninety new 3,000 HP locomotivesare expected to have running costs between 25% and 40% below old locomotivesrunning costs due to a reductionof fuel consumed and some reduction of manpower-km obtained with higher speed and easier and shorter routine inspections. In addition, parallel improvementof operationsand, ANNEX 17 Page 5

in particular,locomotive usage amplifies slightly the impact of the reduction of running costs; the benefits of improvementof locomotiveusage due to improved operating techniquesand upgraded workshop machinery are therefore accounted for in this investment. The "without" traffic situationhere is equivalentto the "with" situationin telecommunicationinvestments. A figure of 90,000 locomotive-kmper new freight locomotive in traffic has been used in 1974, resulting in 3.8 million freight locomotive-kmfor the 90 new freight locomotivesminus about 10% permanentlyin workshops. Further improvementsof locomotiveusage are expected beyond 1974. Combining the ranges of original running costs of old locomotives,reduction of running costs, and improvementsof locomotiveusage, the best estimates of benefits to be expected from reduced running costs are between Ps 10 and 22 million in 1973, between Ps 26 and 40 million in 1975, and are expected to increase thereafteras locomotiveusage improves.

11. Locomotive maintenancecosts have been compiled by consultants (para. 1.04 of main text of this Appraisal Report); general repair costs every 150,000 km range between Ps 75,000 per year for a new 1,500 HP locomotive to Ps 120,000 for an old 1,620 HP locomotive;consultant's average range estimate of Ps 3 to Ps 5 per locomotive-kmrun and year, including all periodic inspection,coincide with SCT evaluationof locomotive costs. The 3.8 million freight locomotive-kmto be serviced by the 90 new locomotives at maintenancecosts below Ps 3 per locomotive-kmwill produce savings reaching about Ps 11 million in 1973 and three times as much in 1975, when compared with higher unit maintenance costs of more and older locomotives. Labor savings have been excluded by taking shadow maintenancesavings equal to 65% of maintenance savings at market value.

12. All benefits range between Ps 53 and Ps 82 million in 1975. IER ranges between 13.7% and 20.6%, best estimate being about 17%.

(d) Freight Cars

13. Benefits attributableto purchase of about 2,800 freight cars, 1,000 sets of roller bearings and two-thirdsof workshop machinery have been measured as the savings of avoiding diversion of freight traffic to road. Total investmentsevaluated are Ps 539 million in 1972 and Ps 349 million in 1970.

14. N de M has been making excessiveuse of foreign cars in the past; the foreign freight cars held by N de M were about 25% of total fleet in 1968, and about 20% in 1970. It is not economic for N de M to operate such a large amount of foreign cars because considerableoperational problems are created and there is also the risk of foreign owners (mainlyUS and Canadian railways),who do not consider this practice acceptable,retiring freight cars and producing a sudden shortage of moving capacity in N de M. As a consequence, N de M has started to replace foreign cars by national ones. Foreign freight cars are expected to be 7% of total N de M's fleet in 1974. ANNEX 17 Page 6

15. As shown in Annex 13, the number of new freight cars to be purchased takes account of improved car load and turnaround time brought about by investments in telecommunications and consulting services. To avoid double counting, the "without" situation of car usage is the same as the best estimate "with" situation used in the evaluation of investments in telecommunications, i.e. 60.0 car-km per serviceable car day in 1973, 60.3 in 1974, and 60.6 in 1975. The "with" situation is 63.0 car-km per serviceable car day in 1973 and 65.0 in 1974. The traffic to be moved by the new freight cars is about 740 million ton-km in 1972, and reaches 1,730 million ton-km in 1975, based on normal availability standards for new freight cars.

16. On a long-run variable cost basis, 1975 railway freight operating cost is expected to range between Mex J 8.6 and 10/ton-km at 1971 prices, depending on whether the present difference up to fully distributed cost is maintained or reduced (Annex 3, Table A, and Annex 18, page 2). If the freight traffic to be served by the cars was to be diverted to road, the cost of moving it would be about Mex J 17.2/ton-km (Table A, footnote 4/). Since the potential traffic diversion to road is a small part of total carrying capacity of Mexican truck fleet (100 billion ton-km/year, para. 2.02 of report), no substantial improvement in truck average load should be expected. In summary, the cost difference road/rail would range between Mex d 7.2 and 8.6/ton-km, the best estimate being Mex d 7.9/ton-km. The benefits are estimated at about Ps 160 million in 1975; the probable IER range between 19% and 23%, and the best estimate of the IER is 21%.

17. On a financial basis, the return would be higher than 30 and the revenues foregone by the railway equal to about Ps 225 million in 1975 if the freight cars were not purchased and freight traffic subsequently lost.

18. Summary. The following table summarizes the results obtained in the evaluation. The benefits attributed to the Plan of Action are calculated by difference.

April 1972 ln-estMrent Evaluated Bet Estimates of Ben fits F's iillioif IER PS million 1972 1973 Total S 1972 1973 1974 1975 l85 T . Inves tment Plan

(a) Ways and Struciares 328 39? 725 29.7 1 -

Heavier trai n loads 7 7 9 Inproved turnaround 51 51 62 Materials saved in reduction of 27 35 operating costs Accidents 26 6 (b) Telecommunications 126 63 166 7.7 20

Improvement of car usage - - - 293 13

Traffic diversion to road 3h 66 l27 160 2J

(Ci) Locomotives andlalre rs 191 203 137 17.Q 17

Reduced runnirg ccsts _ 16 25 33 Reduced maintenance 16 29 33i 69

Total evaluated Q?n 1,0C52 2,031 P3.2 17.6 314 291 611 h65 Other 2114 IoS 19o5 16.8 ------Grand Total, I 1,193 1,2147 2,44c _0.0114.6 314 93 291 611 465

II . Plan of Action

'a) Retention of uneconomic passenger traffic (from column (2) of Table A) -12 -214 -35 - 48 -6o rb) Cumulative abandonment of uneconomic freight traffic and securing of msre economic one _ 7 75 110 176 'c) Additional corswrcial action, rew freight traffic (column (1)of Table A minus I, (e) above minus II, (b). - - 22 22 22

Total,II - -12 1? 62 8h4 138

III. Project, (I) + (II) (from column (5) of'Table A) 22.5 22 1-6 53 695 603

MEXICO

APPRAISAL OF A SEOOD RAILWAYPFROiECT

b ary of Total Benefits to be Generated by tbe Project

(1071 prices)

Road Transport Total avings of thtcols FreightTraffic ~~~~~~~~~~~PocoosgerTraffic Costs N do Mt OpertingCoas Ps million Ps mi o Billion T n-m Ps illionili Pasog Ta Po million Pss i Differenee iliiorat t ht direrted Rood Tota' 8/ 1/ 2/ diverted Road road op. cost- (l)(2) With- With..t9 Diff___c_ With- Withoot- to rood t/ WihWitbt2~~~~~,~~~~ ~~~~752T- -7T3 (4a) (5) - - - 3,164 3,164 - _ 1971 17.6 17.6 - 3t5b 3.50° -11.8 22.2 3,208 3,208 - 22 1972 19.2 19.0 0.2 3b.0 3.344 3.514 -0.230

-23.7 79.5 3,288 3,314 26 106 1973 20.2 19.6 o.6 '03.2 3.184 3.645 -o.461 -35.5 188.1 3,320 3,485 165 353 19717 21.3 20.0 1.3 733.6 3.024 3.718 -O.694 -. 8.o 244.4 3,413 4,863 450 695 1975 22.1 20.7 1.7 292.4 2.860 3.792 -0.932 -60.2 318.2 3,423 4,823 .00 718 1976 23.6 21.4 2.2 378.1 2.700 3.868 -1.168 -i.168 -60.2 318.2 3,423 4,773 350 668 1977 21.2 22.0 2.2 378.1 2.700 3.868 -1.168 -60.2 335.3 3,423 3,723 300 635 1978 21.8 22.5 2.3 395.5 2.70C 3.868 -1.i68 -60.2 352.4 3,423 3,673 250 603 1979-1994 25.1 23.0 2.1A 412.6 2.700 3.868

ter traffic forecast assumes that, if the Project is corred mat, N de N can inerese- 1/ Based on Annex 9, through 1976; 2.5% growth p.a. between 1976 and 1979; stable thereafter. This long its traffic by boht one third in the next decode. 1973, one and a ha1f by 1975, three by 197P. 2/ It has teen av--ced a-coulattie tine logo in the with and witul-ot height traffic situations: one year by potential traffic ioss beyond 1975 are attributed to lack of omrelal action. 3/ This potential traffic direroion suld bo mainly cased by not purchasing now freight corn uotil 1975; additional in 1970 as an overage is 6 18.9/ton-lk (Annex 3, paragraph 10). This coat is ossoemd to 4/ A road transpert cost equol to Men t 17.2/ton-km has been coed, calculoted -s follows: Road transport root diversion tn rood is estirated as aboat 2% cf rood carrying capacity (see psragraph 2.02) re-a-n the -ane in 1971, 00 gcat-er t-uck efficisncy abo brho iflationary cost increae. Ths froight traffic e 18.9/1.10 - d 17.2/ton-ho. and would in-rease average load femc 50% e-timated in An-ce 3 to 55%. Thersfore, th resulting road transport coot is 1976 (ARmeo 18, page 1) Oct -nly hl1f of thi red-ction, i.e., 25% of total s.rcioss, sill be ,/ It too been -etimated for porp-o-o cf thin ralcolatioc tmt about half the servic- e are unprofitable ny a eeptrd by Gocernnent, tie rest being carried by raileays under Governcen.t- ochoidiostion. 18, page 2). Highest parsenerr carrying capacity will be reached in 1976. 6/ It is -r-noed that pasnengor traffic would increase at 2% p.a. if no measores ame taken to avoid it (An-.

7/ A bto operating cost of 6 5.15/pass ko has bero used, calculated as foliows: t Iko,1970 peic-o 5 Crew 47.R Total: 618 .1/he FPol and 0G1 37. l.oad factor: 97"% Tires 17.7 iffective orcopation- 36 passenger- Repairo 3C.3 dorroge coot: 65.15/paso.k Depre-tstion 33.. Insurance i6.2 Road noictenance 3.11 rod and -ing as nmial price deflator of 4.0%. It takee aeoonit of traffis pettrern dee-ribed in 1/ El 8/ From Annex 18, page 7, Total operoting ropondit-or", odj,,tori,no-rluing tntrastr-ctors depreciation unit vhich is a consaerratire esta ofOte tie aso redo of inog te-r rapital productirity foregone 2/ Thro-gh 1976, the some 1sbor co-t, as i cn"-th" alcensti-e snd other rots increasing a-u.ally 2.7% p-r traffic and ma ny mit seei r rdo.d: costs are reduced bv sbout 1..% P.a. in real terma. tf the qroJct Is nodt cmamd oat (-e Anmoa 3. oaraerahi 1). beyond 1c76, lsDor is rodaced ho ttrition

Apr-1 1972

ANNEX1.8 Page 1 MEXICO

APPRADSALOF A 3SEONDRAILhAY PROJ2CT

Income Account, 1964-1976

------Ac t,U ------ippm.:iate e-- -- .------Es iimted------

1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 ...... (P miion)., e ......

OPerating Revenue:

(a) Charges to the public

Passengers 132 130 136 143 150 154 156 11V7 163 179 182 197 187 Express 80 86 89 86 92 102 98 96 102 104 106 108 11l Nail 1 1 1 1 1 1 1 1 52 55 57 59 60 Freight 1,323 1,443 1,458 1,548 1,593 1,678 1,775 1,725 2,112 2,222 2,662 2,748 3,245 Local haulage 17 19 19 19 21 23 23 23 24 24 26 27 29 Demurrage 9 14 22 24 28 28 28 26 30 31 32 33 35 Miscellaneous 38 20 18 17 17 22 29 27 28 29 30 30 Sub-total 1,580 1,713 1,743 1,838 1,902 2,008 2,110 2,036 2,510 2,643 3,094 3,202 3,696 (b) Compensatiot by Goverpment or unprofitable services Irovidei iu the public intereot:

Passenger _ _- 70 120 162 171 Freight - - - 125 250 261 2707 252 Totl ogerating revevue 1,580 1,713 1,743 1,838 1,902 2,008 2,110 2,036 2,635 2,963 3,L74 3,632 4,119

Operaving Dlcpditc'e: Staff costs: Wuges, salaries, over- time, vacat_ono, e. 984 993 1,035 1,125 1,176 1,296 1,388 1,549 1,650 1,773 1,870 2,130 2,139 Bonuses and other concessions 85 105 110 119 123 136 151 186 201, 221 230 250 256 Pefnsi: 182 191 207 206 263 301 330 354 380 410 44r 470 500 Sik Pay 19 21 23 24 25 33 37 39 43 -5 47 50 51 Mlediial nd hospilel services 98 116 130 144 131 138 174 151 185 200 217 233 250 Total staff costs 1,368 1,423 1,505 1,618 1,720 1,9014 2,08o 2,279 2,462 2,649 2,80, 3,0141 3,196 buel 216 110 122 126 105 127 11 130 164 168 173 176 16C Pails, sleepers. fitt-4gs and ballast 56 54 58 61 71 56 52 56 64 60 72 76 0C Other materials 230 227 259 270 321 352 375 430 410 L25 "35 4bO -50 Geaeral eaper.ese 82 78 114 189 156 188 162 185 175 187 190 2DD Root of freight cers cod 210 other equipment (net) 53 46 44 47 56 58 113 8L 60 60 60 60 61 LoPrectiatco- 117 216 206 222 230 230 227 225 252 264 276 2B3 30C fab-total 2,024 2,154 2,308 2,533 2,559 2,915 3,146 3,393 ;,587 3,821 t,010 4,281 4,476 Less, 7stimated savigs from sbaccdos,.eot of passenger serv4ces - - - - - 0 80 120 161 Reimbursement by Gboe=nment of social sesarltt3 costs in excess of thoe psid by private ir.du:try ------99 126 125 159 Totl of operating expenditure 2,024 2,154 2,308 2,533 2,o59 2,915 3,1i4 3,393 3,587 3,682 3,80.. 4,36 4,157

Net Operatincg Dficit (441,) (441) (565) (695) (757) (907) (1,030) (1,357) (952) (719) (330) (4D)i (38) D,terest Charges 141 166 160 151 157 138 145 156 186 209 239 246 250 Net Deficit (585) (607) (725) (846) (911) (1,045) (1,175) (1,513) (1,138) (928) (569) (650) (288)

April 1972 IF4HA .SA1 IF A 02020N1 R02-A I 00221

Bases of the roeo- A-eo _ntPr-oJti-e

-~~~~~~~~~~~~~~~~~~~~~~~~~ _n,a_ _ __ r natinad --

9 24 'SS I 16 19670 19fP 1969 1970 19'l 1972 19?3 1971 1975 1976

Fl-ed -asets, net book eals- (Pe. otlijan) 11,605 li 69 12,179 12 ,}8 13,917 13,733 1 0,96W 4,300 15,000 15,500 16,240 i6,940 17,640 turnover: Operating revenue 5960000 As of T.)-t - witg s,t 1- .; 34 4 h.3 13.9 1. 10.6 15,1 15.5 19.6 4 19.7 21.3 21.1 22.9 fixed onsts .ork done:dac, -t 9TbCWht rarfin, r?et.enl-earuni Tone (-hmilli) 30' 9C.132.9 0 436.e 36.f 38.3 39.3 39.: 60005 J3.9 45.4 h6.2 47.3 6-,6020 20,200 21,30 22,400 23.6610 1Top-Inn (eilttnio} 113,WS 146,s i 5 F 0f6,52 17,175 19,099 10,600 Pooosagere / 35.0 36.6 37.3 .=. nifll=n2) 3133.8 33.0 35.1 35.3 33.2 33.0 36.5 35.9 Pa esogar-Ine 66il1aon) 7990 ,002 3,101 3,263 3,4,6 3,530 3,635 3,504 3,5?4 3,665 3,719 3,792 3,868 Train-Is, (0103 T- Sogs4/1,90 0,0 1,922 1,97 5,1 19,166 1936 9,0 19:0 0 8,300 12,300 1.8,300 18,300 Freight 91,I30 23,,99 36,39620 19,0793 3,9eS, 39 i 015 21,609 221,00 2,00 25,250 26,625 28,000 29,50 Total 39,502 39~~~~ ~~~~~~~~~~~~~~~~3:5,0 37,755 37,991,~~~~~~,092 08,015 30,9137 46902,301 63,550 4.6,925 46,300 47,800 lMa -r otat lotls 6D,517 595,99 57,22, 5A,97 59,10 50,470 58,8hl 59,90O 59,00c0 59,0D 59,000 59,C00 59.000 Inst poe eon esplayed (Pes=os' a-se c- sn =leroso 1 ,300 1 ,BoJ 19,00 19,500 90,500 22,900 2 ,600 26 2,0 28,000 30,100 31,700 36,500 36,050 3ccaia, a ndothr CInresnlm s 1,400 1.900 1, 00 0,00 0 100 2 300 2,600 3.100 3,l68 3,750 3,900 4,250 4,350 Pesnsono 9,0D 2, 600 3,00 3,60 , 500 5,100 e600 5,900 6,630 6,952 7,450 7,950 8,450 3,960 6,150 6,650 4,800 5,100 lM.dial 1 wand ho.pitt1 costs and sick pay 1,900A 50s 2,700 2,701 0,247 33,600 3,700 Tnto 0¼6100 25,600 00,300 29,900 20,300 90:,600 33,2,900 9,000 4,762 66.39 67,005 5,005.W Tra-lic anlt p.e,an ampicysal (OWk e,65 316113 395 362 37 36y6 326 386 4. 43D. 465 R00.--, oorosd per son ePlosyed (PF-os) 2,1200 30,81C 30,360 21,050 30,550 34,340 31,9 196,392 46,660 50,020 358,883 o6i,569 60,826 JIieoes - 1964 = 100 co,cs-er price lole x - D0 102 20 10 0 210117 3 2 329 136 14.2 168 1•36 Cost par msn anplayed At -nr-tni pri-es: ion7s ad alo2rie- 100 100 112 100 106 1'6 145 161 272 185 194 212 22 Other at!f ... ts 00 1210 130 13? ILL 165 187 206 219 238 251 2979 to 114 123 130 174 157 173 185 195 no 226 860 ctal gDJt aer mar- ee 0 loysd to0 112 At osn_teot pri.es as of 1964- lages, naleates, Toostjons 100 107 106 111 113 117 120 125 oo6 13C 131 33 139 Other staf costs moo 122 120, 12 125 112 155 160 '.6c 160 170 181 2la Total toat pere saepyd 0l0o11 211 1i, 116 116 029 134 136 4t 2142 148 I-S Pr-decticlty pr- s

(icainaotec- of tan1 1117 11.9 11.1 1loR 11.0 10C.5 11.0 t 7 12.2 13.1 135° 1.3- 9.3 .t At aoostact priosotncooeirr of IS16, of nov 1 .2 30,0 70.4 1003 36D 9.5 9.1 0.7 8.6 8.6

At oorrat pri... 31.6 11.0 11.9 12.3 12.3 12.9 13.5 13A. 13.6 353. . 38 At -snet-nt pineso .a of 1964 11.f, 11.0 11.2 11.4 11.0 11.1 10,9 10.5 10.1 9.8 9.6 9.5 9.2 Asocraga esoas, par toots-ba (I'aen( ) 6.5 617.12 71.15 79.23 91.61 eh6.9 523120 2.36 1C6.76 106.79 1317.65 2117.5 129.72

rjiossengsr tralolss 7of tottl train-k's 5.1 65.2 b6.6 47.6 46.3 47.8 65.9 L4.5) 9t f, o.nsengs?aare?coV 96 tctal lghtsod o )2FOrs.- r-solts sail dspe-d vpov -tci Fooornoinr reesioc 9,0 . 8.49.3 08.6 9.6 4.1 z ! to be taken totosreass fares and rmh?e Average no-b-r of pas.an.-r- so train 169 169 176 292 199 i6L 11, 191 I 550,705. A.r.a.n 690c,:n PFe6 ao ocoer-k: 'crnorc 4.4 L.30 L.3, 0.37 1.3 L.3, 1.55 1.,5 Average p--esngsr reTsnlc p- p--engter t-ak-nk (p^aoc) 7.43 1.37 .,21 10' P.91 P.50 4.2 a=.7 !

l/Oosaeondr nod pasenoger Oral-, st.ttico foss 1970 on1:anl wilI to sols3sF to o inoit te lig> at =fdenioion5: to .toner. tn ncronse fo-es ar3 ren ics -ssinc.-

2/ Traffic units tnon--k poos.00k 31 Freight trains- frcight prop-rtion 0f inlad trains ¶1

Apr13 1972 ANNEX 18 Page 3

MEXICO

APPRAISALOF A SECOND RAILWAY PROJECT

Income Account

Elaborationof the Bases of the Projection

The revenue projectionis simply a translationinto figuresof the implementationof Government'sstated railway policy and the Plan of Action agreed between Government,N de M and the Bank. The traffic forecastsare those of the N de M, as discussedand agreed with the Bank.

A. OperatingRevenue

I. Passengers

The Report on the Transport Sector of Mexico of September10, 1970, made the recommendationthat "Passengerrevenue should be equated to at least "avoidablecosts," by raising fares and/or abandoningservices; where a service cannot be made to pay and yet must be retained for social reasons, the Governmentshould reimbursethe railways for the loss".

It is not possible in this appraisalreport to forecast the relative proportionsin which the problem of equatingrevenue to avoidablecost will be solved (a) by increasingfares, (b) by reducing services or (c) by Governmentsubsidy of the users of the service. Revenue and costs of passenger services are thereforeprojected as if no alterationto the existing state of affairs were to take place, and net adjustmentsare made in the Income Account for "Estimatedadditional net revenue from abandonmentof passengerservices and/or increase in fares" and for "Reimbursementby Gov- ernment in respect of unprofitableservices maintainedin the public interest."

Passenger traffic,assuming the "status quo", is forecast to grow at 2% p.a. On this basis the costs, revenues and subsidieswith respect to passengerservices are forecastas follows: ANNEX 18 Page 4

Passengers and baggage

Avoidable Savings from Revenue at Increase Government Cost abandonment existing in fares subsidy of (Passenger and of services fares and and baggage unprofitable baggage propor- baggage rates service6 tion of total rates maintained passenger train for social avoidable cost) or economic reasons ...... (Pesos million) ....

1968 364 - 151 - -

1969 411 - 154 - -

1970 429 - 156 - -

1971 445 - 160 - -

1972 455 - 163 - -

1973 474 40 153 26 70

1974 486 80 142 40 120

1975 509 120 130 67 160

1976 518 160 118 69 171

It is appreciated that solution of the problem of equating revenues and costs will require careful study and difficult decisions. It is not therefore expected that costs and revenues will be balanced prior to 1976.

These forecasts are based merely on a rough assessment of the savings which might be secured from abandonment of about one-third of existing passenger services and the maintenance of the remainder on the accepted principle that revenue and avoidable costs must be equated, either by incr3easingfares or by Government subsidy where the section of the population served by the trains is too poor to pay even the avoidable cost of providing the service.

II. Express

The revenue of the express service is sufficient to cover the terminal costs of providing the service, but not the cost of transport. It can be argued that the incremental cost of adding an express car to a passenger train is little more than the cost of providing and maintaining the car, plus a negligible addition to the fuel bill. However, it might with equal reason ANNEX 18 Page 5 be contended that each service provided by a passenger train should bear its share of the cost of running the train proportionatelyto the amount of train- space which the service occupies. On this basis the share of passenger train avoidable costs attributableto express service in 1970 was estimated to be Ps 72 million. How costs and revenue from express services can be equated, either by reducing services or increasingrates, cannot be determinedin this appraisal report. Much will depend on what decisions are made to curtail passenger train services. The Transport Sector report of September 1970 stated "whatever concept of cost is applied, it is certain that at existing charges express traffic does not pay. Rates should be raised to the extent which will provide revenue at least equal to avoidablecost, or the service should be discontinuedif its price at this higher level is non-competitive. It is difficult to believe that adequate alternativeroad services do not exist for this type of traffic." This statement is still pertinent. The projectionsimply assumes a traffic growth of 2% p.a., in line with the growth of passenger traffic. Economies of operation,reduction of service accompaniedby a correspondingreduction of staff, and increased rates will improve financial results of operation to a degree not taken to account in this projection.

III. Mail

Up to the present the railways have received only token payments for carrying mail. Governmentnow accepts the principle that the carriage of mail by the railways should be paid for on the basis of avoidablecost as a minimum. As from 1968 these costs are expected to evolve as shown below, calculatedas a proportionof total passenger train avoidable costs relative to vehicle-kmrun.

Year 1968 x Passenger and baggage car-km 78 Express car-km 13 Mail car-km 9 Total vehicle-km 100

Passenger train avoidable cost Total passenger train Mail proportion avoidable cost ...... (Pesos million) ... 1968 468 43 1969 527 47 1970 550 50 1971 571 51 1972 584 52 1973 609 55 1974 624 57 1975 653 59 1976 665 60 ANNEX18 Page 6

IV. Freight

The projection of freight revenue assumes the implementationof the following proposals,all of which have been adopted as part of the Plan of Action approved by Governmentand the N de M:

(a) The retention by the railways as from 1972 of the 12.2% tax on gross freight receipts.

(b) Freight revenue to be increased in 1972 by about Ps 250 million (i) to compensatefor the added cost of the 1970 Labor Law and (ii) to cover long-run variable costs for all commodities. Government will not agree to raise rates to the public in 1972 or 1973, but accepts the principle that rates should cover long-run variable cost and make some contributionto fixed costs; on this basis, Gov- ernment will pay into railway revenue a user subsidy, identifiableby cawnodAty and user. It is assumed that such payments will be made as from July 1, 1972.

(c) Freight rates to be raised in 1974 and again in 1976 to the extent necessary to compensate for erosion in the value of the currency.

The calculationsare as follows:

Ton-km Revenue at Tax on Increase Government Total existing gross receipts in rates subsidy rates retained by to railway railway users ...... (Pesos million) . ...

1970 18,099 1,775 - - 1,775

1971 17,600 1,725 - - 1,725

1972 19,200 1,882 230 - 125 2,237

1973 20,200 1,980 242 - 250 2,472

1974 21,300 2,083 254 325 260 2,922

1975 22,400 2,191 267 338 270 3,018

19x76. 23,600 2,313 282 650 252 3,497 ANNEX 18 Page 7

The suggested rate £ncraaes are the minimum needed to compensate for projected increases in labor costs. These in turn reflect the projected trend of the consumer price index. If inflationshould be less than projected, the upward trend of wages and rates would be moderated.

B. Operating Expenses

I. Staff Costs

The projection is based on the assurance that the labor force will not be allowed to increase above its present level of about 59,000 men. Wage awards are forecast to increase individualearnings by about 15% every two years, or by more than 53% in the six years from 1970 to 1976. Social security costs are expected to increase at a similar rate. For comparison, the actual movements in wages and productivity in the six years 1964-1970 and the cor- repondingmovements projected for 1970-1976are as follows:

Increases

1964 - 1970 1970 - 1976

Increase in wage levels at current prices 45% 53%

Increase in consumer price index 22% 312

Increase in real wages 20% 17%

Increase in productivity per man employed in terms of traffic units 38% 27%

II. Fuel, rails, etc., other materials and general expenses

These are forecast to increase proportionatelyto train and locomotive-kmand the volume of traffic handled. Fuel prices are further increasedby 20% to meet a prospective increase in PEMEX prices.

III. Freight-carrental

After the peak of 1970/71 it is expected that investment in new cars will enable N de M to reduce the number of foreign cars on line to a fairly stable level of about 4,000 cars, at a rental of Ps 60 million a year.

IV. Depreciation

The increase in depreciationprovision is proportionateto the projected increase in train-km. ANNEX 18 Page 8

V. Reimbursementby Government of social security costs in excess of those'paidby private industry

The principle that the railways should not pay more by way of social security costs than their counterpartsin private industry has been adopted by Governmentas part of its railway policy. The railway administration is preparinga case for relief in this regard but so far no formula has been evolved. The Bank's estimate of a reasonable cost to the railways is based on a comparison with other railways in developing countrieswhere reasonably generous pensions and other social benefits are enjoyed by railway workers. It can be shown that rarely does the cost of pensions, eitlher in the form of actual payments or contributionto pensions funds based on actuarial studies, exceed 20% of the wages and salaries bill, and that medical and hospital costs are normally less than 10% of payroll costs. For the purposes of this projection,the relief from excessive social costs has been calculated at the amount by which pensions and medical and hospital costs combined exceed 30% of payroll costs, as follows:

Payroll Pensions Medical and Total pensions 30% of Difference hospital costs and medical and payroll hospital costs ...... (Pesos million) ...... );

1973 1,702 410 200 610 511 99

1974 1,770 440 217 657 531 126

1975 1,923 470 232 702 577 125

1976 1,970 500 250 750 591 159

(Note: During negotiations,theprojections of payroll costs were changed in the light of more up-to-date information then made available. As the above figures are merely illustrative of one of several approaches which Government may choose in applying the principle set forth in the statement of railway policy, it is not considered necessary at this point to change the figures in the last column.)

April 1972 NMTICO

APPOATSAL OF A SECOND) RAILWAYPA079CT

Cash Floe (N de M)

------Actual ------Estimatedt------1965 19Gfi 196- 16F- 1069 1970 1971 1972 1973 1974 19?5 1976 ...... I...... F - ...... !ssrlin

Source of Fbnds:

Net operating revenue (or deficit) ------(38)

Add: Depreciation provision _ _ _ - _ - _ _ _ _ 300

Cash generation fro- operations ------262

Oovernment sub-eutios, 889 1,260 1,384 1,390 1,499 1,433 z,oc6 1,597 1,692 1,129 1,008 563

De-creao in working capital - 641 ------

Borrowing,

Shcrt and medics-term 1oan and nuppliers' credits 5L2 467 4;9 558 535 638 4.00 900 500 500 400 ItOQ

Long-term Io.ns ------216 559 624 459 475

Total F,uds Acciloble 1,431 1,727 1,983 2,589 2,031 .,071 2,1I96 2,713 2,751 2,253 tB6T 1,700

Application of Foods:

Net oper-ting deficit 441 565 695 75' 90 1,030 1,357 952 719 330 460 -

Adjustmen.ts o net rewnue account - (1) 12 18 - - - - -

Less: Depreciation pro-bsion 21r, 200 222 230 230 2226 229 - 264 276 288

Net ca-h deficit o- opera-icon 225 390 !.79 655 680 h22 1,129 70C 455 5) 116 -

Increase in working capitol ° 38 152 - 81 75 50 50 50 50 50 50

Debt service,

Interest chorges 166 160 151 157 133 1lI5 156 186 209 239 246 250

Redemptior 3h8 762 601 552 577 6 o0 642 699 815 760 705 65o

Capi-1o ives.tment 5q2 41i 4o 1,225 558 429 520 1,078 1,222 1,150 750 750

Total Funds Applied 1,031 1,727 1,803 2,599 2,031. 2,071 2,496 2,713 2,751 2,253 1,867 1,700

April I 972 PIFXICO

APLUAISAT 70 A 17 9.ITIXWYU'

Suo-ary B.lanpe Sheets (N do M'

964 1965 1G6 1961 1968 10619 197011 91 1972 1973 1974 1975 1976

...... alli.) ...... nmed-----sets: At------Estimated ------Fixed Asse ts,

Grose book -alue 13,217 13,706 1!.043 14,463 15,576 16,004 16,392 16,923 37,990 17,212 20,362 21,112 21, 8(2

Less: Accoumlated depreciation _ l612 1.125 1,853 2,015 2,141 2293 2,4318 0 1/295 3,223 3,499 3,787 4.087 T otal net fixed assets 11,605 11,981 12,1¢0 12,358 13,393 13,711 13,914 14,205 15,031 15,989 16,863 17,325 17,775

Deferred Assets 717 159 173 109 72 51 63 60 60 60 60 60 60

Invetster.ts and De.posits 7 17 7 11 1" 20 23 20 20 20 20 20 20 Current Assets:

Cash in hand and at bar-k 16 19 31 15 20 29 22 So 65 80 110 135 160

Cash in transit 30 3b 30 ho 46 L6 73 50 55 60 60 65 70 Re.e.iables, net of bad and doabtful debts provisions 191 112 106 113 200 ?16 1i0 161 170 1t0 200 210 220 Inventorles, net of provision for obooleocenae and deterioration 491 657 690 859 257 278 550 532 552 572 592 612 632

Total curreat assets 731 852 857 1,057 523 569 793 792 842 892 967 1,022 1,082

12,583 13,009 13,227 13,568 11,005 11,351 11,793 15,077 15,953 16,961 17,905 18,427 IS,937

Current Litbilities:

Creditors and accrued expenses 2L3 750 239 242 320 270 435 40o0 I00 00 420 430 440

Deferred Liabilities 12 20 19 21 39 38 48 Lo 40 vi 40 40 40 Pension. Provision 129 79 6b 50 37 25 14 - - - - - Debt:

Short and .edium toe. loans and euppliere' credits 7,1(8 2,635 2,336 2,151 2,162 2,118 2,156 2,004 2,205 1,890 1,642 1,349 1,116 Long term loans _ - - . - . 216 775 1,387 1, 834 2,292

Total debt 2,L73 2,635 2,336 7 51 2,160 ',il 7,156 2,004 2,421 7,665 3,029 3,1S, 3,40B Gover-r-ent Equity:

Capitol aubs-riptioss and subventions 13,818 18,707 15,96- 1-.,352 18,73L 27,2)- 2-7: 23,680 25,277 26,969 28,099 29,156 29,669

Le.a: Accumulsted defisits 1,,077 ,681, 5,39s 6,251 7,293 5,311 9,531. 1-.o4r 12,185 13.113 13_,62 14.332 1.620

Total not eqai7y 9,711 10,7(23 10,569 17,Lol l1,11 11,900 :,180 12,633 33,092 13,856 144,1L6 1,7741 15,0ts

12,583 13,009 13,227 13,563 14,005 14,351 14,793 15,077 15,953 16,961 17,505 18.427 18.237

Ratio of Garrent assets to currant liabilities 3.0h1 3.1/1 3.6/ L.141, 1i.6/ 2.l/ 1.8/1 2.0/ 2.1/ 2.2/ 2.311 2.4A 2.5/ Ratio of liquid assets to current liabilities 1.0/1 0.8/h 0.7h o.8/1 0.9H/ 1.1/3 C.6-, 0.7/1 0.7/h 0.8/1 0.9A 1.0/1 i.o0 Debt/equity ratio 20/80 21/79 18/8? 16/84 16,/'8 15/85 15/85 1i/86 16/81 lf/81 17/83 18/82 19j8P

April 1972 q z ~~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 2

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